Proving loss of productivity in international arbitration

In summary

The proof and quantification of lost labour productivity is among the most contentious topics in international arbitrations, which can be affected by a variety of factors, within or beyond the claimant’s control. This makes it challenging to prove liability, causality and damages for claims for lost productivity. In addition to liability and causality, the article will review common methods used to quantify lost productivity. This article will discuss the role of the disruption expert in international arbitration as well as practical issues in selecting the best approach for a given situation. In addition, this article will address the difficulties arising from disparate legal and cultural contexts and offer caveats when quantifying lost productivity in the context of international arbitration.

Discussion points

• Loss of productivity claims in international arbitration
• Liability of a loss of productivity claim
• Causation of a loss of productivity claim
• Quantification of a loss of productivity claim
• Role of a disruption expert in international arbitration

Referenced in this article

• AACE International Recommended Practice 25R-03, Estimating Lost Labor productivity in Construction Claims
• Society of Construction Law Delay and Disruption Protocol
• ANSI/ASCE/CI 71-21 Identifying, Quantifying, and Proving Loss of Productivity

Introduction

The infrastructure sector is usually considered a cornerstone for economic momentum. The global infrastructure sector has been on a robust expansion. An average annual increase of 4.3 per cent over the past five years was reported in recent market research, in which a surge in the near future was expected.^[1] In recent years, foreign companies have been attracted to countries in the Americas that are developing significant construction projects due to expansion in the infrastructure sector. For example, international contractors from Spain, Portugal, Italy, China and other countries are involved in the construction industry in Latin American countries.^[2]  

Despite the prosperity of infrastructure development with the involvement of international contractors, many risks and uncertainties challenge project participants in project-specific, social, economic, contractual and legal aspects. Inadequacies in addressing these risks and uncertainties may lead to disputes among project participants. For example, it was reported in a Spanish newspaper article that over €4 billion is at stake in an international arbitration arising between contractors from Spain and other countries and Latin American entities.^[3] Among these challenges is loss of productivity. This article covers the issue of loss of productivity in international arbitration.

Loss of productivity claims in international arbitration

In recent years, especially in the context of the global covid-19 pandemic, labour productivity issues have become prominent in international construction, with entities facing labour shortages, changing economic conditions and supply chain disruptions. Consequently, one of the common problems resolved in international arbitration is lost productivity. What exactly is a loss of productivity claim, and what obstacles might you face when trying to prove your case or refute one in international arbitration?

Productivity is defined as a measurement of output per unit of time or effort, usually measured in labour hours. When a contractor is not achieving a reasonable anticipated productivity, the result is loss of productivity. There are many factors that may lead to loss of productivity:^[4]

• absenteeism and the missing man syndrome;
• acceleration (directed or constructive);
• adverse or unusually severe weather;
• availability of skilled labour;
• changes, ripple impact, cumulative impact of multiple changes and rework;
• competition for craft labour;
• craft turnover;
• crowding of labour or stacking of trades;
• defective engineering, engineering recycle or rework;
• dilution of supervision;
• excessive overtime;
• failure to coordinate trade contractors, subcontractors or vendors;
• fatigue;
• labour relations and labour management factors;
• learning curve;
• material, tools and equipment shortages;
• overmanning;
• poor morale of craft labour;
• project management factors;
• out-of-sequence work;
• rework and errors;
• schedule compression impacts on productivity;
• site or work area access restrictions;
• site conditions; and
• untimely approvals or responses.

A loss of productivity claim in an international arbitration is usually related to issues allegedly caused by the impacts resulting from events, actions or inaction attributable to one or more parties in the arbitration. The terminologies ‘a disruption claim’ and ‘a loss of productivity claim’ are often used interchangeably, although ‘disruption’ usually emphasises the cause and loss of productivity stresses the effect.

Although a delay may lead to disruption and lost productivity may contribute to a delay, a delay (or prolongation) claim and a disruption (or loss of productivity) claim can have different natures. For loss of productivity claims, it is irrelevant whether the impacted activities are on the critical path, but for delay claims it is a fundamental issue whether the delay event is on the critical path or not. Notably, loss of productivity is only concerned with the unanticipated increase in effort to perform the relevant work.

There are no set manners for proving lost productivity on a specific project. Rather, it is generally recognised in the industry that a successful loss of productivity claim requires proof of liability or entitlement, causation and damages.^[5] On the other hand, the respondent defending against a loss of productivity claim may wish to demonstrate that the claimant falls short on one or more of the same three aspects.

Liability and entitlement in a loss of productivity claim

The contractual rights and obligations are generally defined in a contract between parties in international construction and are often based on a certain standard contract based on the International Federation of Consulting Engineers’ (FIDIC) suites of contracts. Liability sometimes arises out of one or more instructed or constructive changes that would entitle the contractor to certain remedies. The changes or events associated with the changes are beyond the claimant’s control and not covered in the original contract. For example, per the 2017 FIDIC Red Book, the contractor is entitled to a time extension, compensation or both for the impact resulting from delayed drawings and instructions.^[6] The delayed drawings and instructions can cause abortive work and rework and out-of-sequence work, push work into periods of adverse weather conditions, cause excessive overtime and stacking of the trades in the context of acceleration, which in turn can result in loss of productivity.

