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Builder's Risk - Measuring Delay

J.S. Held expands Surety Practice in Western United States with the acquisition of Benchmark Consulting Services.

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Builder's Risk - Measuring Delay

Jonathon C. Held, President & CEO & Lisa A. Enloe, Senior Executive Vice President
 

I. Introduction

Measuring delay from a loss under a builder’s risk insurance policy is perhaps the most complicated of all time element measures in the claims world. Setting aside the numerous complex issues of coverage, builders risk time element losses require a complete understanding of the period of restoration and the facts surrounding the pre and post loss construction project in order to accurately measure the Period of Indemnity. Because the vast majority of builder’s risk losses involve a repair period which does not run concurrently with the delay, an accurate measurement of the impact from a loss can be difficult to ascertain.

Understanding the many complex issues involved in planning, scheduling and implementing a construction project and the impact that a loss can have on the timely completion of project is complex and involves specific expertise. The following is intended to outline the important factors and typical issues that arise in a builder’s risk loss with delay in opening coverage.

The Basics:

In order to understand the myriad of complex issues surrounding the measurement of delay, trigger of coverage and loss measurement must be understood. First, it is generally accepted that coverage for time element losses relating to Soft Costs and Business Interruption/Rental Value loss is not triggered unless physical damage to covered property from a covered cause of loss results in a delay in the completion of the insured project. Second, the delay is measured from the date the project would have completed “had no loss occurred”. Third, the period of delay assumes that repairs to covered property will be made with the exercise of “due diligence and dispatch”.

Familiarity with the following terms is important to understand how the period of delay is measured:

Period of Restoration – The time necessary to perform repairs covered by the property policy to insured property with the exercise of due diligence and dispatch. Period of restoration typically runs from the date of loss and ends when repairs to covered property have been completed. Although this measurement, (unlike normal property losses) can be complicated because two things will happen after a loss occurs:

  1. Work to repair physical damage is performed.
  2. Contract work in accordance with the project plans and specifications will continue through completion.

Period of Delay – The period of time that runs from the date a project would have been completed had no loss occurred, to the date the project is actually completed. Generally, this time is not expected to exceed the period of restoration, although this measurement is often complicated by any number of things, including but not limited to:

  1. Project re-sequencing.
  2. Consequential impacts on the project schedule unrelated to repair of physical damage.
  3. Repairs to non-covered property.
  4. Post loss delays unassociated with repair from a covered loss.

Notice to Proceed (NTP) – In many projects, NTP is the triggering date for the commencement of the contract for construction, and completion can often be linked to NTP, as expressed in a number of days or months.

Date of Substantial Completion – the date that is typically established in a contract between an owner and construction manager/general contractor in which a project is complete to the point that it is put into service for its intended purpose.

Date of Final Completion – the date that a construction manager or general contractor completes his contract, and all work has been accepted by the owner.

TCO Date – The date that a permit granting authority provides a temporary certificate of occupancy for a project or portion of a project. Typically, TCO dates are the dates that define the actual substantial completion dates.

Final CO Date – The date that a permit granting authority issues a final certificate of occupancy.

Project Schedule – The plan for construction of the project which is typically created by the construction manager or general contractor, and which depicts the sequence and duration of construction activities, typically in a Gantt chart format.

Baseline Schedule – The initial project schedule generally developed at or within 90 days after Notice to Proceed is received by the contractor.

Critical Path – The longest continuous chain of activities which establishes the minimum overall project duration.

Activity/Activities – Items of work to be accomplished on a project that are generally discrete, measurable and consume time.

Float - The amount of time that the commencement of an activity can be delayed before its completion causes it to become critical, thereby having the potential to cause delay. An activity which is critical has zero float. Thus a delay in the completion of any activity on the project’s critical path will result in a delay in project completion.

Project Milestone – A date which signifies an important event in the construction or completion of a project.

Acceleration – Changes to the project schedule to either perform work or deliver critical building components/materials on an expedited basis, often at additional cost. In builders risk claims, acceleration is usually a consideration in performing post loss, nonloss related work, to minimize delays to a project, and mitigate time element losses.

Change Order – a change to the contract between an owner and construction manager or general contractor either adding or deleting contract work. A change order typically amends the contract price and/or time.

