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September 2007 Issue For a print-friendly version, download the PDF. Delay Caused by Prime Contractor May Expose It to Liability to Its Parallel Primes Loss of Productivity Caused by Learning Curves Recent Case Notes Delay Caused by Prime Contractor May Expose It to Liability to Its Parallel Primes By Brian Falcon Brian concentrates his practice in construction law and litigation, public contract law and commercial and business litigation. Frequently, owners enter into a single contract for construction with a general contractor, who then enters into subcontracts for materials and labor. In certain instances however, the owner will enter into multiple prime contracts with different contractors. In such cases, rather than one contract governing the scope of work, multiple prime contractors are charged with responsibility for different portions of the work. Regardless of the nature of the project relationships, an aggrieved contractor usually looks to its contractual privy (i.e. the owner) for relief. This is because the contract creates certain duties that, if breached, provide the legal mechanism for a claim for damages. Generally, only those who are parties to a contract, or in privity with a party, have a right to sue under a contract. Barth Electric Co. v. Traylor Bros., Inc., 553 N.E.2d 504, 506 (Ind.Ct.App. 1990). As a result, on a multi-prime project where one prime contractor is damaged, it will seek recovery from the owner with whom it has contracted regardless of the cause of the loss. However, Indiana does recognize an alternative means of recovery against another prime contractor under very specific conditions. The prime contractor must understand the terms of its contract with the owner however to make use of this theory. Despite the fact that no direct contract between the prime contractors exists, each may be afforded status as a “third-party beneficiary” of the other prime contractor’s contract with the owner. Third-party beneficiary status exists only upon a finding of the following elements: (1) the parties to the contract intend to benefit a third party; (2) the contract imposes a duty on one of the parties in favor of the third party; and (3) the performance of the terms of the contract render a direct benefit to the third party intended by the parties to the contract. Tonn & Blank, Inc. v. Board of Com’rs of LaPorte County, 554 N.E.2d 827, 828 (Ind.Ct.App. 1990). The “intent to benefit” must clearly appear in the terms of the contract and may be shown by naming a specific third party or a class of third parties. Id. In Barth Electric, three prime contractors entered into identical contracts with the owner. Each contract referred to the other parallel prime contractors. The key contract provisions were as follows: ¶6.2 MUTUAL RESPONSIBILITY The Contractor shall afford the Owner and separate contractors reasonable opportunity for the introduction and storage of their materials and equipment and the execution of their Work, and shall connect and coordinate his work with theirs as required by the Contract Documents. Any costs caused by defective or ill-timed work shall be borne by the party responsible therefor. Should the Contractor wrongfully cause damage to the work or property of any separate contractor, the Contractor shall upon due notice promptly attempt to settle with such other contractor by agreement, or otherwise to resolve the dispute. Barth Electric claimed that it was delayed as a result of schedule deviations by the other contractors and it sued the other contractors, asserting rights as a third-party beneficiary of the contracts between the owner and the contractors. The Court of Appeals held that Barth Electric could properly pursue its third party beneficiary claim, relying most notably on the clause which provided that “any costs caused by defective or ill-timed work shall be borne by the party responsible therefore.” Id. at 506. The Court of Appeals applied and considered six specific factors in determining whether a third-party beneficiary claim is supported, including whether: “(1) the construction contracts contain substantially the same language; (2) all contracts provide that time is of the essence; (3) all contracts provide for prompt performance and completion; (4) each contract recognizes other contractors’ rights to performance; (5) each contract contains a non-interference provision; and (6) each contract obligates the prime contractor to pay for the damage it may cause to the work, materials, or equipment of other contractors working on the project.” Id. at 507. In light of those six factors, the Court of Appeals held that a third-party beneficiary claim by Barth Electric was supported. Id. Each contract was “essentially identical” and the project general conditions required that each contractor pay for damages it caused to other contractors, even though no direct contract existed between the contractors. Id. A similar result was reached in Tonn & Blank, although the contractual terms were not as direct as those at issue in Barth Electric. Tonn & Blank was to provide demolition and general construction services while another contractor (“Southern Steel”) was to