Are acceleration costs recoverable?

Are acceleration costs recoverable?

A typical scenario where the contractor is compelled to accelerate his work can be described by the following fact pattern:

Owner and contractor are parties to a contract which requires project completion by June 1990. During construction the contractor is delayed several times due to changes by the owner. Contractor requests an extension of time from the owner which the owner rejects. As the June 1990 date approaches, the owner, by letter to the contractor, impresses upon the contractor that the June 1990 completion date must be met. Consequently, the contractor is required to perform the work in a shorter time period than the time extension to which he is entitled.

It is reasonable to expect that the contractor in the above example will incur additional costs and expenses due to acceleration, i.e., the cost of employing additional workers and working overtime and weekends to meet the original contract completion date. From a legal standpoint, those costs associated with acceleration are generally recoverable by a contractor from an owner upon a showing by the contractor that: (1) any delays giving rise to the order to accelerate are excusable, (2) the contractor was ordered to accelerate, either by direct order or constructively by refusal to grant a time extension and (3) the contractor in fact accelerated performance and incurred extra costs. What constitutes an excusable delay is typically spelled out in the contract?

These elements, however, are not always exclusive and some jurisdictions require an additional showing in order to recover acceleration damages.

A prerequisite to the recovery of acceleration damages is a finding by the court that the owner, or in some instances, the general contractor or construction manager, order directly or indirectly the contractor or subcontractor to accelerate. What constitutes an order to accelerate may raise numerous factual issues. The broad spectrum of factual issues giving rise to acceleration is depicted in Norair, where the court stated as follows:

An order to accelerate to be effective need not be couched in terms of a specific command. A request to accelerate, or even an expression of concern about lagging progress, may have the same effect as an order.

What constitutes an order to accelerate usually depends upon the facts and circumstances of each case.

Costs recoverable due to acceleration are normally those costs associated with the increase in the cost of performance resulting from a compressed progress schedule. Liability for acceleration costs can be imposed upon an owner, a general contractor or, in fact, any party compelling another party to speed up his work progress. For example, recently in Mobil Chemical Co. vs. Bloumt Bros. Corp., 809 F.2d 1175 (1987), the court held that both a general contractor and owner were equally liable for acceleration damages sustained by the subcontractors on the project.

Mobil involved the construction of a chemical plant owner by the plaintiff. The contract between the general contractor and the owner required completion by January 1983. Although work on the project began in 1981, the early phases of the project were significantly delayed because of poor management, coordination and control of the project by the owner and the general contractor. Consequently, the court found that the work of the subcontractors went "uncoordinated and construction proceeded chaotically and behind schedule."

In the fall of 1982, the owner and general contractor engaged in a joint effort to push the subcontractors to meet the January 1983 completion date by overmanning and acceleration. The court learned that the owner knew it could not be finished on time and told the general contractor that later completion was acceptable. However, the owner and the general contractor conveyed to the subcontractors that completion by January was crucial. In fact, it was brought out at the trial that the owner even "threatened to black-ball several subcontractors if they did not add workers and make up time."

The project was completed in April 1983. Thereafter, the general contractor, subcontractors and the owner all sued each other for various breaches of contract. Particularly, the subcontractors asserted claims against the owner and the general contractor for the costs of acceleration.

It was easily established in Mobil that the subcontractors' work was accelerated. However, an important issue in the case was whether the general contractor was liable for its subcontractors' acceleration costs. Likening the relationship between the general contractor and the owner to a conspiracy to accelerate, the court was not reluctant to impose liability upon the general contractor for its subcontractors' acceleration costs. In fact, the court divided the liability equally between the owner and the general contractor after finding that they were both at fault for the subcontractors' losses.

Another issue addressed in Mobil was whether the general contractor was entitled to its 5 percent mark-up on the cost of acceleration expenses incurred by its subcontractors. Pursuant to its contract with the owner, the general contractor was entitled to this mark-up for additional work. The court, however, found that the general contractor's participation in the acceleration decision negated its right to recover a mark-up on damages owed to the subcontractors by the owner. The court's reasoning was as follows:

The general contractor should be allowed a markup on subcontractors' acceleration damages only if it tries and fails to prevent the damages. ... A general contractor should stand with the subcontractors and request time extensions and extra payments in the face of acceleration pressures by the owner -- in other words, it should demand an orderly and negotiated resolution of problems.

The Mobil case offers a good example of what may constitute acceleration, and it also sends out a warning to general contractors faced with acceleration pressures from the owner.

Before taking sides with the owner and compelling its subcontractors to accelerate, the general contractor should realize that by doing so it may be imposing acceleration liability upon itself that perhaps can be avoided by negotiating the appropriate extensions of time.

Peter Goetz, Esq., is a senior member of the New York- and New Jersey-based law firm of Goetz, Fitzpatrick & Flynn which concentrates its practice in construction and real estate law and related fields. The firm litigates and arbitrates construction and real estate matters throughout the United States and abroad. Goetz is both an attorney and a graduate civil engineer.