Understanding and managing power project contractor claims

Construction claims are very common on public power projects. Therefore, it is critical that owners of public power projects understand – long before a need arises – which claims contractors are most likely to assert.

The most common contractor claims on public power projects are delay, acceleration, and loss of efficiency.

Delay Claims

In a typical delay claim, the contractor will claim it was delayed in completing the project by the contractual deadline due to the fault of the owner and, as a result, the contractor is entitled to additional time and / or compensation.

Construction delays are categorized into three types. Excusable delays are unforeseeable and not caused by the fault or negligence of the contractor. They can include delays caused by unusually severe weather, labor disputes and acts of war. Compensable delays typically include owner changes, owner interference, differing site conditions, and, if the owner is responsible for the design, design errors and omissions. Inexcusable delays are those that were either caused by the contractor, its subcontractors, suppliers and / or vendors, or are specific delays that the contractor assumed the risk of under the contract terms.

When a contractor asserts a delay claim against an owner, the economic damages generally sought include:

Extended field overhead or “general conditions,” such as costs for project engineering, trailer rent or onsite secretarial support;
Extended general and administrative expenses, or home office overhead;
Equipment rental and ownership costs;
Increased labor hours;
Lost productivity of labor;
Increased material direct costs due for example to price increases; and
Costs of demobilization and re-mobilization.

Determining the merits of a delay claim can be complicated because many projects experience concurrent excusable, compensable and inexcusable delays. Therefore, scheduling consultants are often engaged to perform a delay analysis.

Acceleration Claims

Typically, a contractor acceleration claim arises when the contractor claimed an excusable and / or compensable delay, the owner refused to extend the schedule, and the contractor accelerates its work to achieve the contract substantial completion deadline. After project completion, the contractor asserts a claim that the owner “constructively accelerated” its work and seeks costs related to this acceleration such as overtime premiums, additional labor, additional materials and equipment, re-sequencing work, and administrative and overhead costs.

Loss of Efficiency Claims

In loss of efficiency claims, the contractor seeks additional costs alleged to have been incurred due to productivity losses arising from events, delays, or disruptions for which the contractor alleges the owner is responsible. These costs could include expenses related to workers waiting for work areas to become available, increased worker project mobilizations and demobilizations, slowdowns in workers’ pace, and rework of completed work. Common causes of loss of efficiency claims include delays, acceleration, site access restrictions, differing site conditions, defective plans and / or specifications, owner changes, owner interference, and adverse weather.

If an owner receives a loss of efficiency claim, a consultant may be needed to analyze it and defend against the claim and to determine whether there was in fact a compensable loss of efficiency and, if so, the extent or number of additional hours to which the contractor may be entitled.

Damages

The types of damages that may be recoverable due to a contractor claim are:

Actual or compensatory damages, which reflect the actual and direct losses;
Incidental damages, which are reasonable expenses incurred that are incidental to a party’s breach of contract, for example per diem costs for laborers who were required to travel to a jobsite;
Liquidated damages, which are defined in the contract;
Nominal damages, which are symbolic costs reflecting a legal wrong but where no actual financial damages were suffered;
Consequential damages, which do not flow directly from a breach of contract, but are a secondary or indirect consequence and loss of the breach, for example lost profits, lost opportunities, increased financing costs, increased bonding costs, and reputational damage; and
Punitive damages, which are intended to punish a party for a tort claim such as fraud.

Contracts typically do, and in most cases should, contain mutual waivers of consequential and punitive damages. Owners should ensure that (notwithstanding a consequential damages waiver) the contract grants them a right to liquidated damages that could be imposed under a power purchase agreement. Because power purchase agreements generally impose liquidated damages in the event power generation is delayed, owners will mitigate the risk of such damages on account of project delays if they are expressly excluded from the consequential damages waiver. In addition, unless the contract provides otherwise, attorneys’ fees generally are not recoverable.

Must-Have Provisions to Avoid Claims

Owners are best equipped to avoid contractor claims, or adequately manage them, when their contracts contain several “must-have” provisions, including the following:

Notice, Substantiation, and Certification: These are provisions that require the contractor to (a) provide advanced and timely written notice of claims, changes and delays as express conditions precedent to recovery, which will allow the owner the opportunity to conduct its own prompt investigation of claims, cure or mitigate the cause, and settle the claim by granting proper and timely relief to the contractor; (b) substantiate claims with detailed supporting documentation; and (c) certify that every claim is made in good faith, supporting data are accurate and complete, the amount requested accurately reflects the contract adjustment, and the person making the certification is authorized to do so;
Audit: This provision grants the owner a right to examine and audit all records and other evidence of costs that the contractor claims;
Offsets: These provisions grant the owner a right to offset and withhold payment for defective work, liquidated damages (delay or performance), back charges, and for the contractor’s default, provided that such provision is enforceable in the jurisdiction and would not violate a prompt payment statute;
Mechanics Liens: These provisions require the contractor to (a) warrant and guarantee that paid work will pass to the owner free and clear of mechanics’ liens, provided that such provision is enforceable in the jurisdiction, (b) submit lien releases, and (c) defend and indemnify the owner (and its lender(s)) in the event of liens, and also grant the owner a right to (d) withhold sufficient payment to discharge subcontractor mechanic’s liens;
Schedule Specification: Having a detailed technical schedule specification will mitigate the risks of inexcusable delays by identifying the required submittals, providing the requirements for the submissions of schedules and their contents, and defining key terms such as “critical path,” “CPM,” and “float.”
Disputes Procedure: This defines a way to facilitate an amicable resolution of claims and disputes by requiring, as express conditions precedent to litigation or arbitration, a meaningful executive-level conference procedure and mediation.