provide detention equipment. Each contracted separately with the owner and each contract provided that, “The Contractor shall afford other contractors reasonable opportunity for the introduction and storage of their materials and equipment and the execution of their work, and shall properly connect and coordinate his Work with theirs.” Tonn & Blank was delayed by Southern Steel and sought recovery from Southern Steel for damages as a third-party beneficiary of Southern Steel’s contract with the owner. Southern Steel argued that it owed no duty to Tonn & Blank. The Court of Appeals agreed with Tonn & Blank, noting that the contract between Southern Steel and the owner demonstrated an intent to benefit other contractors with “properly coordinated and connected work.” Id. at 829. Such coordination would have directly benefited Tonn & Blank. It is important to remember that third-party beneficiary status is determined based upon the factors discussed herein and most notably the express contract terms. Of utmost importance is a showing of a direct intent to benefit the aggrieved contractor in the contract between the owner and prime contractor. Also, contractors should be mindful that the presence or absence of a third-party beneficiary claim need not be made at the expense of a claim against the direct contractual privy, generally the owner. The contract between the owner and aggrieved contractor likely still confers a duty on the part of the owner and the cautious contractor will seek its remedy against both the owner and the parallel prime contractor causing the damage. If you have any questions regarding this article or related matters, please contact Brian Falcon at (317)580-4848 or bfalcon@drewrysimmons.com. top Loss of Productivity Caused by Learning Curves By Daniel M. Drewry Dan concentrates his practice in construction law and litigation, public contract law, surety law and commercial and business litigation. In construction, productivity is often viewed as manhours per unit of work – greater productivity means fewer manhours spent per unit of work. Since contractors estimate work and prepare their bids based upon predetermined labor productivity, productivity is an important and vital part of a contractor’s ultimate success. As such, decreased productivity directly affects the bottom line. Delay and impact claims typically include as a damage component the loss of productivity due to delays, interferences, disruptions and/or acceleration of a contractor’s performance. Learning Curves Although there are numerous causes of labor inefficiencies, such as re-sequenced work, trade-stacking or excessive overtime, many of which are interrelated, one culprit of decreased productivity not often discussed is the “learning curve” of an employee or crew. It is a generally accepted principle that the time required to perform a certain task decreases with practice and experience doing that task. In the construction industry, the time required for a worker to perform a repetitive activity decreases with each repetition performed by that worker. This is referred to as the “learning curve.” There are essentially two types of learning curves. The “basic curve” is the learning curve necessary for an untrained worker to acquire training, knowledge and skills fundamental to a particular trade. This curve is necessary in order for the worker to achieve an average level of proficiency. In contrast, the “experience curve” is the worker’s attainment of the specialized skill set required to perform a specific repetitive activity. The “experience curve” is the curve most likely to have an impact on productivity, especially in the context of acceleration in work. In order to accelerate, the contractor frequently requires its labor to work extra shifts or on an overtime basis, which in either event results in increased base wages, fringe benefits and premiums beyond the standard labor rate. When accelerated, a contractor will often add extra crews in order to perform the same work. If you have two crews performing the same amount of work originally intended to be performed by one crew, the number of repetitions by each crew will only be one half of what was originally planned. As a result, neither crew will meet the same planned level of efficiency. Additionally, the contractor may also lose money on the initial work being performed by both crews, as the second, new crew will presumably be at the beginning of its “experience curve” when performing this work as opposed to where the original crew would have been if allowed to perform that work without the acceleration. The rate of unlearning also has a major impact on productivity with regards to repetitive work that is delayed during the performance of that work. Often, if there is delay between repetitions, the employee will have to start further down the experience curve in order to re-achieve the efficiency he or she had prior to the delay. The extent of the relearning, or rather the forgetting, is related to the duration of the delay or disruption. The longer the delay or disruption, the more the worker will forget and have to relearn. The problem, as with all loss of productivity claims, lies with quantifying the impact of the delays