II. Fundamentals of Project Scheduling:

The Basics:

Constructing a project is essentially the assembly of many parts or elements over time, in proper sequence, ultimately resulting in successful completion. A successful construction project must be planned and scheduled so that all of its parts or elements are erected in a timely and efficient manner. From the outset of a project, a contractor works to create a plan by which the complete project is sequenced and documented to show the flow of activities over time. A project schedule depicts this plan, which is typically communicated, monitored and updated. Initial planning, therefore, is the first step in developing a measuring tool by which project performance will be tracked through completion.

The development of the complete plan to erect or install all elements of a project requires certain considerations, including:

  • Time,
  • Availability of labor, materials and equipment,
  • Logistics,
  • Seasonal or other constraints.

The above considerations are necessary and must be accomplished so that the parties are assured that they have a complete and viable plan to successfully meet the project goals on time and on budget. Contractors generally provide varying levels of detail of this initial plan during the bid phase to assure themselves that the project can be built in the allotted time for their proposed bid amount.

After award, a contractor will usually produce a baseline schedule for an owner’s approval, indicating the contractor’s initial plan to successfully perform the required work. This baseline, is typically required in the contract for construction, and once approved, becomes the plan by which the progress of all project work will then be tracked and measured. It is common industry practice to update the project schedule on a monthly or periodic basis (or as events warrant).

A project plan or schedule can be documented using various methods, such as a list of project milestones or a Gantt bar chart. For large commercial construction projects, it is standard industry practice to use software such as Primavera (P3-P6) to document the contactor’s plan (project schedule) and to allow for the efficient tracking, updating and monitoring of the plan. Scheduling software is essentially a tool which allows the contractor to provide the logical predecessor and successor relationships of all the activities necessary to complete a project.

When proper logic, sequence and duration are input, scheduling software will calculate future dates of all project activities.

A contractor’s goal is for a project to be a success, and as contractors recognize that change is inevitable, they must be able to react appropriately. Therefore, the plan must be continually monitored to measure progress and to manage change.

The project planning and monitoring cycle can be described as follows:

  • Plan development - the detailed planning of work activities and sequencing.
  • Plan execution - the communication and implementation of the plan.
  • Plan monitoring - the measurement of the as-planned vs., as-built conditions.
  • Adjusting and adapting, or “re-planning” the plan - adjusting or re-planning to accommodate any differences in the as-planned vs. as-built data.

Good project management practice requires a monthly or periodic update and review of the project schedule, and revisions or adjustments to the plan to accommodate unforeseen circumstances that may arise. It is generally understood that the realities of a construction project are dynamic, and thus the plan should be able to be revised and adjusted with the underlying premise that unless there is a change in scope and a corresponding change in time, the end date will not change. Therefore, notwithstanding issues such as extraordinary weather or other unforeseen events, a project is planned, monitored and adjusted continually to compensate for variations that have or will occur. Examples of these that are typical are late or early deliveries of material, or labor productivity rates which are different than as planned. These, amongst many issues must be dealt with so that a project will finish on time and on budget.

A competent project management team understands this dynamic process and will review and adjust the project plan as needed. Project managers realize that they must be flexible, adjusting and adapting, and “re-planning the plan” to adjust to the many conditions that arise on any construction project.

Elements of Project Scheduling – The Baseline Schedule:

Planning and Scheduling involves the understanding, coordination, and interplay of all of the work activities required to complete a given project with respect to:

  1. Quantities of materials
  2. Labor Productivity rates
  3. Labor Availability
  4. Material Availability
  5. Seasonal Considerations
  6. Site Logistics

In establishing a project schedule, activities required to complete the project are identified, and durations are assigned with the understanding of the following relationship:

Quantity of Material divided by Labor Productivity = Duration

It is not uncommon to find that schedulers and planners do not actually perform this equation for each activity, but experienced contractors understand the relationship. A test of the viability of a schedule can be made by reverse engineering the durations provided with subcontractor or industry productivity rates. Obviously variations exist, including the actual durations measured against the plan. This is exactly why the measurement and re-planning phases of project planning are so important.

Activities are then organized with respect to the order in which they must be completed9 by the use of logic predecessor and successor relationships. The contractor studies the logistics, hoisting requirements, weather, site access, availability of resources, etc. for each activity to assure work can be performed. Each activity must be properly and logically linked to indicate planned restrictions with respect to labor crew flow, material and equipment availability, area availability etc. and coordinated with other activities.