In certain jurisdictions in North America, it is generally recognised that there is a general right to recover the cumulative impact of changes that can be greater than the effects of the individual change orders when taken collectively. This right can be based on either the doctrine of cardinal change or the doctrine of constructive change, which allows the recovery of loss of productivity resulting from cumulative impact of changes.^[7] The concept has gradually been extended to other jurisdictions. For example, Society of Construction Law (SCL) started to formally recognise the concept of cumulative impact in 2017.^[8]

The entitlement for a loss of productivity claim also relies on whether the claimant has properly preserved its legal right to make such a claim. This right may be lost or given up if the claimant fails to comply with the notice requirements in the contract or it agrees to release the respondent for relevant liability in executed variation orders.

Causation of a loss of productivity claim

Causation is the causal nexus showing that liability issues lead to unavoidable damages for the claimant. Lack of causation is often the reason for a failed loss of productivity claim. The cause-and-effect relationship is required to successfully prove a loss of productivity claim. As loss of productivity issues are often unique to a specific project, a definite formula that can fit all or most situations is not available in terms of establishing causation. Rather, an extensive and meticulous examination of project data and documents is typically necessary to determine the causal link in a loss of productivity claim. Clarifying specifics of a project typically requires interviewing the project staff to gain specifics of project events. Adequate supporting documentation, including contract documents, change instructions, meeting minutes, pertinent correspondence and filed reports, can be crucial in substantiating the loss of productivity claim.  Additional exercises may help demonstrate causation, such as:

• an analysis of resource-loaded programmes (or schedules) may help demonstrate the use of overtime and shift work, worker increase and out-of-sequence work;
• a time-scaled chart plotting the productivity and the occurrence of liability events, which may help demonstrate the temporal correlation;
• a chart plotting liability events by location and corresponding productivity, which may help demonstrate the spatial correlation; and
• a cause-and-effect matrix or diagram, which can help demonstrate the link between the root causes, intermediate effects and downstream effects and the resulting lost productivity.

Quantification of a loss of productivity claim

Quantification of a loss of productivity claim is the calculation of hours lost due to the loss of productivity once the causation between the disruption event and the loss of productivity effect is established. These lost hours can then be converted into a monetary value based on an hourly cost rate. There is no one quantification method for a loss of productivity claim, but there are a variety of acceptable methods, all requiring certain considerations in selecting them. 

The Society of Construction Law (SCL), the American Society of Civil Engineers (ASCE)^[9] and the Association for the Advancement of Cost Engineering (AACE) list the common and acceptable loss of productivity methodologies. The ASCE lists its methodology order of preference as measured mile (Tier 1), academic and industry productivity factors studies and modified total cost (Tier 2), and total cost (Tier 3). The AACE similarly lists its order of preference as: (1) project-specific studies (including measured mile); (2) project comparison studies; (3) specialty industry studies; (4) general industry studies; and (5) cost-based methods. The SCL lists the methodologies into productivity-based methods and cost-based methods. The SCL lists the productivity-based methods as: (1) project-specific studies (including the measured mile); (2) project comparison studies; and (3) industry studies. 

The measured mile method, a project-specific study, is identified as the most preferred method for quantifying a loss of productivity claim. The preference stems from its use in actual project-specific productivity data. The method compares the productivity during a period impacted by a disruption event to a period not impacted by a disruption event in order to isolate the effects of the disruption event on the contractor's productivity. Another benefit of this method is that it negates the reliance on the contractor's bid estimate in calculating a productivity value, which an opposing side can argue is not a reasonable productivity rate. An important consideration in selecting the impacted and non-impacted periods of productivity is that the works performed during these two periods must be as similar as possible. In the absence of similar work periods, the contractor can compare the productivity rates on the same project with an unimpacted productivity rate from a different project with similar characteristics, and this is referred to as a project comparison study. Other project-specific studies that are recognised by the industry include earned value analysis. If properly implemented, this method can benefit from the use of actual project data; however, it does rely on earned or planned information.

In the absence of reliable project data to conduct project-specific or project comparison studies, industry studies can be used. These studies provide loss of productivity factors that can be used in a disrupted period to calculate the lost hours. Specialty industry studies are focused on specific subjects to calculate loss of productivity. These subjects pertain to a variety of labour productivity factors, such as acceleration, cumulative impact, learning curve, overtime, trade stacking project management factors and weather. General industry studies are published by trade associations and cover a variety of labour productivity factors. These associations include the Mechanical Contractors’ Association of America, the National Electrical Contractors of America and the United States Army Corps of Engineers. 

