Snowy, abandoned, empty construction site. Credit: maykal/Adobe Stock

Götz-Sebastian Hök
Dr. Hök, Stieglmeier & Kollegen, Berlin

Priscilla Kar
FTI Consulting, London
priscilla.kar@fticonsulting.com

What is a construction contract from a legal perspective?

At the outset of the subsequent discussion of empirical models for the assessment of disrupted construction progress, it might be helpful to recall the very nature of a construction contract or ‘locatio conductio operis’.^[1] A construction contract is a bilateral, synallagmatic and commutative contract which may incorporate obligatory elements (creating obligations) and dispositive elements (transferring property of materials from the contractor to the employer).^[2] Under such a contract, civil law and common law legal systems usually regard the agreed reciprocal performance and counter performance as equal and/or equivalent (in terms of value).

Under the German Civil Code, if the parties omit to determine price as counter performance, the law deems the parties to have agreed on the usual and habitual price for the works at the place (see Section 632 (2) German Civil Code).^[3] In South Africa, the court concludes that the contractor was entitled to ‘reasonable remuneration’.^[4] Under English law, the English court observes that, if a contractor undertakes specific work that is not priced in the contract, the contractor is entitled to be paid a reasonable sum for the work.^[5] The comparative approach in Article 5.1.7 of the Unidroit Principles refers a reasonable price as the default rule.

When the parties execute their contract, they decide to put their future behaviour (for instance, ‘risk events’) under the constraints and restrictions of their reciprocal contract, no matter what happens. In other words, by means of their contract the parties find a temporary community of fate (a temporary structure; in German, Gefüge) which aims to complete a piece of work (the target), regardless of any changes it may undergo.^[6]

The community ends upon completion of the works (for instance confirmed by a taking-over certificate or similar) which states the date on when this community transforms into a relationship which is less intense (aimed at merely protecting the employer against defects). In summary, the law basically divides contracts inter alia into:

• unilateral contracts;

• bilateral (common law) and synallagmatic contracts (civil law); and

• commutative and aleatory (contingent) contracts.^[7]

What is disruption?

Project disruption commonly has multiple causes which can be hard to disentangle, resulting in a ripple effect that magnifies the impact on productivity. The greater the number of causes, the harder it is to keep comprehensive records and quantify losses with precision. Although a contractor may have a duty to mitigate its loss, it may not detect a disruption or realise its full impact until after the event has occurred or when the project is completed. When defining disruption, the main difference between English and German law relates to the way to assess it.

England

The Society of Construction Law Protocol (SCL Protocol) refers to disruption as ‘a disturbance, hindrance or interruption to a Contractor’s normal working methods, resulting in lower efficiency. Disruption claims relate to loss of productivity in the execution of particular work activities’.^[8]

In large and complex construction projects, some level of disruption to the contractor’s original plan is likely to be unavoidable. This could be due to variations to the works, late instructions, a change in site condition, or third-party actions which result in work area congestion, intermittent working, out-of-sequence work or extended working hours. When an activity is carried out less efficiently than it could have been without disruption, the contractor may have to increase the use of labour and plant resources to complete the work and stay on schedule.

Although most standard forms of contract address some of the specific events that could lead to disruption, they do not expressly address recovery for disruption under the contract.^[9] A contractor which makes a disruption claim is required to demonstrate that a disruptive event, which is attributable to the employer, has caused it to incur identifiable additional cost due to down time, uneconomic working, or loss of productivity.^[10]

Germany

The German Civil Code classifies disruption as a cause of action. However, Section 642 outlines that:

(1) If, during the execution of the works, an act by the customer is necessary, then the contractor may demand reasonable compensation if the customer, by failing to perform the act, is in default of acceptance.

(2) Compensation is assessed based on the duration of the default and the agreed remuneration, in addition to the contractor’s expenses or what it could earn from other utilisation of its labour.

How to establish a disruption claim

Common law and civil law jurisdictions have different ways of establishing a disruption claim, but the results are more or less the same.

