Seeking dollars for delays

Mark Voigtmann, Baker & Daniels LLP -- Control Engineering, 9/1/2006

When a delay occurs on an automation project, and your company is considering whether to seek additional compensation, there are really only four questions.

The first question is “who caused it?” If it's your company that is to blame, lay low and don't mention it again. (Oh, and, by the way, you can forget about the three other questions.)

The second question is “were you damaged by the delay?” There are a lot of different ways of looking at this. On the surface, you might simply take a look at the cost of extending your company's “project overhead” for the additional time period of the delay — which is to say, the extra cost of equipment, additional salaries of supervisory personnel, insurance premiums, etc. However, if you want to be a bit more comprehensive, there are a few more items that might be added, such as material or wage escalation costs, interest expense, hidden labor inefficiency expenses, duplicative mobilization charges — even the project's share of home office overhead.

Assuming that the delay expenses add up to a number that is worth thinking about, the third question then becomes: “how do those expenses compare to the damage that would be caused by making a claim?” In other words, if the delay is putting you out of pocket by $100,000, but an amicable business relationship with the other company is worth $1 million to you annually, you might want to consider — to put it bluntly — eating the delay damage.

To the extent you get past the gauntlet of the previous three questions, the final question is one for your lawyer: “does your contract prohibit the recovery of delay damages?”

That's where the rubber really hits the road. Because these days any owner's attorney worth his law degree usually writes into the contract a clause that, in essence, says the following (and I am paraphrasing): “Your company and ours both recognize that projects like this one are often delayed. You have taken this fact into consideration in your bid. Not only that, but you agree that you will not make any claim for extra compensation in the event your company is delayed. However, we will give you an extension on the completion date so that you are not penalized if the delay was not your fault.”

Are such contract clauses valid? The answer is yes in many states and countries (although there are exceptions). Obviously, such a clause can be a dagger aimed at the heart of an automation company when a project has veered out of control.

Not long ago, a federal judge in Chicago handed down a typical court decision involving these issues. A subcontractor was pursuing a claim under the Miller Act (the law protecting subcontractors on U.S. government jobs). The contract said that “subcontractor's sole remedy shall be to receive an extension of his scheduled time regardless of the cause….” Although many states, including Illinois, have carved out exceptions where such contract paragraphs are ignored, it can be a difficult road to travel.

The Illinois exception, for example, only invalidates such clauses if the delays were not “naturally arising” from the work. But in the Illinois project, almost everything went wrong (sequencing problems, profound conflicts in the plans, inadequate specifications, scope disputes, problematic weather) and the subcontractor still did not collect any delay damages.

The lesson here? Be cautious — be very cautious — when considering whether to seek additional compensation because a project was delayed. Some of the smartest companies are the ones that walk away from seemingly sure-thing claims.