American Bar Association
Forum on the Construction Industry
the reality behind the theory of
loss of labor productivity
Challenges to Admission of – or Belief in – LOST ProductivityClaims Based on Industry Studies
W. Alexander Moseley
Hand Arendall LLC
Mobile, Alabama
Presented at the 2013 Mid-Winter Meeting
Making Dollars and Sense of Construction Damages
January 31 – February 1, 2013
Waldorf-Astoria Hotel, Naples, Florida
2013 American Bar Association
1
Challenges to Admission of – or Belief in – Lost
Productivity Claims Based on Industry Studies
W. Alexander Moseley
Hand Arendall LLC
Mobile, Alabama
Vinny Gambini: I object to this witness being called at this time. We’ve been given no prior notice he’d testify. No discovery of any tests he’s conducted or reports he’s prepared. And as the court is aware, the defense is entitled to advance notice of any witness who will testify, particularly to those who will give scientific evidence, so that we can properly prepare for cross-examination, as well as to give the defense an opportunity to have the witness’s reports reviewed by a defense expert, who might then be in a position to contradict the veracity of his conclusions.
Judge Chamberlain Haller: Mr. Gambini?
Vinny Gambini: Yes, sir?
Judge Chamberlain Haller: That is a lucid, intelligent, well thought-out objection.
Vinny Gambini: Thank you, Your Honor.
Judge Chamberlain Haller: Overruled.
My Cousin Vinny (1992).
- INTRODUCTION
My presentation is directed primarily to the lawyers in attendance, and particularly to those who may not have often, or ever, wrestled with a claim for loss of labor productivity on a construction project. The first time one is faced with such a claim he or she will be hearing references to theories of recovery that are likely to be arcane and in many cases difficult to understand and evaluate, at least until after the engagement of a helpful expert consultant who can explain the issue. Thereafter, the lawyer can spend some time thinking about how to get a client’s claim for lost productivity into evidence, or keep out an opponent’s claim, or support or debase the credibility of the claim once in evidence.
Many lawyers reading this may have had the experience of opening a Rule 26 Expert Report and reading something like the following (actual) opinion:
The CII’s study on the effects of changes on labor productivity found that on average, labor inefficiency when performing changes was about 70 percent of the efficiency when not performing changes. . . . Other industry studies (MCAA and NECA Studies of Productivity Factors) found that multiple contract changes cause manpower to be reassigned, dilutes supervision resulting in errors and omissions and have a negative effect on morale and attitude that can increase costs in the a range of 20 percent to 40 percent.[1]
The author, relying upon these references, assigned a 30 percent inefficiency factor to all manhours worked by a general contractor’s forces after a major disruption of a project to renovate public housing.
Another consultant testified, in a case involving construction of a municipal building and disputed changes in erection of structural steel, as follows:
Again, CII[2] and most published studies say a contractor should anticipate between six and ten percent on an average project for change. Anything in excess of that can be considered excessive changes and subject to impact and inefficiencies caused by excessive changes. . . . We look at the report that says okay, you should expect 30 percent impact and inefficiency when you have excessive changes. . . . Excessive changes cause 30 percent. . . . The items that I found from the mechanical contractors and electrical contractors associations factors which, according to the most recent studies I’ve seen, apply to all trades, percentages would be higher, but they are cumulative. They would be higher than 30 percent. I took the low end.
A (perhaps more cautious) expert submitting a report in a recent case involving changes to steel mill construction contracts, alleged to have resulted from late or incomplete engineering drawings, vaguely listed a number of references, including the “Leonard Study” and a couple of the CII reports referred to below, without referring to any specific pages, language or conclusions from any of them, then stated flatly that it is “generally accepted” that if a base construction contract receives more than 10 percent in change orders over the base price, a productivity loss occurs.
What is this “loss of productivity” effect that seems to crop up so often in construction cases? And what are these magic studies that seem to apply to all construction projects equally, and allow the mechanical assignment of productivity loss factors so easily? And can these studies really carry so much freight?
- What Is Lost Productivity?
I defer to my fellow panelists, who are acknowledged experts on the subject of lost productivity, for the technical description; in layman’s terms a loss of labor productivity occurs when some element of construction requires more labor than it should have. If the excess labor hours can be shown to be the responsibility of another party, under circumstances where the contract or law affords a remedy, then a valid lost productivity claim may be made. In some of the cases, the reader will see these claims referred to as “inefficiency” or “loss of efficiency” or “disruption” claims. Moreover, any research on the subject in either the judicial or the scientific literature will lead one to a discussion of “cumulative impact,” which usually will involve claims of lost productivity based on a series of change orders or other disruptive events, often where the lost productivity claim was omitted from the original request for compensation.[3]
- When Is a Claim of Lost Productivity Likely To Be Encountered In a Construction Dispute?
