This blog explores loss of productivity (disruption) claims in construction contracts, their key features, and how Indian courts and arbitral tribunals address them.
1. What is Loss of Productivity?
Productivity in construction refers to the rate of output per unit of time or effort, commonly expressed in man-hours or man-days. For example, cubic meters of concrete placed per man-hour or per man-day.
Loss of productivity arises when work cannot be performed at the efficiency normally achievable under unimpacted conditions. It results in increased cost as it takes more labor and equipment to complete the same amount of work.
Accordingly, a loss of productivity claim, also known as a disruption claim, refers to a contractor’s assertion that actions or inactions of the Employer have adversely affected its ability to perform work efficiently, leading to increased costs.
For the sake of brevity, we will be using the term disruption claim in the rest of the blog.
2. Delay claim vs Disruption claim
In construction, delay claims and disruption claims are distinct concepts, even though they may arise from the same events. A project may be delayed without giving rise to a claim for loss of productivity. Conversely, a contractor may experience productivity losses even if the project is completed on time. In some cases, both types of claims may exist simultaneously.
A delay claim typically involves a contractor seeking an Extension of Time (EOT) to be relieved from liability for delay damages. Such claims generally include compensation for time-related costs, such as extended overheads, standby expenses, or the costs of acceleration measures taken to mitigate delay.
A disruption claim, on the other hand, relates specifically to the additional costs incurred due to reduced efficiency i.e., increased labour or equipment costs.
Unlike delay claims, disruption claims do not depend on whether the impacted activities lie on the critical path.
3. Why are Disruption Claims difficult to prove?
One common refrain that one finds while researching this subject is that disruption claims are notoriously difficult to prove.
As with all claims, the contractor, as claimant, bears the burden of establishing both the existence and quantum of damages with reasonable certainty, i.e., the assessment of damages must rest on more than speculation. Disruption claims, however, present some additional challenges:
- Establishing a direct cause-and-effect link between the employer’s (or employer-responsible third party’s) actions or inactions and the contractor’s loss of productivity is challenging.
- Daily reports, schedules, correspondence, and resource logs, which are essential to connect periods of reduced productivity with their root causes, are either not available or are not available in sufficient detail.
- It is difficult to distinguish between contractor-caused and employer-caused impacts. The contractor must prove that productivity losses were not self-inflicted through bid errors, poor management, site disorganization, or defective work. Claims also fail where losses result from foreseeable factors, such as normal weather conditions or known site restrictions at the time of bidding.
- The several methodologies available for measuring lost productivity carry their own limitations and complexities.
4. Evaluation of Disruption Claims
The AACE Recommended Practice and the SCL Delay and Disruption Protocol identify several methodologies for quantifying lost labor productivity in construction claims. Of these, the following two are most commonly relied upon.
a. Measured Mile Analysis
It is the most widely accepted method for calculating lost labor productivity. It compares the productivity of identical activities performed in impacted sections of the project with those carried out in non-impacted sections (the “measured mile”). This comparison helps to quantify the productivity loss caused by the disruptive events.
The principal advantage of the measured mile method is that it focuses solely on actual project data, eliminating disputes over the accuracy of initial cost estimates or factors unrelated to the employer. It directly compares performance under normal conditions with performance under impacted conditions.
However, this method also presents challenges. It requires the identification of a truly “unimpacted” or “unhindered” period that can serve as a reliable baseline. The analysis assumes that, absent disruption, work would have continued at the same rate as during the baseline period—hence the selected reference must be representative.
This method requires detailed data by location, type of work, and crew. It also does not fully account for natural productivity variations, learning curves, or gradual efficiency losses over time. Use of this method becomes problematic where no clear unimpacted period exists or where the impacted work was simultaneously affected by non-compensable factors, necessitating complex adjustments.
b. Earned Value Analysis
This method compares the tendered or budgeted man-hours/days for specific work activities with the actual man-hours/days expended to complete those activities. The “earned” man-hours/days represent the value of work actually performed. Where actual hours/days exceed the budgeted allowance, the difference is treated as productivity loss. In the absence of detailed man-hour/day data, the method can also be applied on a cost basis.
This approach is often adopted where a measured mile analysis is impractical. For instance, where cost codes are too broad, or where no period of unimpacted work exists for comparison.
However, it has notable limitations. It requires a resource or cost-loaded baseline schedule. It also requires monitoring of incurred costs in sufficient detail and their comparisons with the budgeted costs. Results may be unreliable if cost codes used for monitoring are too high-level to capture productivity impacts.
