Disruption claims and prolongation claims are two of the more common types of financial compensation for loss and expense in respect of construction contracts. For reasons that will be examined in this article, claimants may find fairly limited success in recovering disruption costs than prolongation costs as part of their loss and expense claims. This article addresses tips and traps in claiming, defending and assessing disruption claims. 

To understand the challenges associated with disruption claims, it may be useful to first contrast disruption claims from prolongation claims. Practical completion date (or time for completion) is one of the more fundamental conditions under construction contract where any breach by either party may attract liability. The contractor in culpable delay may be liable for liquidated damages whilst the Employer that prevented the contractor from completing its works within schedule may be responsible to the contractor for its site overhead over the extended period, i.e. prolongation costs. On the other hand, disruption claims are generally costs incurred by the contractor due to interruption, disturbance or hindrance caused by the Employer which resulted in loss of productivity. Such disruption in productivity may not necessarily give rise to delay. This is why disruption costs is separate and distinct from prolongation costs. 

Whilst delay in completion of works is factually self evident, the same cannot be said when there is allegedly a disruption in productivity but the project is still completed on time. If the works were truly disrupted, how can it still be completed on time? Even if the concerned works were both delayed and disrupted by the Employer, should the contractor not be adequately compensated with just prolongation costs? Further, was the productivity rate which may be inferred from the contractor’s programme and method statement part of the contract conditions? Whilst these questions do not necessarily suggest that disruption claims are frivolous claims, it forces the claimant to be more thoughtful and discerning when recovering disruption costs. What is also evident from these line of enquiries is that prolongation costs appear more intuitive than disruption costs. This could in some ways explain why disruption claims tend to require more substantiation and proof of causation than prolongation claims. 

Are disruption costs incurred by the contractor recoverable regardless of the type of contract form used? Does the choice of procurement pathways e.g. lump sum fixed price contract, remeasurement contract or cost reimbursable contract affect entitlement to disruption costs? To better deal with these fundamental issues, it is important to get back to basic by understanding what exactly is disruption claim and how can it be quantified? The basic definition and quantification may shed light on some of the more consequential issues.

What Are Disruption Claims?

Whilst there is no universally accepted definition of disruption in construction contract, it generally refers to reduction in contractor’s productivity, efficiency or output caused by Employer related events which may or may not result in delay. Consequently such hindrance or interruption to the contractor’s workflow give rise to an increase in costs to carry out the same amount of construction activities. If and when disruption occurs on the programme’s critical path, it may give rise to delay. 

Whilst disruption is separate and distinct from delay, both concepts are routinely presented simultaneously for contrasting purposes in order to illuminate its respective definitions. Delay could give rise to disruption and likewise disruption could give rise to delay. Under the former, if multiple construction activities are delayed, the contractor may need to carry out various subsequent activities concurrently on site resulting in congestion, conflicts and stretched in use of common site resources. These in turn give rise to drop in productivity (i.e. disruption). Under the latter, if certain site activities are disrupted over an extended period of time without appropriate follow up measures e.g. provision of additional resources, re-sequencing of work flow etc, project schedule delay may ensue. The closely interwoven relationship between delay and disruption is the reason why various textbooks and industry protocols are often presented with both delay and disruption e.g. ‘Delay and Disruption In Construction Contracts by Keith Pickavance’ and ‘Society of Construction Law (SCL) Delay and Disruption Protocol’.

The concept proximity between delay and disruption is often utilised by parties to their strategic advantage in legal proceedings to either advance or defend against disruption claims. Parties defending claims often conflate delay and disruption by arguing that since the project was completed on time, the alleged disruption could not have factually occurred. Such argument may be problematic as it implies that disruption ‘always’ precedes delay which in turn suggests that there is no entitlement for disruption claims for non critical activities (namely when there is no delay to time for completion). On the other hand parties advancing disruption claims, often argue that since extension of time is granted for Employer related events, excusable delays in and of itself is proof of disruption to the construction’s workflow. Such argument blurs the distinction between delay and disruption. Whilst ‘delay’ is typically evident from breach of deadline, ‘disruption’ is in essence reduction in construction productivity, efficiency or output. Disruption costs is incurred when the contractor expended additional cost for supplementary resources to maintain an appropriate level of productivity. Disruption claim therefore typically involve both demonstration of reduction in productivity and additional cost that is incurred in consequence of such disruptive event. 

