Valuation matters: disruption

In writing this article, I have used the very helpful ‘ascertaining loss and expense’ RICS practice note. This is an authoritative and very helpful guidance document that is used by industry professionals when valuing loss and/or expense.

In this article, I will cover some of the basics, outline some of the challenges with proving disruption claims, and provide some top tips to help you reflect on and improve your approach.

The Basics

Disruption is not prolongation.

The costs for disruption relate to loss of productivity and/or uneconomic working caused by a non-critical delay event, whereas prolongation costs are time-related costs caused by a critical delay event.

The basis of the argument is that you had to carry out the works in a different order to that which you agreed in the contract and that you carried out the works less efficiently or uneconomically when compared with your recovery through the contract.

To make a disruption claim, you need to show that the planned and actual use of labour and plant differed, and this difference can be tied to a client event, then the contractor can recover the cost incurred.

For example, keeping things as simple as possible, if your planned labour productivity factor is 0.75 (i.e. that is the rate that you recovered through the contract sum) and your actual productivity factor is 0.5, then you will incur the cost of more labour hours than you recover through the contract sum.

However, the fact that you have spent more is not enough, and you need to connect your loss to events that are your client’s risk under the contract.

Prove It

Disruption claims are simple in theory, but, in practice, they are notoriously difficult to prove, and there are numerous reasons for this.

Firstly, the baseline productivity information is either missing or unclear. Where this occurs, how do you demonstrate that the baseline from which you are measuring change is correct? In these circumstances, you will always be met with criticism that you have not proven your claim.

Secondly, you will inevitably have payroll records showing how many labour hours you spent, but is that information structured in a way that allows you to analyse loss? Can you measure efficiency in different sections of the work or by trade? How do you connect the increase in hours in a given period with an client risk?

Thirdly, if you are not recording and analysing resource efficiency to analyse performance, then how do you overcome a criticism that you failed in your duty to mitigate? You were losing money for weeks, if not months, and you didn’t know or do anything about it? That might be a difficult hurdle to overcome.

Fourthly, failure to notify might time bar you, as might your obligation to submit information to ascertain the amount of loss and/or expense due. If you realise you are going to lose a load of money and go to your client at the end with a global claim, then you probably will not get very far.

Top Tips

If you self-perform work, then your approach to commercially managing projects should be very different from that of a main contractor, who will typically transfer labour productivity to the supply chain and administer subcontracts.

You need to establish your baseline productivity data, which should be contained in the estimating information. Once you have pulled that out, you need to look at how many hours you have for which operative types and, if it isn’t already done, work with the planning team to prepare a labour histogram that aligns the contract programme with your allowances in the contract sum.

You could then take what seems like a crazy step and make that information visible to your client. There is a huge amount of nervousness about doing this because it will be used as a stick to beat you with.

I have never quite understood this mentality because, at the same time, you are depriving yourself of an opportunity to prove a future claim. If there are issues during project delivery, which is most likely to be the cause: dependencies not achieved by your client or you not providing enough resources?

A baseline is a start, but the data structure of your cost records needs to be aligned so that you can analyse performance. This means working with the operational team to agree how and when information will be recorded. Don’t assume it will magically appear—educate the team, be the thorn in their side, get what you need to protect the project.

Lastly, take a little and often approach. The issues that occur should really be recovered as variations or compensation events. Try and make it a weekly habit to reconcile the data, establish the events, and notify them. Your chances of being paid will be better with an itemised list of 500 x £500 issues versus a one-line £250k disruption claim.

Final Reflections

Disruption claims are difficult to prove, but only because businesses that self-perform construction work do not put the right controls in place to measure performance and ensure they recover their entitlements. If the work isn’t done to contemporaneously prove these issues, then doing it retrospectively will be extremely difficult, if not impossible.

Your approach to managing commercial risk needs to be led by the type of risk that you typically take in construction contracts. If you are taking productivity risks and you do not have productivity controls in place, then you will find yourself in some financial difficulty sooner or later.

The controls are difficult to implement, but living the nightmare of a financially troubled project is far harder!

Next week, we will continue the focus of this valuation matters mini-series with a focus on acceleration.

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