In a properly constructed project schedule, project phases should be presented as they either consume time or are important milestones, including but not limited to:

  • Bid and Award (Purchasing and Sign contract),
  • Submittals and Approvals,
  • Fabrication and Delivery,
  • Construction,
  • Testing and Commissioning,
  • Certificates of Occupancy and Turnover, and
  • Punchlist and Closeout.

Other project delivery methods such as design build, should accommodate the above specific requirements, but will also include a design schedule. Therefore, depending on the delivery method and other contract requirements, all projects should be reviewed for their uniqueness.

Project schedules are intended to accurately represent a contractors plan to complete all work. This doesn’t mean that every screw, nail or bolt has to be listed as an activity, with logic ties from bolt to bolt. Generally, the minimum unit of an activity’s time is one day. Sometimes, however, projects may require hourly monitoring, such as an “over-the-weekend” bridge replacement, where each hour is monitored and critical to the success of the project. It is also customary to have individual activity durations of no longer than 30 calendar days, or from one update period to the next, except for administrative activities such a bid and award, submittals and approvals, and long lead fabrications. Critical path activities (activities which, if delayed will have a corresponding delay in completion), should have more detail, i.e., more activities over time. More detail allows shorter measurement periods, allowing earlier recognition of issues which may lead to a delay. This will allow a quicker response should an unforeseen event arise.

Project schedules are often accompanied by a schedule narrative, explaining what may not be readily apparent in the schedule such as logistics, equipment and crew flow, etc. Thus, a completed baseline schedule should represent a viable plan to complete the work, with the available resources, within the available time.

The Dynamic Project - Monthly/Periodic Schedule Update:

It is understood that a project is unlikely to proceed exactly as planned, and that the contractor, by monitoring and measuring progress, will recognize this, and adjust the schedule accordingly. At the end of each update period, assuming no change in scope or unforeseen event occurs, the project should be tracking on time. The point, therefore, of a monthly update is to allow early recognition of activities that may not be tracking on time, and to be able to adjust the schedule to accommodate this difference. The result is an updated schedule to be implemented and communicated to the project team.

A contractor should take care to accurately update the schedule by using appropriate data. For instance, if an activity’s original duration is 20 work days, and 15 days have passed, but only 25% of the work is completed, the contractor should not use the 5 remaining days duration in the schedule, if the rate of installation is not planned to be changed. Clearly, the same installation rate used during the first 25 days will generate a remaining duration longer than 5 days. Simply put, contractors recognize that their original plan and schedule of the work is likely to change, and for that reason schedule updates are an important tool to track progress.

III. Measuring the Loss:

“Completion – Time and Money”

A loss, which is nothing more than an “event” which causes a change to the project, can impact a project in only 2 ways. First, physical damage to real property may cause a change in the scope of work required to complete the project, resulting in additional cost. Second, physical damage affecting a project’s critical path, may cause a delay in the completion of the project.10

But what does “completion” mean?

From the standpoint of measuring economic losses, it is important to note that the only “completion” date that is relevant, is one in which, if delayed, additional expenses will be incurred and/or revenue will be lost. In most large projects, delaying one or more milestone dates can cause increased expenses and lost revenue. For example, high rise condominium projects will typically have rolling turnover dates for apartment units, floors or areas, which will allow unit closings to take place. These dates will often represent contractual requirements that a contractor or construction manager is obligated to meet, and which are established in a project’s schedule. Since condominium unit sales produce the revenue necessary to retire construction debt and provide profit to the developer, it goes without saying that a delayed milestone date caused by an “event” can result in economic loss, even if substantial completion and final completion of the entire project is affected. Likewise, office buildings and retail projects will typically require turnover dates for tenant finishes, Industrial buildings will require turnover to install manufacturing equipment, etc.

The Pre-Loss Completion Date:

Establishing the date by which the insured project would have “completed” had no loss occurred is the first step in any analysis of delay, when measuring time element claims. Determining whether a project was “on schedule” immediately prior to a loss is key in being able to both measure a delay period, if any, or make a decision to “accelerate” work to mitigate anticipated delays and losses. The date a project would have completed absent a loss is generally considered the commencement date for the period of delay for time element losses.

