Recouping Your Losses

Often times a contracted project takes longer to complete and requires a larger budget than was originally planned. Many factors can be contributed to the increased duration and cost of a project. But who is responsible for such delays? Is it the electrical contractor, due to poor labor productivity? Or is it the owner, due to poor site management and policies?

In one case, an electrical contractor in Ohio had been in business since 1954. Their geographical work area included parts of West Virginia. The contractor became aware of a two-phase project in West Virginia, undertaken by a global industrial owner. The contractor had been contracted by the owner before, when it was known under a different name. The contractor passed on bidding on Phase I, but prepared a bid on Phase II, which consisted of electrical installation and instrumentation on additions and renovations to an industrial site.

After meeting with officials from the contractor, the owner and engineer/construction manager awarded the contractor the bid for the approximate amount of $640,000. The contractor commenced work on Feb. 19, 1998. The bid contract indicated the project was to be completed on June 28 of that year.

Immediately after being awarded the bid, the contractor’s manager was asked if he had any concerns about the project. “I have two,” he said. “Price and material.” Regarding the price, he was told their bid was very, very competitive and close to other bids.

He was also reassured that material delivery wouldn’t be an issue, as the engineering firm entered a blanket order arrangement with a local electrical supplier for all owner-furnished materials and all materials would be delivered to the job site within 24 hours of notification.

Owner-furnished materials

Early on in the project, it became evident that this blanket order was simply not working. The construction manager assured the contractor that all cable tray and fittings were on the job site as early as Jan. 14, but three weeks after beginning the project, the contractor was still awaiting such materials. The contractor was also told all lighting fixtures would be on site when they began the project; the fixtures arrived a month later. As a result, the contractor began using some material from their own inventory to keep the job moving. Representatives for the engineering firm were informed of this and told the contractor that the problem had been solved, but throughout the duration of the project the material shortage issue was never solved. Eventually the contractor asked the owner for permission to buy materials from other suppliers but was denied. A review of the material delivery showed that it took an average of 20 days for ordered materials to arrive on site.

Change order impact

It became clear to the contractor that the engineers’ original design was flawed. A total of 1,000 field deviation reports throughout the duration of the project resulted in extra work orders; the electrical contractor generated 250 of these reports. The mechanical contractor for the job experienced an extreme number of piping changes. Approximately 30 percent of the piping system was reworked or redesigned. Since the electrical contractor follows the mechanical contractor, these changes led to the electrical contractor having to work out of sequence and leave some tasks unfinished while focusing on others.

The high amount of change orders and the project management’s poor coordination between tradespeople led to overcrowding on the job site. Studies have consistently shown normal amount of change to be around 5 to 10 percent of the original contract, yet 36 percent of this project underwent change orders. Soon more and more workers of all trades were needed. Labor density reached a peak of 104 workers in 9,600 square feet of work space (or 92 square feet per worker). The job site became cluttered and disorganized. The contractor had, in their estimate, planned a peak of 20 workers; that peak turned out to be 34 workers. Scheduling, the responsibility of the engineers, was poor; delays were common. The slow material delivery times only compounded the overmanning problem.

In addition, 15 separate chemical spills resulted in fume release and evacuations of the jobsite. These frequent chemical spills resulted in decreased morale and attitude of the workers and interrupted the rhythm and flow of the project. After being informed of the problem, the owner told its contractors that the problem had been resolved and did not follow the procedure they had set in the case of fume release, making workers uneasy due to health concerns.


In the end, the poor site management was devastating to the contractor. An estimated 24-week project duration turned out to take 36 weeks. They utilized double the estimated man-hours, including nearly 1,500 hours of overtime. These figures were not standard for the contractor. During the same time period, using the same management staff, the same estimator, even the same workers, the contractor performed another electrical/instrumentation job. That job was bid at 14,000 man-hours and came in at 14,500 man-hours. The contractor couldn’t find any evidence that they had been accused of holding the project up; during the latter part of the job there had been no pressure by the owner to finish the job, while the pressure was immense at the beginning of the job.

As soon as the contractor realized they were going to incur increased costs from the extended duration of the job, the contractor presented a request for an equitable contract adjustment to the owner and engineers. In the request, the forecasted damage to the contractor was $300,000. The request was not received well; upon seeing the request, the president of the owner company told the contractor’s CEO, “You’ll need to bring suit to get this kind of money.” So the contractor did.

In their claim, the contractor blamed the owner and engineer/construction manager for the losses incurred. Incomplete, vague construction plans and specifications caused some productivity losses. The fume releases contributed to a poor working environment, an environment that the owner was contractually bound to avoid. The piping redesign and rework led to delays in the contractor’s work. The large amount of change orders resulted in overmanning, trade stacking and a disorganized work sequence. The failure of the owner to deliver materials on time caused many unproductive hours.

Officials from the contractor approached the defendants about reaching a settlement in the case, but none was reached. The owner claimed the contractor was to blame for the incurred losses. They said the contractor’s bid was low, nearly $350,000 lower than the next bidder. The owner said the contractor should have coordinated work between tradespeople and taken trade orders into account on their bid and that the contract relieved them of damage liability. They said chemical fumes should be expected when working near chemical plants.

Binding arbitration ruled in favor of the electrical contractor in the amount of $351,000.

Lessons learned

Much can be taken out of this case study. The owner took a risk by agreeing to furnish all materials. In the end, this is a risk not worth the overhead it may save the owner; furnishing of materials is best left up to the contractor. The delays caused by the failure of timely material delivery cost the electrical contractor, and ultimately, the owner, much in lost productivity and damages. Accurate engineering is needed at the outset of a project in order to minimize change orders and keep the job running as scheduled. Contractors should adjust their bid to reflect risky aspects of a job. In this case, there were many risks present, such as the owner furnishing materials, the poor contract document, and working on operating units.

A major issue at the arbitration hearing was that of fraud. Remember the contractor’s manager who was told their bid was “very, very competitive?” The owner claimed the contractor’s bid was nearly $350,000 lower than the next bidder and denied telling the contractor their bid was competitive. If the contractor had documented the minutes of their original meeting at the awarding of the bid, their claim would have been more concrete than “your word against my word.” EC

HANNA is a professor of construction engineering and management at the University of Wisconsin-Madison. He may be reached at


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