Whether a disruption claim give rise to entitlement to additional payment or compensation depends on the terms of agreement. There are contract forms which may allow for disruption claims but may not necessarily define ‘disruption’ with sufficient clarity. In fact the phrase ‘disruption costs’ may not even be expressly provided for under such contracts. In general, disruption costs are deemed part of heads of claims for loss and expense. Therefore contract forms that have contractual provision for loss and expense claim should have allowance for recovery of disruption costs, subject to the actual terms of agreement. Even for contract forms without express provision for recovery of loss and expense, there may be entitlement under common law rights subject to demonstration of cause of action at law. Further background and context on this subject are available in a separate article published on this website entitled ‘Part 2 of SIA vs PSSOCC – Loss and Expense Claims’. Such subtlety in definition increases complexity in advancing disruption claims. It is typically more challenging to establish a claim if the underlying definition is vague. One of the reasons that makes disruption claim challenging is identifying whether or not there is an agreement between parties on the desired level of productivity. After all the essence to disruption is reduction in productivity. Does deviation from certain planned productivity give rise to liability in the absence of an agreement to specific level of productivity to begin with? If there is an alleged agreement to certain level of productivity, what are the applicable construction trades? By way of illustration, if the contractor exhibits its intention to install 100m2 of raised floor in a calendar day based on both its baseline construction programme and approved method statement, are these documents part and parcel of the construction contract? In general these documents are post contract deliverables as opposed to contract document. Therefore the complexity in disruption claims is not just defining the term ‘disruption’ precisely but also identifying the agreed level of productivity (if any) as well as any deviation from such planned productivity. 

How does one quantify disruption claim given the inherent ambiguity in contract definition and the measurement of deviation in productivity? This will be explored in the next section of this article which underscore the challenges in advancing disruption claims. 

Quantification Of Disruption Costs

Quantification of disruption cost is done through disruption analysis which identifies and measures the extent of drop in productivity. The drop in productivity is essentially the difference between the contractor’s baseline productivity and the actual reduced productivity. Using the earlier example, let us assume the contractor’s baseline productivity is installation of 100m2 of raised floor in a calendar day but only achieved 40m2/day due to irregular provision of site access by the Employer. The drop of productivity is 60m2/day due to Employer related event. The drop in productivity then becomes the basis of establishing the impact on actual resources utilised over the period of disruption e.g. labourer, plant, equipment, materials including affected site overheads. Disruption cost is derived based on pricing of the impacted resources. By way of illustration, if the contractor incurred $50,000 for additional labourer as well as their overtime charges, rental of additional equipments including supplementary site supervision cost to maintain its baseline productivity, the sum of $50,000 represents its disruption costs. 

There are a few arithmetical assumptions that formed the basis of this $50,000 which often draw contentions. Firstly, is the drop in productivity of 60m2/day exclusively and wholly caused by the irregular provision of site access? Construction site is a dynamic environment with interplay of a myriad of variables concurrently. It is often challenging to isolate the effect of one variable and examine its disruptive effect singularly, which in this case refers to irregular provision of site access by the Employer. If and when parties sieve through all contemporaneous records during the material time e.g. site diaries, minutes of meetings, correspondence, progress reports etc, there is highly likely a variety of events happening that both support and discredit the disruption claim. For example, there may be (1) delivery orders that may suggest that the raised floor materials may have been delivered late  to site by domestic supplier, (2) documented adverse comments from consultants on the contractor’s existing workflow that appear to compound the disruptive effects of irregular provision of site access, (3) rejections of the initial installed raised floor due to alleged non compliance with specification etc. Therefore if the disruption analysis does not address these competing variables, the $50,000 may be criticised as being highly theoretical. Secondly, was the baseline productivity of 100m2/day a meaningful benchmark? If the 100m2/day productivity was derived based on the contractor’s intention as indicated in its tender proposal, has the contractor demonstrated its ability to actually accomplish such intention? It is challenging for the claimant to gain access to a reliable and meaningful baseline productivity figure because such information are not usually agreed and included in contract document. It is also very rare for parties to agree in advance any evaluation methodology of disruption which explains why quantification of disruption costs can be particularly tricky. Very often, the choice of method of assessment is heavily influenced by the limitations of documentation available. The documentation administration is also rarely curated based on claims requirements. Finally, is the 40m2/day that was alleged to be the reduced productivity which formed the basis of disruption claim a reasonable basis of comparison? Construction productivity typically involve a ‘learning curve’ where the workers tend to get more proficient over time. Therefore if a typical floor plate of a commercial building that is to be installed with raised floor spans across 600m2, the productivity of the first 100m2 is likely to be lower than the final 100m2 even without any disruptive effects. If the computation of reduced productivity is derived based on the first 100m2 of a new floor plate with different layout, the lower productivity cannot be reasonably attributed to the Employer related event. 

