In this edition:
- Shipyards Dealing with Disruptive Claims
- Construction Project Environments)
- Professional Spotlight: Michelle Nenna Delehanty
- Favorable Ruling in Complex Design-Build Case Involving U.S. Government Facility
- Shipyard Contracts: New Construction vs. Ship Repair
Shipyards: Dealing with Disruptive Claims
By: Robert C. McCue Shipyards that are building or repairing ships operate in a very complicated marketplace where costs are carefully monitored. Often claims are submitted requesting additional costs above the stated contract amount because problems beyond the shipyard’s control resulted in disruption of their as-planned flow of work. All too often, the alleged problems follow a pattern that becomes apparent when analyzing such claims. Common allegations of disruption include excessive owner changes, delays in approving changes, late responses to inquiries and problems, defective design, late or defective information or equipment supplied by the owner, and over-inspection. Such allegations form the basis for requests for equitable adjustments, claims, and lawsuits. However, many claims overlook problems that may be the responsibility of the shipyard such as underbidding the costs, rework due to poor performance, management and planning inadequacies, detail design errors, procurement problems and labor difficulties.Changes
Design Problems
Shipyards frequently argue that numerous changes and performance cost increases are the result of problems with the ship’s design as provided by the owner. Shipyards may allege that the design contains errors, ambiguities, conflicts with other requirements, or fails to provide enough information or detail to allow adequate price or schedule analysis. Often in developing a new class of ships, the shipyard is engaged to design the first ship based upon the performance criteria established by the owner, and then to produce a specified number of units. The design developed by the original shipyard (the “lead shipyard”) is then the basis for the contract documents for the construction of additional ships by a “follow-on” shipyard. It is not unusual for the follow-on shipyard to submit a claim for defective design developed by the lead shipyard although the lead shipyard constructed the first ships without a similar claim. In more than one instance, when the shipyard served as both the lead and follow-on, it submitted claims based upon deficiencies in its own design passed on as contract documents for the follow-on ships.Late Responses
During performance of a new construction or repair contract, the shipyard may have inquiries concerning problems, details, and ambiguities found in the contract documents. If the responses to the requests are not timely, the shipyard may allege that its performance was disrupted and its costs increased. Timely responses and an agreed to goal for response time may have prevented or reduced such costs.Over-Inspection
New construction or repair work is subject to ongoing inspections and special reviews at stated milestones such as dock and builder’s trial. A common complaint by shipyards is that the owner’s inspectors imposed a stricter standard of inspection than required by contract or industry practice. Constant interruptions by inspectors and the processing of additional documents allegedly disrupt the productivity of the shipyard’s work crews.Late Owner Furnished Items
Commonly, in ship repair or new construction work, the owner agrees to furnish the shipyard with items of specialty equipment and related information. If the equipment is delivered late or defective, the shipyard may claim disruption and delay. Similar claims may arise, particularly in the design effort, if the relevant information is inadequate or tardy.Impact of Claimed Problems
The impact of the possible disruptive events described above varies both in scope and severity depending upon the timing of the event and the shipyard’s program status. A shipyard with financial or scheduling difficulties may claim a full range of impacts. Loss of labor productivity may be claimed due to the following: required overtime and the associated inefficiency, dilution of effective management by the craft supervision, inability to obtain necessary craft talent, doing work out of the most effective sequence, congested work areas, and inability to use advanced outfitting techniques. The list of potential impacts on the productivity of the labor force includes several other theories, depending upon the project and the creativity of the shipyard.Costs and Damages
A shipyard’s calculation of the alleged costs and damages from disruptive events often lacks exactness and the itemization found in change order back-up. This may be due to the difficult nature of determining the impacts with scientific certainty and mathematical precision, or from the difficulty in determining costs with proper record keeping during construction. Frequently shipyards resort to the use of formulas and factors. For example, one publication that was originally intended to assist in forward pricing of change orders has been used by shipyards to calculate damages on post-contract claims. EntitledGuidelines on Factors Influencing Cost for Forward Pricing Change Order Disruption, Delay a Cumulative Effects. NAVSEA 0283, this publication was based on a study of the application of statistical methods for determining damages for a variety of disruptive events. Known in the industry as the Factor Formula Method, impacts are quantified by factors based on the type of ship, number of trades affected, number of compartments impacted and the timing of the change. Each alleged disruptive event is assigned a factor multiplied by the number of direct labor hours involved in the change order to obtain a price for the disruption. To our knowledge, use of this approach has not been successful in litigation. There are at least three major problems with the use of such factor formulas in claims and at trial. First, the factors are not based on the actual performance data for the particular contract, and may not be relevant to the specifics of the claimed impacts. Second, the statistical background for the factors may not be reliably established for litigation purposes. Finally, where agreements between the shipyard and the owner allow factors to be used for forward pricing change orders, the agreements often specifically prohibit the use of formulas in claims or litigation. As an alternative to the factor formulas, labor efficiency variations may be determined by analyzing the detailed labor records for the contract during specific periods and in distinct locations. For example, labor productivity, measured by labor costs/units produced, can be compared for periods of time not subjected to disruptive events against periods affected by disruptive conditions. Difficulties in using this approach may arise if there are no distinct locations or time periods that are unimpacted to compare with the allegedly impacted periods. Other problems arise if there are too many disruptive events or inadequate records concerning the labor hours, activities, or the disruptive events.Conclusion
The maritime industry is highly competitive and cost-conscious which may be the reason for the frequency of disruption claims. Because these disputes are common, they will likely be subject to increased scrutiny. In particular, the approaches used in calculating the alleged labor disruption losses may be challenged with increasing vigor. For both shipyards and owners, good record keeping is important to resolve labor productivity claims.
Professional Spotlight:
Michelle Nenna Delehanty
Ms. Delehanty has over 20 years of experience in the construction industry, having worked on all sides of a project including construction manager, contractor, consultant, operations, and owners’ representative. She has experience across multiple industries such as healthcare, utility plants, manufacturing, government, museums, and residential.
Her skills include project management, cost evaluation, scope monitoring, contract administration, change order review, schedule investigation, earned value reporting, estimating, and commissioning. Her engineering experience contributes to her skills in design and construction defect analysis as well as code compliance evaluations. She has experience with MS Project, Suretrack, and Primavera (P3, P6) including the use of the Claim Digger program. These skills, along with a technical engineering background, enable her to add a unique insight into the discovery and analysis of an engineering and construction project.
Favorable Ruling in Complex Design-Build Case Involving U.S. Government Facility
Our client is extremely happy with the judgment in the United States District Court, Western District of Virginia, regarding the design and construction of a complex process facility. This Design – Build construction of a US Government process facility encountered several technical engineering and construction issues and associated delays before start-up operations. The contractor asserted that much of their work was outside the Design – Build contractual requirements. The bridging documents were complex and detailed, and their interpretation required a competent, knowledgeable engineering organization with many process design professionals. The bridging documents incorporated a 3–D CADD BIM model based on a foreign licensed technology process design. During the litigation, MDC Systems prepared three dispositive Expert Reports. Robert C. McCue, P.E., delivered over seven hours of deposition testimony and five hours of direct and cross-examination testimony at the trial. The court determined that the technical and interpretive Project and Construction Management determinations that MDC Systems presented were significant in its final opinion.
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