If it is not possible to quantify a loss of productivity claim using the aforementioned methods, cost-based methods can be used to quantify a loss of productivity claim. The AACE, the ASCE and the SCL rank the cost-based methods among the least preferred methods, either implicitly or explicitly. The cost-based methods rely on project cost data from project job cost reports. One common cost-based method is the total cost method. This method calculates the difference between what the contractor spent on the project and what the contractor planned to spend and claims the difference in the loss of productivity claim.

Considerations in quantification method selection

While the order of preference of the loss of productivity quantification methodologies are important considerations when selecting an appropriate methodology, the available project data, quality of the data and effort required to complete the analysis should also be considered when determining the suitable method. The preferred methodologies require a higher degree of contemporaneous project data and effort in quantifying the loss of productivity claim. For instance, the preferred measured mile analysis ideally requires detailed project data on installed quantities by area or zone available on a periodic basis. This would require the availability of reliable quality data and may additionally necessitate the effort of gathering the data through contemporaneous project records.

The purpose of the analysis and the level of certainty of the quantification help determine the appropriate methodology. In the earlier non-formal phase of the dispute, a less costly and less time-consuming analysis may be more appropriate in determining a rough order of magnitude quantification. Later formal and binding phases of the dispute may necessitate a detailed analysis with higher levels of certainty in the quantification, thereby necessitating extra cost and effort. Ultimately, selecting the appropriate method depends on the circumstances of the claim and the needs of the project team. The experience of a disruption expert can assist the team in identifying the most applicable method to be used based on the project team's needs and the available project data.

Certain technical considerations must be considered when selecting an appropriate method to identify its suitability. Through these considerations, one can then identify the project data and estimate the effort required to complete the quantification analysis. The important consideration with project-specific and project-comparison studies is demonstrating the similarity in the work being compared. The added requirement with the project comparison study is to demonstrate the comparability between the projects being compared. The concern with the earned value analysis is that it relies on the bid estimate, which may require an extra effort to validate the reasonableness of the hours in the bid estimate.

When presenting a loss of productivity claim using industry studies, it is essential to understand that the conditions presented in the studies apply to certain conditions in the historical projects used to develop these studies. These conditions generally bear little to no relationship to the project in which loss of productivity is being quantified, which adds to the burden of demonstrating how the conditions experienced on the affected project are similar to those presented in the studies. The ASCE states that the use of these studies should be based on a clear understanding of the methodology presented in the study, as well as an explanation of the strengths and limitations of the methodology. The AACE cautions against the use of the studies based on the source data not being known and, therefore, being unable to validate the study. Additionally, the studies do not usually address how to apply the factors with multiple causes of productivity loss and how to apply them to portions or the entirety of the project.

To utilise cost-based methods and overcome any legal challenges to their use, a claimant must demonstrate the following: (1) the data available and the nature of the loss makes it impractical to use any other preferred method; (2) the contractor’s bid is reasonable; (3) the actual cost incurred by the contractor was reasonable; and (4) costs from other events not related to this disruption were removed from the quantification. The cost-based methods have been ruled against in court when the contractor, for example, did not separate costs unrelated to the claimed event in the quantification.^[10]

Role of a disruption expert in international arbitration

Loss of productivity issues are usually subtle and complicated, and productivity is a ratio of input and output that normally cannot be tangibly measured. As commented by a United States court more than 50 years ago, ‘[i]t is a rare case where loss of productivity can be proven by books and records; almost always has to be proven by the opinions of expert witnesses’.^[11] This highlights the importance of the expert’s role in resolving a loss of productivity claim.

In international arbitrations, the experts are generally obliged to assist the arbitral tribunal with their expertise, experience and knowledge in an impartial manner. Per the Royal Institute of Chartered Surveyors (RICS):

Your primary duty as an expert witness is not to a client but to the tribunal where your expert witness report and evidence given: must be, and must be seen to be, your independent and unbiased product and fall within your expertise, experience and knowledge; must state the main facts and assumptions it is based upon, and not omit material facts that might be relevant to your conclusions; and must be impartial and uninfluenced by those instructing or paying you to give evidence.^[12]

Per the Chartered Institute of Arbitrators: ‘. . . experts should provide assistance to the Arbitral Tribunal and not advocate the position of the Party appointing them’.^[13]

These guidelines are applicable to the disruption experts with expertise, experience and knowledge in disruption and loss of productivity. In addition to the obligations to the arbitral tribunal, the disruption expert can also provide useful input to counsel regarding the specific loss of productivity analysis for the project in question itself, and relevant technical background.

Conclusion

Construction projects are susceptible to productivity variability, often affected by numerous intrinsically intertwined factors due to their inherent complexity, especially in the international context. Given all these factors, it is not surprising that proving lost productivity attributed to one or more causes will often be extremely difficult. A disruption or productivity expert is needed to analyse these problems and assist the arbitral tribunal to sort out the messy and complicated issues using their expertise, experience and knowledge, so the arbitral tribunal can adequately evaluate the liability and entitlement, causation and damages associated the loss of productivity claim in question. 

Endnotes