England

In Walter Lilly v Mackay,^[11] Akenhead J summarised the principles in proving a disruption claim at paragraph 486:

‘Ultimately, claims by Contractors for delay or disruption related loss and expense must be proved as a matter of fact. Thus, the Contractor has to demonstrate on a balance of probabilities that, first, events occurred which entitle it to loss and expense, secondly, that those events caused delay and/or disruption and thirdly that such delay or disruption caused it to incur loss and/or expense (or loss and damage as the case may be).’

To justify a disruption claim, one must demonstrate that:

1. an event has actually occurred;

2. the event is entitled to recovery of loss and expense;

3. notification has been given according to the contract provision; and

4. the event has caused disruption and loss of productivity.

If all four of these criteria are met, then loss can be quantified.

However, when there are many or a constant flow of disruptive events, finding the causal link between the event and the loss suffered can be difficult. It is not uncommon for contractors’ site records to be patchy and full of contradictions. Without good quality contemporaneous records, it is hard to prove the extent of productivity and its impact. Also, the greater the number of causes of disruption, the harder it is to pin down when and exactly how they happened from the site records. When there are several causes of disruption, there will likely be unmeasurable effects in other areas. These losses may not be easily recognised by the contractor as part of their assessment.

Germany

The German Federal Supreme Court requires the submission of a coherent construction progress-related presentation that outlines the actual effects of the respective disruptive events on the specific progress.^[12] A detailed overview of when and how individual activities were supposed to be carried out must be provided, supported by details on the specific use of labour and machinery. This should then be compared with actual progress to be substantiated. In practice, expert statements will be produced and submitted. The legal approach has become an art, practised by construction business administrators.

The causality test

To prove a claim for loss or productivity under both civil and common law, the claimant must demonstrate a causal link between an act of hindrance by the employer and the loss of productivity and additional expenditure. The claimant must prove that the loss of productivity and additional expenditure was a direct consequence of the disruptive events.

In most legal systems, evaluation and determination of quantum is contingent upon the confirmation of a cause-and-effect nexus (ie, the causality test). However, this test is aimed at confining liability to attributable reasons and should not be applied too narrowly. The causality test as a mere ‘but for’ test (meaning causation in fact) is frequently easy, while the discussion of remoteness or similar may be difficult.

To allocate liability, there are four legal constraints on the causality test which must be met. The disruptive event must be:

• bearable;

• foreseeable;

• adequate; and

• calculable.

Accordingly, the legal specification of causality (which is typically aimed at allocating liability and avoiding injustice), and their inherent limitative elements make it difficult to demonstrate a sufficiently strong factual basis for causation. While English law provides the foreseeability test,^[13] German law proposes the adequacy test.^[14]

Adequate causation is established if the act of the wrongdoer created a high risk of generating the kind of losses incurred, or if the risk of the occurrence of such a loss has been substantially increased.^[15]

Foreseeable damages arise naturally, ie: ‘according to the usual course of things, from the breach of contract itself’ and are ‘supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach of it’.^[16]

Methods in measuring disruption

The construction industry has developed various methods for measuring loss of productivity due to disruption events depending on the types and quality of records available. In England, the SCL protocol sets out a range of disruption analysis methodologies that can broadly be divided into ‘productivity-based’ and ‘cost-based’. Two of the most widely used project-based methods are the ‘measured mile analysis’ and the ‘earned value analysis’, both of which have their own advantages and disadvantages.

In Germany, the ‘Schottke pattern’ provides conclusive guidance on the assessment of disruption of progress claims, focusing on the contractual intentions of the parties subject to general legal limitations and restrictions.

This article provides a comparative commentary focusing on these three methodologies.

Measured mile analysis

The measured mile analysis is a widely accepted method for analysing disruption. The SCL Protocol defines it as a method that ‘compares the level of productivity achieved in areas or periods of the works impacted by identified disruption events with productivity achieved on identical or like activities in areas or periods of the works not impacted by those identified disruption events’.^[17]

As measured mile analysis compares actual cost data, the productivities over the two different periods must be of the same type of work which is performed under the same physical conditions in the same project.

When limited site records have been maintained by the contractor, establishing a baseline of productivity might be extremely difficult, if not impossible. If the work is severely disrupted throughout the project, it may be impossible to find a period that was not impacted, or no similar activities exist to allow for a like-for-like reliable measured mile for an accurate calculation. This method assumes that the data is error-free, yet incorrect data could distort the results of the analysis.