The cynical impulse would be to answer, “when a contractor has hired the right expert,” but let us focus instead on when a compensable loss of productivity is likely to have occurred, and then assume the ably represented contractor will present a claim for it. The literature on productivity, the presentations submitted by my co-panelists, and a number of industry sources referred to hereafter all provide guidance about the likely causes of productivity loss, but generally they refer to matters that disrupt a contractor’s planned work sequencing, scheduling, volume, manning, and flow. An article by Bill Ibbs and others, crediting Schwartzkopf,[4]provides a list of six groups of controllable and uncontrollable factors which affect labor productivity: schedule acceleration, change in work, management characteristics, project characteristics, labor and morale and project location/external conditions; and quotes other authors who categorize the major components of productivity loss as “waiting or idle, traveling, working slowly, doing ineffective work, and doing rework.”[5]
Why are so many claims for lost productivity encountered at present? Experts have referred to an “epidemic of claims” in the construction industry, and reported the following: “No reliable estimates on the size or value of lost labor productivity could be found, but it is certainly a major portion of the $65 billion total claim figure reported by Ibbs and Allen (1995).”[6] Others have recently reported that “schedule delay due to lost productivity is one of the hottest topics in delay claims,”[7]and a 1994 study of 24 construction projects found that 50 percent of the value of claims was for disruption or loss of productivity.[8]
One theory is that lost productivity claims are increasing because of an overall decline in productivity,[9] although productivity “lost” in this way would not appear to be compensable under any normal theory. Whether the cause is decreasing productivity, or increasing recognition of the loss by contractors, or of presentation of claims for the loss by experts, the fact remains that these claims are often in issue, and many of them require us to deal with industry studies cited in their support. A final, intriguing theory is that lost productivity claims are proliferating because of the availability of industry studies to support them! “One of the factors contributing to the proliferation in such claims is the availability and convenience of labor productivity studies produced under the auspices of various institutions and industry groups, such as CII.”[10]
- PROOF OF LOST PRODUCTIVITY – FOUNDATIONS OF EXPERT TESTIMONY
- General Principles
The general subject of this presentation is “industry studies involving loss of labor productivity claims,” and I will concentrate on the evidentiary issues involved in claims based on those studies, but it may be helpful todiscuss briefly some of the basic approaches to proving these claims, for a number of reasons. For one, it will demonstrate the variety of techniques in use, related to the issue whether there is a single gold standard that courts should require. For another, in many cases an expert witness combines reliance on an industry study with some other technique to support his or her testimony. It is also helpful to know the preferred techniques, if only to inquire why an opposing expert isn’t using one of them. Finally, one should not be shocked to realize that a witness may occasionally be presenting a claim based on one of the less-respected techniques but describing it as something more credible.
This introduction assumes that there will be an expert testifying, or trying to do so. Generally expert testimony will be required, except in the very rare case where a contractor has realized it was suffering productivity loss in time to keep detailed, credible records of its losses. These cases do not appear often in the literature or the reported judicial precedents.[11] Lost productivity claims are not easy to prove, and in most cases, the courts take the position that expert testimony is a necessity.
It is a rare case where loss of productivity can be proven by books and records; almost always it has to be proven by the opinions of expert witnesses. However, the mere expression of an estimate as to the amount of productivity loss by an expert witness with nothing to support it will not establish the fundamental fact of resultant injury nor provide a sufficient basis for making a reasonably correct approximation of damages.[12]
This latter point is critical – an expert, no matter what her qualifications, will not normally succeed in delivering a bald opinion on the amount of damages caused by a productivity loss without some sufficient factual basis for it.
Expert testimony alone will generally not be sufficient to establish lost productivity, particularly if the expert’s opinion is not firmly grounded in the project records. On numerous occasions, courts and boards have found proffered expert testimony to be unpersuasive and insufficient to support an award of damages for lost productivity. “‘[A]fter-the-fact, conclusory’ opinions of expert witnesses are not sufficient proof of lost productivity.”[13] On what foundation the expert’s testimony about damages rests is the subject of this presentation.
One important point to keep in mind is that experts’ use of industry studies (or other methods) to prove the amount of a productivity loss will be a useless exercise if the other elements of a successful lost productivity claim – liability and causation – cannot be established. Liability must be based either on a remedy-granting provision in the contract or on the owner’s breach of contract, and evidence that the owner did something to hinder the contractor’s performance such as denying it access or initiating a substantial number of changes. Causation requires proof that the loss of productivity was caused by the owner’s conduct, rather than the contractor’s poor estimate, inability to properly schedule its own work, or failure to coordinate the work; causation can be “an elusive commodity.”[14]
If these elements of proof are available, the claimant’s expert will face a choice of methods to attempt to quantify its actual damages from lost productivity. Where actual detailed cost records, allowing allocation to periods of impacted productivity, are not available, a contractor might attempt to prove, on its own or through a damages expert, a total cost claim (my total costs less my estimated costs = my damages),but the courts and boards are highly skeptical of these.[15] A modified total cost claim includes adjustments for those estimating errors and contractor-caused or otherwise non-compensable cost overruns which the contractor is willing to concede, and while it is obviously a more objective claim in the usual case than the total cost claim, it is not a favored method of proof.