or disruptions to the productivity. Experience curves for repetitive tasks apply to both individual workers as well as to crews. Missing or additional crewmembers can also disrupt established flow or sequencing of work and reduce overall crew efficiency and/or productivity. With a missing crewmember, the tasks originally to be performed by him or her must now be assumed by the remaining crewmembers. Depending on the skill set of the missing member, this potentially adds another layer to the learning curve of the remaining crewmembers. The addition of crewmembers can also upset the established division of work amongst the crew. Existing crew members may have to take on the task of instructing and training the new member to bring him or her further along the learning curve, all of which contributes to decreased efficiency. In addition to the sheer number of repetitions, the following factors can impact the learning or experience curve: a. Job organization b. Equipment and crew coordination c. Crew familiarity with the job through repetitive operations d. Daily project management and supervision e. Sufficient workspace for crews, i.e. no trade stacking or over-manning f. Development of efficient material supply systems g. Development of efficient equipment and tools Ward & Thomas, A Validation of Learning Curve Models Available to the Construction Industry, Pennsylvania State University, Construction Management Research Series, Report No. 20 (Aug. 1984). However, these factors can also directly impact productivity without impacting the experience curve. Conclusion The identification and measurement of productivity losses presents a unique hurdle to the contractor, in part because productivity on a project is often analyzed after the fact in an attempt to ascertain the full extent of a contractor’s labor cost overruns as part of a claim. Although labor inefficiency is a real consequence of acceleration and/or delay, the resulting damages to the contractor are extremely difficult to quantify and prove. In fact, the methodologies used to measure productivity losses warrant a lengthy discussion of their own that would extend well beyond the scope of this article. However, familiarity with the causes of labor inefficiencies, such as learning curves, will better enable the contractor to identify and document such problems as they arise, thereby increasing the likelihood of recovery of productivity claim components. If you have any questions regarding these cases or related matters, please contact Daniel M. Drewry at (317) 580-4848 or email him at ddrewry@drewrysimmons.com. top Recent Case Notes By Lynn A. Toops First National Bank & Trust v. Indianapolis Public Housing Agency, 864 N.E.2d 340 (Ind. Ct. App. 2007) The Court of Appeals affirmed the lower court’s grant of partial summary judgment in favor of an owner who brought an action against a bank for breaching a retainage agreement. The owner claimed the bank was in breach of the agreement by distributing escrowed funds pursuant to a judgment rendered in a prior case involving only the owner and the contractor. The Court held that the bank breached the retainage agreement when it paid the escrowed funds pursuant to the judgment but without the owner’s written authorization. Bailey v. Concord Construction, Inc., 868 N.E.2d 921 (Ind. Ct. App. 2007) (unpublished decision). A property owner in Martinsville entered into a contract for the sale of farm land. The contract was contingent on the approval of a zoning change and the buyer obtaining financing. Prior to closing, the buyer contracted with Concord to construct a steel building that would house a motorcross track on the property. The owner and the buyer did not close on the sale. As a result, Concord filed a mechanic’s lien on the property. The Court of Appeals found that Concord’s lien was not valid and enforceable because there was insufficient evidence of the owner’s active consent to the construction. Specifically, the owners merely allowed the construction to begin shortly before the scheduled closing and there was no evidence they benefited from the construction. Wolfe v. Eagle Ridge Holding Co, LLC, 869 N.E.2d 521 (Ind. Ct. App. 2007). The owner provided the contractor with a “full satisfaction check” that was conspicuously marked on the front and back as being for full and final payment of the owner’s outstanding debt to the contractor. The amount of the debt was disputed so the contractor recorded a notice of intent to file a mechanic’s lien. Shortly thereafter, the contractor endorsed and cashed the “full satisfaction check.” The Court found that, pursuant to the Indiana Uniform Commercial Code, the contractor’s act of cashing the check operated, as a matter of law, as an accord and satisfaction, i.e., full discharge of the contractor’s claim against the owner. Therefore, there was no longer a debt to support the lien against the property so the Court affirmed the lower court’s judgment against the contractor on its complaint to foreclose the lien. If you have any questions regarding these cases or related matters, please contact Lynn A. Toops at (317) 580-4848 or email her at ltoops@drewrysimmons.com. |
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