Author: Thomas S. Tripodianos

Question. I have received a number of questions surrounding claims for delay damages from various sides of the issue. In order to provide even a cursory understanding of the issues surrounding delay damages I am devoting the November and December column. This month I will take the opportunity to explore how to value delay claims.

Total Cost Claims: The total cost claim approach is the least complex and most easily applied methodology used in calculating and presenting construction damages. It also tends to be the most frequently used general theory. In its basic form, damages are calculated by comparing the original bid to the actual costs incurred on the project. There are several disadvantages to the use of a total cost claim, including an extremely strict, legal standard of proof and the necessity to prove several underlying assumptions:

Modified Total Cost Claims: The modified total cost method quantifies damages by using the inherent simplicity of the total cost approach. Modifications are offered to demonstrate the cause-and effect relationships that exist between the costs and the events or transactions presented in the specific cost approach. The success of the approach often depends upon the extent of the modifications which demonstrate the cause and effect dynamics.

Quantum Meruit Claims: A final type of damage theory involves an analysis of the “reasonable value” of the work performed. Contractors and subcontractors are afforded protection under mechanic’s liens to recover the value of labor and materials used in improving property. The theory of quantum meruit is often used in damage claims when a subcontractor does not have a direct contractual relationship with an owner but the owner has been “unjustly enriched” by work performed by the subcontractor.

Specific Identification Claims: In this approach, the importance of each event is tied directly to the cost impact of that event, such as late material delivery and the impact of idle labor time, or the disruptive impact on productivity caused by over-inspection.

Jobsite Overhead Costs: Jobsite overhead, or general conditions, are generally charged as direct costs in the job cost report for the project. In the most common approach to pricing a claim for jobsite overhead costs, the costs are generally viewed as a “pool” of costs for the duration of the project. This pool of costs is then divided by the days of total performance of the project to establish a daily rate of jobsite overhead costs. This daily rate is then multiplied by the compensable days of delay to establish the cost of the delay. This approach is viewed as relatively conservative as it establishes one rate for the entire project, taking into account the “ramp up” and “ramp down” of the project.

Home Office Overhead Claims: A contractor’s home office includes the necessary costs required to run a construction business. When a project’s duration extends beyond the contract completion date, a contractor’s home office functions continue to support that project for a longer period than anticipated at bid time. Contractors often argue that during this delay the contract does not generate its share of gross margin, resulting in “unabsorbed” home office overhead, and/or the home office must support this project for a longer period of time, resulting in “extended” home office overhead. This unabsorbed or extended overhead is often a significant component of a deadly claim.

Equipment Costs: Time-related equipment costs consist of the fixed cost of rented equipment as well ownership costs for owned equipment. These ownership costs include the depreciation, the cost of the investment in the equipment, major repairs and overhaul, and insurance. The activity-related costs for equipment include fuel, oil, and grease, commonly referred to as FOG; tires and tracks; and minor repairs. As in other claim components, the equipment cost should be separately calculated for time-related and activity-related claim issues. Equipment rental costs. Contractors often rent a significant portion of their equipment. These rentals are often “dry.” In other words, the contractor supplies all FOG and other operating costs. The rental agreement for such equipment often provides for a fixed monthly charge, with an additional charge for operating hours over an established level.

Escalation: Escalation is the price impact of providing goods or services in a later (and presumably higher cost) period than originally planned.

Measured Mile: The Measured Mile approach is a widely recognized and well received method of pricing inefficiencies related to specific events on a project. The Measured Mile approach compares the performance in the impacted period of the project to the performance in an unimpacted period of the same project. The performance measurement (e.g., work hours per linear foot) is calculated during the unimpacted or Measured Mile period.

Should Cost Estimates: In many disruption situations, the impacts are so pervasive that there are no unimpacted periods in the same project. In these cases, the so called should cost estimate methodology is one that compares actual labor costs incurred with an accurate estimate of what the labor costs should have been if no disruption had occurred.

Industry Standards: In this case, the contractor may develop a yardstick employing productivity rates that are contained in published industry sources.