More likely, the expert will express an opinion of the contractor’s lost labor productivity based either on a scientific comparison of productivity rates under different circumstances, or on conclusions drawn from comparisons to published productivity studies, or both, bolstering his or her opinion to the maximum extent possible with whatever data is available from the contractor’s records. Many writers and courtshave declared that the former method, comparing productivity rates experienced by the contractor under different circumstances, is preferred where actual cost records don’t make the case, and that the “measured mile” technique is the gold standard of estimating. For example,
There are several methodologies that have been employed traditionally for quantifying loss productivity. Those that are more favored by courts and boards specifically demonstrate the cause and effect relationship between the owner’s act or omission and the inefficiency sustained. The ‘Actual Cost’ and ‘Measured Mile’ methods discussed below fall into this more favored category. The methods least favored by courts and boards are those that assess loss productivity damages more generally without distinguishing the separate causes for the loss. The ‘Total Cost’ and ‘Modified Total Cost’ methods described below fall into this, least favored, category. Other methodologies fall somewhere in between.[16]
My fellow panelists are far more qualified to describe “measured mile” technique, and some of the problems in applying it, than I.[17] Experts opining about damages on the strength of a measured mile must do so diligently; a “misapplied measured mile analysis is as hurtful to a claim as a well-conceived analysis is helpful.”[18] In P. W. Construction, Inc. v. United States,[19] a court of appeals vacated the Court of Claims award of damages for lost productivity because the expert’s measured mile analysis had not compared equivalent types of work.
- Proof of Lost Productivity by Reference to “Industry Studies”
Where one of these favored techniques is not available, for lack of records or of comparable labor statistics, the testifying expert will likely resort to forming an opinion supported by a study of productivity from some of the sources discussed in this presentation and those of my fellow panelists. The use of opinion testimony based on productivity studies is well-established in the cases, and approved in much of the literature, but obviously this type of analysis, like any other, is capable of being performed incorrectly. Ways in which this analysis can be evaluated, and possibly discredited, will be discussed below.
It is clear that industry studies[20] must be used sensibly, in order to be believable (possibly even admissible); to have one’s project superintendent testify to labor inefficiency caused by, for example, project acceleration, then whip out an industry study and assign a value to it, will not be likely to work.
The common thread running through decisions and cases in which construction industry studies are approved is when the claimant uses such studies in conjunction with qualified expert opinion testimony; as opposed to the blind application of such studies in a vacuum, e.g., without regard to the facts of the particular construction project. Indeed, academics and construction law practitioners have noted that a mere expression of an estimate is not sufficient but, instead, a claimant must establish a sufficient basis for making a reasonable approximation of the amount of damages incurred. In other words, application of a labor productivity study, whether well-known or obscure, by a qualified expert in a reasonable manner can, in the right circumstances, be a legitimate means to calculate damages. [21]
Not only should the study be utilized by a qualified expert, however, but it should also, ideally, be used to support an opinion that has another foundation.
The primary utility of academic and industry studies lies in bolstering the credibility of a claim prepared using another method, such as a Measured Mile analysis. . . . If the contractor has no other options, use of industry and academic studies can be helpful, although recovery on a claim based solely on such studies can be a daunting proposition, and few court decisions have permitted such claims.[22]
What do we mean by these studies? There are a number of industry or academic studies in publication,[23] many of which are described in the portions of this presentation produced by my fellow panelists, who have been involved in actually producing a number of them. My experience has exposed me primarily to manuals or publications generated by the Mechanical Contractors Association of American, to what is referred to as the “Leonard Study,” analyzing the effects of change on labor productivity, and to certain publications of the Construction Industry Institute (although there are many more, some highlyarcane, and other construction lawyers’ experiences have no doubt been entirely different from mine).
- MCAA
The study seemingly most often discussed is the “MCAA manual,” most recently revised in 2012,[24] which provides a list of 16 factors affecting labor productivity, with a percentages of loss for each factor, according to whether the factor’s impact is “minor,”“average” or “severe,” along with an article on how to use these factors.[25] These factors can be used to derive the “should have spent” hours on the project, which can then be deducted from the total, adjusted actual hours spent to determine hours of lost productivity. Hypothetically, “should have spent” hours ought to equal the estimated hours, although for various reasons this almost never happens.[26] The MCAA bulletin contains its own cautions about overuse of these factors, discussing the desirability of using actual labor cost records where available, and advising against over-reliance on its percentage factors, but where an actual cost claim has been impossible, experts have successfully relied on the MCAA factors. The authors recommend that a modified total cost method analysis of productivity loss be prepared as a sort of sanity check on the estimated loss of productivity resulting from using the MCAA factors.[27]