For a project that has been severely disrupted, it is rare to be able to identify an unimpacted period that is long enough to be used as comparable baseline productivity. Instead, a modified approach – a ‘baseline measured mile’ – is often deployed. When adopting this method, a less impacted section or period of the project will be chosen, and disruptive events or any other anomalies that are not an employer’s culpability will be excluded.

Earned value analysis

Earned value analysis identifies the number of man-hours reasonably included in a tender for completing certain work activities and compares this with the actual man-hours in completing the same tasks.^[18] If all goes to plan, as the work activity progresses, the tender allowance is ‘expended’, and the man-hours allocated are ‘earned’.

For example, a contractor originally planned to take 20 hours to lay ten metres of pipework. Because of a disruptive event, the contractor took 35 hours. This means that the contractor spent 35 hours to earn 20 hours allowed in their tender, and the additional 15 hours ‘expended’ is because of productivity loss.

Earned value analysis is based on an estimated baseline productivity; it is usually derived from the contractor’s planned productivity rate in its tender. It is important that the tender allowance is accurate and achievable. A contractor may often overestimate their efficiency and productivity and not allow sufficient risks for unforeseeable work to keep its price competitive in winning a tender. To avoid any challenges to the baseline productivity, the Contractor must properly verify its tender allowance, as it was emphasised in the judgement of Walter Lilly v Mackay that a contractor ‘will need to demonstrate that its accepted tender was sufficiently well priced that it would have made some net return’.^[19]

Proving whether the estimated productivity is realistically achievable is crucial. In Amey v Cumbria,^[20] Amey quantified its disruption by comparing planned output from its tender allowance with productivity actually achieved. Although the court accepted Amey’s disruption measurement method, Amey did not provide convincing evidence that its tender planned output was realistically achievable. Judge Stephen Davies commented that ‘if this approach was to be taken it ought to have been verified by being able to demonstrate that the planned outputs had actually been achieved in some cases where the disrupting events did not occur’.

The court continued that, by reference to the contemporaneous records which were produced, the contractor could have conducted a cross-check on a suitable sample basis.^[21]

Regardless of the method chosen for measuring disruption, the underlying data must be credible.

The Schottke pattern

Due to the 2018 change in German construction contract law, Professor Ralf Schottke, an engineer, business administrator and experienced German delay and disruption expert, developed a tool to assess disruption of progress claims. This method takes into account the contractual intentions of the parties subject to general legal limitations and restrictions.

The Schottke pattern aims to overcome a too-legalistic view on ‘cause and effect’ discussions without neglecting the existence of such legal requirements, based on the observation that construction contracts are embedded in a characteristic commercial logic known as commutative justice. The tool is fact-based and universally applicable, with five key stages.^[22]

Stage 1: Determination of impeded part of the works

Stage 1 of the Schottke Pattern involves an analysis of what is or was actually impeded or disrupted, and the related tender assumptions (planned expenditure) with regard to the related activity. This stage identifies:

• Planned performance of each activity based on a resource-loaded programme.

• Tender assumptions regarding the use of resources by asking the questions:

1. What material shall be used?

2. What is the intended or necessary working method?

3. What equipment shall be used?

4. What class of labour is involved?

5. How much labour is used?

At this stage, the affected activity (in a detailed construction programme) must be identified, for instance ‘steel bending’ (regarding a floor level), by taking in account the working conditions (eg, complexity, weather, etc), working method, the equipment, labour and material (eg, dimensions, quality, workability factors, etc).

For example, a project involves significant steel bending activities, which include labour and steel, being price based on kg at €18/h. A variation impacted 1,000kg of steel bending out of an estimated 2,000kg. It emerges from the calculation that the Contractor assumed in the Contract a productivity rate equal to 0.8 hour per kilogram. This equals to a calculated tender cost at €14.4/kg.

This identified figure applies to 1,000kg steel bending (the identified disrupted activity).