In order to determine the pre-loss completion date and/or milestone dates, a virtual snapshot of the project’s progress immediately prior to a loss must be taken and compared to the project schedule. Since project schedules are designed to be dynamic, they are typically updated on a monthly or periodic basis to show how the project is proceeding against the contractor’s plan. Therefore, understanding the pre-loss project history is vital to being able to establish a project’s accurate pre-loss completion date. The following are typically analyzed in order to determine the accuracy of the pre-loss completion date:

  • Change order requests or project cost events – requests made by the construction manager, general contractor or subcontractors to change either the contract price and/or the contract time.
  • Executed change orders and related scope of work
  • General project progress prior to the loss including delay.
  • Pre loss weather delays
  • Other events which can jeopardize the project’s milestone or completion dates.

On most projects, a contractor or construction manager will typically update and/or change the project schedule to reflect the realities that arise in construction. Therefore, sole reliance on the baseline schedule is improper and can result in the establishment of an erroneous pre-loss completion date.

It is also important that anticipated future dates (after a loss) be studied to determine whether certain milestones or activity dates affecting the project are expected to be met, thereby affecting the anticipated date of completion. For example, suppose a labor strike at a plant manufacturing component equipment for the project’s elevators was underway at a time of loss, and would have affected a future critical path activity. In such a case, the anticipated post loss delay, which may not be related to physical damage caused by a covered peril, could impact the project’s completion date. Although the project schedule update prior to the date of loss should reflect this problem, this is not always the case.

Measuring the Impact of the Loss – establishing the post loss completion date:

The period of delay typically begins on the date a project would have completed had no loss occurred, and ends on the date the project is actually completed, although in many cases this can be difficult to measure for any number of reasons, including:

  • Post loss delays unrelated to the loss.
  • Delays which are affected by non covered issues, including:
    • Consequential impacts on the project schedule;
    • The need to repair or replace non insured property;
    • The need to correct an uninsured condition such as a product or failure or design flaw.

It is important that pre-loss project schedules be analyzed in their electronic format, in order that the analysis can study (among other things), the project logic, including an activity’s predecessor and successor relationships.

IV. Hypothetical Project Example:

In this section, we present a sample project schedule to illustrate the initial plan, updated plan and schedule impact caused by an unforeseen event. This example shows the original project schedule, a pre-loss delay in TCO completion dates due to productivity issues at the building skin, and a fire which disrupts the project and affects the critical path.

(Please see the PDF Overview for full example details and associated imagery)

V. Summary

Measuring the delay period to buildings in the course of construction is a complex, time consuming and expensive process requiring both retrospective and prospective analysis of a project. Knowledge of the construction process, project scheduling and integrating repairs to a project which has been damaged by an event are required in order accurately measure the delay from a loss.

About the Authors

Jonathon C. Held is President and CEO of J.S. Held LLC, a global multi-disciplinary consulting firm. Mr. Held has more than 30 years of experience in the measurement of property damage losses including many large complex claims to projects in the course of construction. He has frequently lectured on the topic of Builder’s Risk coverage and claims to numerous industry groups and authored a number of articles and papers regarding builders risk issues.

Lisa A. Enloe is a Sr. Executive Vice President at J.S. Held LLC. For almost 25 years, Ms. Enloe worked for one of the nation’s largest contractors in a myriad of positions including Vice President and executive in charge of the scheduling department. During her career, she successfully completed more than $1.5 Billion in projects ranging from office and residential buildings, to convention centers and rail projects. Ms. Enloe is an expert in project scheduling. She has planned and implemented many large scale and complex projects, has acted as owner’s scheduling representative on large projects, and consulted on numerous delay related claims arising from physical damages sustained to insured property.

Jonathon C. Held
President & CEO
J.S. Held LLC
50 Jericho Quadrangle, Suite 117
Jericho, NY 11753
jheld@jsheld.com

Lisa A. Enloe
Sr. Executive Vice President
J.S. Held LLC
1140 Connecticut Avenue NW
Suite 609
Washington, DC 20036
lenloe@jsheld.com

 

This publication is for educational and general information purposes only. It may contain errors and is provided as is. It is not intended as specific advice, legal, or otherwise. Opinions and views are not necessarily those of J.S. Held or its affiliates and it should not be presumed that J.S. Held subscribes to any particular method, interpretation, or analysis merely because it appears in this publication. We disclaim any representation and/or warranty regarding the accuracy, timeliness, quality, or applicability of any of the contents. You should not act, or fail to act, in reliance on this publication and we disclaim all liability in respect to such actions or failure to act. We assume no responsibility for information contained in this publication and disclaim all liability and damages in respect to such information. This publication is not a substitute for competent legal advice. The content herein may be updated or otherwise modified without notice.

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