Productivity Studies: Besides industry manuals, other published studies have attempted to quantify the impact of various factors such as change orders, weather crowding, and overtime on the construction process. These studies usually express this impact in terms of a percentage range.

Markup and Profit: In a claim situation, the contractor typically includes a percentage markup on the claimed costs for its markup or profit. What percentage to use is not always clear. Options include:

Question. I have received a number of questions surrounding claims for delay damages from various sides of the issue. In order to provide even a cursory understanding of the issues surrounding delay damages I am devoting the November and December column. This month I will take the opportunity to explore important concepts in delay claims.

The legal obligations and rights associated with the concept of delay arise from the obligation implied in every contract that one party will not delay, hinder, or interfere with the performance of the other party. If a party to a contract hinders or prevents performance by the other party or renders it impossible, it may not benefit from this wrong.

As with any other claim, the key elements to recovery on a delay claim are cause and effect. The aggrieved party must show that the other party is responsible for the event and that the event had the effect of delaying the job and increasing the claimant’s costs.

Duty to Coordinate: The implied duty to schedule and coordinate may impose an obligation upon the person responsible for scheduling to schedule the work in a reasonable sequence. Unreasonably interfering with work activities of contractors or subcontractors may violate this implied duty to schedule the work in a reasonable manner. Failure to schedule and supervise the work adequately might prevent a contractor from recovering damages from an owner.

Duty Not to Delay: The duty not to delay, hinder, or interfere with the performance of other parties to the contract is an implied term in most construction contracts. Various acts or omissions by a party can constitute interference with another party’s work and impact upon a project schedule. If an owner is responsible for furnishing materials, labor, or information to the contractor, the failure to do so in a timely manner may constitute interference with the contractor’s work.

Duty to Cooperate: The duty to cooperate is implied in every construction contract and the failure to do so may also have an impact on a project schedule. The duty usually applies in all phases of construction. It may require an owner to rectify problems in the drawings, and at the same time require a contractor to cooperate with a subcontractor in rectifying a problem during construction.

Duty to Extend Time: The duty to grant reasonable time extensions may impact a project schedule when the failure to do so results in further delay, By failing to grant a necessary time extension within a reasonable period of time, the owner may be held to have accelerated the contractor to finish earlier than it should have finished.

Compensable Delay: From a contractor’s perspective, compensable delays are those for which the owner is responsible in damages, because an owner-caused delay is a breach of the duty not to hinder or disrupt the contractor’s performance. Accordingly, the contractor is entitled to both compensatory damages and a time extension when such a compensable delay occurs. The same concept would apply as between a contractor and subcontractor.

Excusable Delay: An excusable, but non-compensable, delay entitles the contractor to a time extension but no more money. It is a delay for which neither party (contractor nor owner) is responsible. When unanticipated outside forces delay completion of the work, the delay is excusable under the terms of most contracts. The contractor is not entitled to compensation from the owner because no breach of contract is involved, but is entitled to an extension of performance time under the contract if it so provides.

Concurrent Delay: Concurrent delays are delays which occur, at least to some degree, during the same period of time. The term is used in construction law most frequently when a compensable delay and an unexcusable delay occur concurrently or in overlapping time periods.

Notice Clauses: Most construction contracts (and many statutory provisions) require that any claim for additional compensation or performance time be preceded by written notice to the owner or architect within a definite period of time. A notice requirement is imposed to protect the interest of the owner, who may be unaware of the causes of the particular delay and thereby precluded from taking immediate measures to rectify the situation. Failure to give prompt notice may cause the owner to deny the time extension request and result in time-consuming litigation over the issue of proper notice.

Formal notice may be held to be unnecessary when the owner has actual or constructive knowledge of the problem or when the lack of notice does not prejudice a legitimate owner interest. However, since some courts view notice as a condition precedent to recovery, the better practice is to provide the written notice required by the contract.

