How to calculate the true cost of a construction delay
Traditionally, the construction industry has been viewed as inefficient, with low productivity rates. This results in projects going over budget and over schedule. Some may claim “that’s construction” and accept the consequences. However, owners and general contractors are leaving money on the table if they accept the status quo. Just how much? Let’s dig in and try to calculate the true cost of a construction delay.
Traditionally, the construction industry has been viewed as inefficient, with low productivity rates. This results in projects going over budget and over schedule - and it can be very difficult to calculate the costs of these construction delays. Some may claim “that’s construction” and accept the consequences. However, owners and general contractors are leaving money on the table if they accept the status quo. Just how much? Let’s dig in and try to calculate the true cost of a construction delay.
Types of Delays in Construction Projects
First, it’s important to understand how contracts deal with construction delays. There are three basic types of delay that contracts typically deal with. They are the inexcusable delay, excusable delay, and compensable delay.
The inexcusable delay could be caused by one or more of the following: general contractor, subcontractor, supplier, etc. Examples of this include the contractor that did not properly staff the project and suppliers that were late delivering material.. “As this is a self-imposed delay, the contractor is typically entitled to recover no time and no delay costs,” says Navigant/Guidehouse, a management consulting firm for the public and commercial sectors. “Under most contracts, the contractor is exposed to potential liquidated damages or may be directed to accelerate their work, at their own expense, to recover the lost time.”
Excusable delays are usually caused by a third party and are not anticipated. Examples include extreme weather, earthquakes, and labor actions. Navigant/Guidehouse explains further, “Under most contracts, as neither the contractor nor the owner caused the delay, the contractor is entitled to recover the time but no delay costs, while the owner is required to grant an extension of time and forego late completion damages for this period of time.”
A compensable delay, according to Navigant/Guidehouse is an “… owner caused delay but also includes delay caused by events or circumstances for which the owner has assumed liability under the terms of the contract.” Examples of this include change orders by the owner and work delays caused by the owner. “In such situations, as the owner is responsible for the delay, most contracts provide for recovery of the time resulting from the delay and for delay damages from the owner.”
While recognizing who is to blame for a construction delay is important, it does not help in terms of calculating the true cost of a construction delay.
Calculable and Incalculable Costs of a Construction Delay
The Construction Industry Institute’s research found that “the average delay caused by a widespread event seems to fall somewhere in the 20 percent to 30 percent range.” Note a widespread event is defined as one that “can throw the entire project off course with project teams never fully able to recover.”
Deltek, a software provider, gives an example. A three-year contract for $50 million equates to $45,662 per day. If a project with these parameters had a 30% delay, the costs would be nearly $15 million.
As damning as that $15 million price tag is, it is not the end of the costs. In fact, it’s just the beginning, since for each day a construction project is delayed, every party involved with the project is negatively impacted. Some of the financial impact will be covered by the liquidated damages figure that was agreed upon in the contract.
From the owners’ perspective, the costs of a delayed project could be felt for years to come. Consider, each completed project is expected to bring in income - whether it comes from tenants (think an apartment building, office building, etc.) or some other entity. Monies not collected means the owner may be strapped and unable to move on to other projects. It could also drive up lending costs and cause loans to go unpaid. Finally, it could lead to challenges in gaining partners for future projects.
And what about from the general contractor’s perspective? They also lose out in multiple ways when a contract goes late, making it hard to calculate an exact cost. Crews need to stay on a job and therefore can not move to the next job as planned. This leads to issues in other jobs. Equipment needs to be retained for longer than planned, which can lead to a shortage somewhere else and or more in rental costs. Insurance costs will rise. Job trailers will need to be held over. Then, there’s a damaged reputation, which just might be the greatest cost of all.
Lastly, there’s the end-user. On an infrastructure project, delays in completing a project mean commuters are inconvenienced. Perhaps, they must take a detour or deal with increased congestion. Each of these is costly. For projects such as a retail outlet, housing, office space, etc, the tenant is unable to move in at the expected time and will have to pay for another residence/workspace. A business may lose out on sales.
Calculating the true cost of a construction delay is difficult. Every party – owner, general contractor, and end-user – suffers a financial loss due to a delay regardless of the type of delay and who is deemed culpable.