What is clear from the hypothetical scenario above is that computation of disruption costs involve various judgment call and subjective assessments although such arithmetical process may give the impression as being objective, neutral and empirical. The subjectivity is compounded with the lack of clear contractual definition of disruption as well as agreement on evaluation methodology. 

Disruption Claims Under Lump Sum Contract, Remeasurement Contract And Cost Reimbursable Contract  

Does the choice of procurement pathway have any impact on entitlement to disruption costs? Fixed price lump sum contract, remeasurement contract and cost reimbursable contract are the three more prevalent types of procurement pathways in construction contracts that may be useful as points of reference. In general parties allocate execution and commercial risks as part of contract negotiation. Under certain scenario the Employer may decide to shift most of the risks to the contractor in order to secure price certainty in exchange for possibly paying a higher construction cost. In this regard, fixed price lump sum contract will be able to fulfil the Employer’s desire for price certainty. By contrast the nature of certain types of project may be so uncertain such that very few contractors may be willing to accept onerous terms under fixed price resulting in the Employer assuming most of the execution and commercial risks. Under this scenario cost reimbursable contract will be suitable as the contractor will be paid based on its actual costs incurred plus a percentage of agreed fee. As regards remeasurement contract, it is typically a middle ground option where both the Employer and contractor shoulder a fair share of risks. The contractor prices a composite unit rate which typically represent a ‘mini lump sum’ of the all inclusive cost to undertake a unit of works (e.g. $/kg of reinforcement bar, $/m3 for excavated soil etc), whilst the Employer pays the contractor based on actual quantities of work done. Therefore from a holistic perspective, (1) lump sum contract, (2) remeasurement contract and (3) cost reimbursable contract represent a spectrum of procurement pathways with the contractor progressively shouldering less risk from option (1) to option (3). It is also worth pointing out that occasionally there may be hybrid option where a project consist of both lump sum and remeasurement contract for different parts of the works.

Although the recoverability of disruption cost by the contractor is invariably dependent on the wordings of the contract, an understanding of the procurement pathway provides an insight of the parties’ intention in respect of risks allocation between them. As part of negotiation, parties should make certain that the final wordings included in the contract accurately reflect their intentions. The contractor typically favours lump sum contract upon determining that the commercial reward in exchange for risk allocated to be financially favourable. This may be the case where the contractor takes the view that it has competitive advantage relative to other tenderers in carrying out certain works due to its competence and efficiency in specific category of project. Therefore, such contractor may be able to effectively undertake riskier project but maintaining its economic competitiveness. By way of example, an internal fit out contractor tend to be more proficient than a builders’ works general contractor when carrying out construction works in an operational building that is subject to various restrictions imposed by the Building Management Office (BMO). The Employer that engages the contractor may be a tenant looking to carry out large scale renovation works over multiple floors of its newly leased space in the building concerned and may not be in complete control over the restrictions imposed on the contractor. The Employer therefore may be willing to pay a higher contract sum by utilising a lump sum contract so that it can have price certainty whilst being insulated from contractual externalities beyond its control. If the restrictions imposed by the BMO give rise to irregular provision of tenanted space resulting in disruption of installation of raised floor, what is the implication on disruption claim? On one hand, there may be a case to be made that this should be a compensable event in favour of the contractor as it may have incurred additional costs for supplementary resources expended so as to maintain its baseline productivity. On the other hand, when the risks allocated to the contractor under lump sum contract materialised, should the Employer still be made liable for the disruption costs? In reality, whether the contract in hand is actually lump sum in respect of the risk in issue is both a question of fact and question of law. Parties are likely to offer their contesting interpretations over the conditions in issue as well as evidence (e.g. correspondence during negotiation) which support their argument. This is because the application of lump sum principles may differ depending on the types of risk. Whilst the contractor may be agreeable to shoulder disruption risks arising from ‘neutral event’ such as BMO related access restrictions, it is less likely to accept Employer related event e.g. revision in design.