Stage 2: Determination of hypothetical ‘actual cost/expenditure’ but for the impeding event [correction of errors]^[23]

With an intention to substitute the ‘measured mile’ approach, Stage 2 of the Schottke pattern analyses the details of the impeded activity. For example, the steel bending activity may be broken down into different steel bar diameters. At a subsequent step it is possible to rely on referenced resource expenditure values as recorded in manuals.

Stage 2 is the most important phase of this method as it corrects basic assumptions (also requested by the SCL)^[24] with regards to hypothetical working conditions. This is because the occurrence of the disruptive event means that the contractor will not carry out the work as planned and thus, actual expenditure but for the disruptive event can usually not be identified and/or measured.

However, if exceptionally measurable, the measured data will be used.^[25] If no value can be determined by measurement, it must be derived from the baseline contract calculation.^[26] In this situation, the values can be estimated by taking into account either empirical or reference values from undisturbed areas.^[27] The similarities with the measured mile approach cannot be denied. However, the Schottke pattern avoids deriving the result from actual cost (in respect disturbed and undisturbed miles); it merely uses reference data to correct the calculation assumptions, if necessary.

By comparing as-planned and hypothetical as-built data, it is possible to obtain a correction factor. Hence, this stage aims to understand what the contractor was supposed to expend compared to what it planned to expend (in terms of resources) as per tender.

Stage 3: Determination of ‘actual cost’

This takes into account the impeding event and eliminates extrinsic or irrelevant sources of additional expenditure (such as learning curve of steel bending gang, insufficient equipment, or temporary raw material shortage).

Stage 4: Extrapolation of tender rates by using corrected (hypothetical) values from Stage 2

Intermediate result:

At this stage, the previously ascertained value applies in order to extrapolate applicable tender rates.

Stage 5: Evaluation

The German Schottke pattern does not intend to substitute the evidence for cause and effect, but it provides a reasonable and appropriate method to adjust the original price in lieu of introducing a foreign element of compensation on a ‘cost plus’ basis. It allows the users to:

• take into account evidence for cause and effect;

• restore the contractual equilibrium in a sensitive and reliable manner by adapting the price to the changed circumstances based on resource management data;

• rely on corrected tender rates rather than tender assumptions; and

• extrapolate a new price, or, in other words, determine an unknown value outside of a set based on the existing curve.

Conclusion

In assessing disruption, it is important to bear in mind that disruption by an employer’s risk event means interference with the contractor’s freedom to manage the works efficiently, and due expedition of the work according to the appropriately planned resources originally included in the contract sum. To restore the contractual equivalence of performance and counter performance, a pragmatic and rational approach in measuring loss of productivity due to a disruptive event is normally adopted, depending on the circumstances surrounding the disrupted works. It is important to clearly explain the reason for the measurement method chosen, and to set out the causation, liability, and the associated losses comprehensively and logically.

Any method of disruption must involve identifying, analysing and costing relevant or consequential resources and should ascertain the actual additional expenditure. High quality, accurate site records are essential. Regardless of the method, the underlying data must be credible and reliable.

The ‘measured mile’ method identifies the actual productivity rate of an undisrupted progress mile as the baseline, instead of using tender allowance based on assumptions, to compare against an impacted period. By contrast, the earned value method adopts tender allowance instead of actual productivity rates achieved as the baseline.

The Schottke pattern considers tender allowances as unrealistic and not achievable, and new productivity rates should be derived from tender resource allowances to reflect the hypothetical actual resource allowances, subject to the application of correction factors. This is to assume that when the work is severely disrupted, it may be impossible to ascertain the actual allowances of a (hypothetical) planned undisrupted work progress.

As much as we like to emphasise the importance of theories and maxims, in order to move forward and evaluate the contractor’s loss of productivity with accuracy, good record keeping on the use of resources and understanding of the contractor’s calculation of tender allowances is key. A reliable database is imperative in restoring the equivalence of price and expenditure by evaluating the impact on the contract price as a result of the disruptive events. A contractor’s hypothetical, and frequently inaccurate or speculative assumptions in its initial contract price, and its own culpable (coincidental or incidental) losses or gains, should be eliminated.

This article is based on a presentation given at the DRBF Central and Eastern Europe Conference at Vienna, Austria, on 10 March 2023.