The contractor who gives the owner prompt written notice of delays and disruptions that are the owner’s responsibility increases its opportunity to recover the costs generated by those problems. In the process, the contractor may also motivate the owner to alter existing costly contract administration procedures.

Question. With all the rain (and flooding) that has plagued the region recently I’ve received a number of inquiries as to what a builder’s liability is in connection with storm water damages. The good news (for builders at least) is there is no special liability for unusually high amounts of rain. This month I will take the opportunity to explore home warranties which may come in to play.

In the case of renovations a contractor has an obligation to comply with the plans and specifications which form a part of the contract. An inadvertent and insubstantial deviation from the specifications will not ordinarily be deemed a breach of the parties’ agreement. Any claim that work is inferior to that required by the specifications must be established by the owners.

The provisions of the General Business Law govern warranties on the sales of new homes. Except as otherwise provided by the statute concerning the exclusion or modification of warranties, other implied warranties may arise from the terms of the contract or agreement or from a course of dealing or usage of trade.

The “housing merchant implied warranty” created by these provisions is implied in the contract or agreement between builder and owner for the sale of a new home and becomes effective on the “warranty date.” The warranty that a home will be free from defects due to a failure to have been constructed in a skillful manner endures for one year from and after the warranty date. The warranty that a home will be free from defects due to a failure by the builder to have installed the plumbing, electrical, heating, cooling and ventilation systems in a skillful manner endures for two years from and after the warranty date. The warranty that the home will be free from material defects endures for six years from and after the warranty date. The warranty extends to the first person to whom the home is sold and, during the unexpired portion of that period, each successor in title to the home.

“Material defect” means actual physical damage to the load-bearing portions of the home caused by failure of such load-bearing portions which affects their load-bearing functions to the extent that the home becomes unsafe, unsanitary or otherwise unlivable. “Constructed in a skillful manner” means that workmanship and materials meet or exceed the specific standards of the applicable building code. When the applicable building code does not provide a relevant specific standard, such term means that workmanship and materials meet or exceed the standards of locally accepted building practices. Other defined terms are: “building code;” “plumbing systems;” “electrical systems;” and “heating, cooling and ventilation systems.”

Written notice of a warranty claim based upon a housing merchant implied warranty must be received by the builder prior to the commencement of any action for damages caused by the breach or for other relief, and no later than thirty days after the expiration of the applicable warranty period. Furthermore, the owner and occupant of the home must afford the builder reasonable opportunity to inspect, test and repair the portion of the home to which the warranty claim relates.

The measure of damages in an action for breach of a housing merchant implied warranty is the reasonable cost of repair or replacement and property damage to the home exclusive of the value of the land, unless the court finds that, under the circumstances, the diminution in value of the home caused by the defect is a more equitable measure of damages.

Question. What is the difference between a guaranty of payment and a guaranty of collection? Also, if the guaranty language does not specify the type of guaranty it is how will courts interpret it?

Generally, a guaranty is an agreement or promise to answer for the debt or default of another. A guaranty creates a secondary and not a primary liability, and is only meaningful in relation to, the independent obligation to pay of the primary obligor, and is contingent upon his default. In other words, in the case of a President of a Corporation giving a personal guaranty to a Supplier, it must be shown that the Corporation has failed to make payment before the Corporation’s President will incur any liability.

Thus using our example, a “guaranty of payment” is an unconditional undertaking that the Corporation will pay. On such a guaranty, the Supplier may, upon default, proceed directly against the President, without taking any steps to collect the amount due from the Corporation.

A “guaranty of collection” binds the President to pay only after all attempts to obtain payment from the Corporation have failed. To recover in the case of a guaranty of collection, the Supplier must have reduced its claim against the Corporation to judgment, and an execution returned unsatisfied, or insolvency or other circumstances make it apparent that it is useless to proceed against the Corporation. The exercise of due diligence by the Supplier to collect the debt is a further condition of the President’s obligation to pay under a guaranty of collection.