Adjustments need to be made for overly optimistic tender assumptions or contractor-caused inefficiencies. To improve reliability, projects are often divided into discrete time periods, each analyzed separately, with conservative allowances made for the contractor’s own shortcomings.
5. Legal Basis of Disruption Claim
Most contracts do not include any reference to Disruption claims. But this omission does not disentitle the Contractor. Disruption claims can be submitted under the following principles:
The Prevention Principle, which essentially states that an Employer cannot benefit from the non-fulfilment of a condition in a contract (such as the Contractor completing the works by a specific date) if the Employer themselves hindered the Contractor’s performance of that condition. This prevents an Employer from taking advantage of a situation they contributed to.
The Employer has an implied duty not to hinder or prevent the contractor’s performance and to provide access, information, or approvals in a timely manner.
6. Provisions of FIDIC Contracts
The FIDIC Contracts contain specific provisions dealing with disruption claims. The 1999 FIDIC Red Book contains the following two references to disruption:
Sub-clause 1.9 (Delayed Drawings or Instructions) mandates the Contractor to give notice to the Engineer if the Works are likely to be delayed or disrupted due to delay in necessary drawing or instructions. The Contractor can lodge a claim for EOT and cost-plus profit if he suffers delay and/or incurs Cost, due to such delays.
Similarly, sub-clause 8.5(Delays Caused by Authorities) provides for a claim for EOT and cost-plus profit if the Contractor suffers delay and/or incurs Cost, due to such delay or disruption caused by authorities.
These provisions contemplate three distinct scenarios:
- The Contractor suffers both delay and cost (a combination of delay and disruption).
- The Contractor suffers delay only (a pure delay claim).
- The Contractor incurs cost only (a pure disruption claim).
7. Judicial Decisions
Indian courts have recognized disruption claims in construction contracts. However, the cases we could find concern claims for idling of resources, i.e., situations where disruption brought the work to a complete halt, resulting in zero productivity. Such claims are relatively straightforward to evaluate: the contractor needs only to establish the affected period and compute the cost based on wages paid for the idle man-days (and related equipment charges).
The Chief Engineer (Construction), Southern Railway and Another v. Sri Swarna and Co.
The Court held that a disruption/idling claim must be proved by showing: (i) that disruption occurred during the contract period for reasons attributable to the employer, and (ii) evidence of actual expenditure incurred on labour and machinery during the affected period.
The General Manager/Southern Railway and The Chief Engineer/Central Construction, Southern Railway v. URC Construction (P) Ltd. (2022).
The Court set aside the arbitral award granting compensation for the idling of resources, holding that the Tribunal had awarded amounts without justification or supporting evidence. It emphasised that disruption claims must be proved through hard evidence of expenditure actually incurred, citing Associate Builders v. DDA (2015), where the Supreme Court ruled that an award based on “no evidence” is contrary to public policy.
In these cases, the Courts used the term Disruption to mean idling. We could not locate any Indian case law specifically addressing situations where productivity was less than optimal but more than zero.
8. Experience in Arbitration
The authors have come across instances where arbitral tribunals, while adjudicating claims under FIDIC contracts, have awarded compensation for disruption claims. Unlike the court judgments referred to above, these claims did not concern complete idling of resources, but rather situations involving less than expected productivity.
In these cases, the contractors did not apply any recognized methodology for quantifying productivity loss. Instead, they compared the anticipated monthly revenue stated in their bids with the actual revenue earned during the disrupted period, contending that the shortfall reflected reduced productivity.
They further argued that, because revenue was lower than anticipated, they were unable to recover their monthly fixed costs. They referred to the bid price breakdown for the fixed costs considered by them in their bid. So essentially, they compared the fixed costs that they had considered in their bid to the fixed costs they could realise and claimed the difference. No further supporting details were provided.
The entire shortfall in productivity was attributed to employer-caused delays. No independent experts were engaged, and no adjustment was made for contractor-risk events. The contractors did not provide any evidence to show that the costs claimed were actually incurred. Despite the employer’s objections regarding the absence of evidence, the tribunals nonetheless allowed the claims.
9. Conclusion
Disruption claims allow contractors to recover costs when employer-related issues prevent them from working at full efficiency. These are different from delay claims and can still be made even if the contract doesn’t specifically mention them. FIDIC contracts, however, do provide for such claims.
In India, courts have mostly recognized Disruption as idling of resources, where work comes to a complete stop and productivity drops to zero. In such cases, contractors must clearly prove that the employer was responsible and show evidence of the costs incurred. There are instances of Contractors succeeding in arbitration, even for claims involving partial loss of productivity.
Disclaimer: This blog is for informational and educational purposes only. The information provided should not be construed as legal or professional advice.