Quantifying Change Order Labor Hours

On construction projects with disputes involving labor productivity losses, an expert or analyst is often required to evaluate the magnitude of total project change.

Industry studies measure change using direct labor hours, comparing the hours added through change with the hours in the original scope of work. Even in cases where a contractor is not asserting a claim for the cumulative impact of changes, the percent change (added hours/originally budgeted hours) is a useful figure and one in which counsel and the trier of fact will likely take interest.

An expert can face complications trying to accurately quantify change-related hours, including, but not limited to, the following:

1. On very large projects, contractors and subcontractors can submit thousands of change requests in various forms (site instructions, field instructions, field change requests, change order requests, engineering change notices, etc.), with varying pricing mechanisms, such as time and materials, lump sum estimates, and unit rates. The sheer volume of changes can make the evaluation time consuming and can lead to difficulties in applying a quantification approach consistently across all changes.
2. The parties contemporaneously agree to change order pricing, but not necessarily to the additional direct labor hours, which then need to be calculated or estimated after the fact. If the change request is quantified using unit prices (which include labor, equipment, materials, overhead, and profit), one needs to quantify the direct labor costs and hours embedded in the rates. Also, if the price in a contractor’s change request is reduced in the final change order price, one needs to understand how to properly adjust the direct labor hours, if at all.
3. The owner and contractor may negotiate a change order price that incorporates the settlement of dozens or hundreds of individual changes, without documenting the basis for the settlement.
4. To achieve like-to-like comparisons, one must align the direct labor hours in the change orders with those in the original budget. For example, if the original budget includes positions such as equipment operators, riggers, spotters, scaffolders, fire watch, and hole watch in the direct labor pool, these positions need to be included in the change-related labor hours as well. For more information regarding direct versus indirect labor, see my blog post “Direct and Indirect Labor in Change Orders and Claims.”
5. The parties may disagree on the contractor’s entitlement to recover monies on either a portion or the entirety of certain change requests.

As an example that involved many of these complications, on a recent project in which Long International quantified the change-related direct labor hours, the owner and contractor negotiated a tranche of over 200 Change Order Requests (CORs) with a combined value of approximately $4.0 million. They settled these CORs in a single Change Order valued at approximately $3.2 million. The management-level negotiations addressed only the overall figure, and therefore there was no record of the amount settled for each COR.

Given this data point alone, one way to quantify the additional labor hours in this Change Order would be to total the labor hours in the CORs and reduce them by 20 percent, or proportionally to the reduction of the contractor’s requested pricing as compared to the parties’ final pricing (under the assumption that all COR prices—labor, equipment, materials, etc.—and labor hours should be uniformly reduced by 20 percent).

However, on this project (as on most projects), the project control teams had analyses and correspondence related to most of the CORs. Evidence showed that the owner’s team had contested certain CORs due to lack of entitlement, others for lack of cost support, and still others related to a dispute over the contractor’s markup. Therefore, estimating labor hours using the 20 percent reduction factor would introduce significant error into the analysis and ignore the factual evidence. On the other hand, analyzing the hours related to over 200 CORs would take significantly more time.

Evaluating change-related additional labor hours should be performed early in the dispute process. First, given the complications above, the evaluation can take considerable time. Second, the evaluation should inform other analyses, such as quantifying the extent of change by discipline or timeframe, or a schedule analyst’s determination of the impact of changes to the project’s duration.

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