Whether a guaranty is one of payment or of collection depends upon the intention of the parties, as expressed in the agreement. If a guarantor binds himself to pay immediately upon default of the debtor, he becomes a guarantor of payment. A guaranty of “the prompt payment of all obligations of the debtor” and providing that the guaranty shall be a continuing, absolute, and unconditional guaranty of payment is, unequivocally, a guaranty of payment, not of collection.

The Uniform Commercial Code, in dealing with commercial paper, and in making provision for the contract of a guarantor, specifically declares that words of guaranty which do not otherwise specify are to be deemed to create a guarantee payment.

Question. I am a real estate agent and my husband is an attorney who handles real estate matters. Can my husband represent a lender, buyer or seller in a transaction in which I am participating as a real estate agent?

This month’s question actually comes from my wife Kleo, and some of her clients. While it would seem to be natural for attorney and real estate agent spouses to refer business to one another the New York State Bar Association has opined that it is not permissible for an attorney to represent any party in a real estate transaction in which he or she has a personal interest in the outcome. In Kleo’s situation her financial interest in seeing that the transaction be completed so that she may be paid her commission is imputed to me as her husband thereby preventing me from being able to represent any other party in the transaction. It is irrelevant whether Kleo would be representing the buyer and I the seller or vice versa. The same preclusion would apply for any other member or associate in my firm regardless of how impenetrable a “Chinese Wall” the firm can craft.

It is not clear based upon my research whether the conflict is one that can be waived by the potential client. However, I would suggest that the economics of the matter weigh against an attorney risking an ethical violation if the waiver is not permitted or is somehow ineffective.

If anyone would like to see the research upon which this month’s answer is based please feel free to contact me.

Question. What are liquidated damages?

Liquidated damages are a creature of contract, and are sometimes used when the exact amount of actual damages will be difficult to ascertain in the event of a breach. Liquidated damages clauses usually pertain to damages for failure to adhere to a contract schedule. Such liquidated damages are agreed to be a reasonable pre-estimate of damages a party will incur, as a result of delayed completion of work. Where liquidated damages run in favor of the Owner, they presuppose that

1. the Owner is entitled to full and beneficial occupancy and use of the completed work following expiration of the contract time; and
2. if the Contractor fails to complete substantially any portion of the work within the contract time, the Owner will sustain extensive damages and serious loss, as a result of such failure.

Liquidated damages are usually expressed in the form of a per diem amount, and are meant to fairly compensate the party assessing liquidated damages, and not to penalize the breaching party.

It may be preferable for contractors to liquidate the owner’s damages for delay, when a contractor fails to reach substantial completion by the completion date. If a valid liquidated damages provision is not established in the contract, the contractor may be liable for the owner’s actual damages. In a commercial or industrial situation, the owner’s actual damages could have been far in excess of what a contractor can economically absorb. Reasonable liquidated damages remain a better alternative than unspecified actual damages. Obviously, low liquidated damages are to the advantage of the contractor.

Question. Recently I completed a remodeling job on a private residence and the owner has failed to make final payment. What do I need to do in order to place a mechanics’ lien on their home?

A contractor, in order to secure his lien rights, must file a lien with the Clerk of the County in which the property is located within 8 months (or 4 months if it is single family residence) after his last day of work. The lien must be verified by the contractor. Within five days before or thirty days after filing the notice of lien, the contractor must also serve a copy of the lien upon the owner. Additionally, he must file proof of such service with the County Clerk within thirty-five days after the notice of lien is filed.

Pursuant to New York Lien Law the notice of lien must contain:

1. The name and residence of the contractor;

1-a. The name and address of the contractor’s attorney, if any.

2. The name of the owner of the real property, and the interest of the owner.

3. The name of the person by whom the contractor was employed, or to whom he furnished or is to furnish materials; or with whom the contract was made

4. The labor performed or materials furnished and their agreed price or value.

5. The amount unpaid.

6. The time when the first and last items of work were performed and materials were furnished.

7. The address of the property being liened together with its section, block and lot.

Subcontractors and vendors must follow similar, but slightly different, procedures. If properly served and filed the lien will be good for one year unless further extended.