In an alternative scenario, the use of cost reimbursable contract is fairly common when the engagement of main contractor starts much earlier than usual, even before the scope of works is fully defined and designed. This procurement pathway is favoured when the Employer intends to procure and ‘nominate’ multiple specialist subcontractors to the main contractor. In this regard, the main contractor becomes the ‘contracting proxy’ on behalf of the Employer in respect of these subcontractors. Additionally the main contractor also provide its input on issue of ‘buildability’ during the design development phase, due to its early engagement. Whilst the term ‘cost reimbursable’ suggest that the contractor will be paid based on its actual cost incurred plus an agreed percentage of fee, amount payable is usually subject to proof of record e.g. delivery orders, receipts, purchase orders, subcontractors’ invoices etc. How are disruption claims affected by this procurement pathway? As alluded to earlier, the contractor shoulders the least risks under cost reimbursable contract because the contractor effectively recovers all if not most of its cost incurred regardless of its productivity level. This also explains why the Employer undertakes the most financial risk under this procurement pathway. Some of the concerns over this procurement pathway is that there is very limited incentive for the contractor to carry out its works productively. Therefore, it will be extremely rare for the contractor to claim for disruption costs in addition to its regular interim progress payments. This is because even if there are any disruptive events impacting the contractor’s works, it would have been compensated through its regular progress payments without the need to initiate an extra over claim. 

Relative to lump sum contract and cost reimbursable contract, the risks under remeasurement contract are allocated more equally between the parties. As alluded to earlier, the Employer undertakes quantity related risk whereby it is expected to pay the contractor for actual quantity of works carried out. On the other hand, the contractor assumes unit rate related risk where subject to its preamble, the contractor will be responsible for the adequacy of the costs to carry out a unit of construction works. By way of illustration using infrastructure project (of which the use of remeasurement contract is more prevalent), the contractor provides its unit rate for reinforcement bars at $/kg or unit rate for soil excavation works at $/m3. These unit rates are typically inclusive of labour, plant, equipment and materials for the associated works. The basic principle of remeasurement contract is that the quantities indicated in the pricing schedule included in the contract document are deemed ‘provisional’. Therefore the actual quantities of work is likely to differ from the provisional quantities. A remeasurement of actual quantities of work done is therefore expected to supersede those provisional quantities. However, disruption costs relate to expenses arising from supplementary resources incurred in order to maintain the contractor’s productivity as a result of disruptive event. This is more applicable when the works were executed not under conditions described in the contract. Consequently an extrapolation or fair allowance ought to be made to the contract unit rates to cater to such difference in conditions. The challenge however is that such assessment is very much sensitive and dependent on the facts surrounding the case. In particular what were described in the contract document including specifications, drawings and/or descriptions of the pricing schedule for the works in issue? By way of illustration, if the actual excavation works is much deeper than what was originally contemplated under the contract such that it necessitated additional lateral excavation support and soil stabilisation works, the original contract unit rate ought to be adjusted. It should be quite self evident that the site congestion arising from the presence of strutting and propping of temporary support should affect work productivity. The contractor may enhance its case by demonstrating that it will not be adequately compensated by the additional payments arising from incremental quantities of soil excavated via deeper excavations.

Conclusion

It should be clear from the above that it is challenging to substantiate disruption claims as it often require demonstration of deviation from the contractor’s baseline productivity due to compensable disruptive events. Unfortunately most conditions found in standard forms of contract e.g. submissions and acceptance of baseline programme, grounds for extension of time, loss and expense claims provisions etc do not necessarily establish a concrete benchmark for what is considered ‘baseline’ productivity. In other words, even if the contractor’s method statement infers a certain baseline productivity, the Employer can hardly assert a breach of contract if the contractor is unable to fulfil its ‘self imposed standard of productivity’. By contrast, disruption claim is quite ironic in that the contractor is in essence claiming for additional payment due to its inability to accomplish ‘self imposed target’, albeit in consequence of an Employer related event.




Koon Tak Hong Consulting Private Limited