Maintaining Relationships When Dealing with Prolongation Costs

On the jobsite, everything from supply chain issues to design coordination problems can lead to delays. Not only do delays mean the owner doesn’t get use of the project at the estimated date, but these lags also generally cost other stakeholders — namely, the general contractor — money. 

Construction delays are an extremely common problem. The Associated Schools of Construction (ASC) reports that 72% of projects experience delays, leading to cost overruns on 63% of projects. The cost of those delays — also called a prolongation cost — adds 24% to project budgets per the ASC. 

These costs pose an issue to the bottom line of both project owners and general contractors (GCs). But that’s not all. The added expense and determining who’s responsible for that prolongation cost can strain relationships, making communication on the project contentious. In worst-case scenarios, this could even mean paying for legal fees to sort things out in court.

Ultimately,  the cost of delays can make projects more difficult for all stakeholders involved. This article touches on managing prolongation costs as well as maintaining relationships through that process. 

What are prolongation costs?

The answer to what prolongation costs are depends on who you ask. Some architecture, engineering and construction (AEC) professionals categorize these costs as anything that comes out of someone’s pocket as a result of a delay, such as paying trade contractors overtime to correct an issue before pouring the concrete.

Others, however, apply a more granular definition of prolongation costs. This way of thinking allocates delay-related costs into two categories:

• Liquidated damages for which the general contractor is liable because they’re the party responsible for delays
• Prolongation costs for which the owner is responsible because of delays either within their control or for which other parties or outside forces (e.g., weather events) are responsible

Ultimately, there are various ways that project delays can cost money. But while most delays get expensive in the forms of extra costs for the project owner, they don’t always mean someone has to hand over money to compensate for the delay (i.e., compensable vs. non-compensable delays). 

Today, the focus is on prolongation costs for which the owner is financially responsible — and how GCs can manage to get that money while protecting the relationship. 

Prolongation Cost Categories

For starters, clear recordkeeping makes a huge difference here. When GCs need to communicate the delays and their expectations for compensation, it’s critical to be able to show why the delay is occurring and how much it will cost.

This is generally easier with direct costs. Tracking labor and materials is usually fairly straightforward because they are tangible expenses, and the resulting invoices make it easy to capture them. 

But GCs could eat into their bottom line if they don’t also capture indirect costs. Suppose a firm hires a senior project manager and an accountant to help with a specific project, for example. Their rates need to be factored in for any timeline-related cost overruns.   

Generally speaking, GCs should look for potential prolongation costs in the following categories.

• Labor

  If the firm needs to keep workforce on for a longer period of time — from their own team allocated to the project to trade contractors — that costs them money. They could potentially invoice the owner for some or all of that added cost. 

• Material

  While delays might not necessitate extra materials, that’s not to say they won’t add to material costs. If the firm has to pay to store materials at an offsite location, for example, that would be considered a prolongation cost. 

• Equipment

  Many GC firms rent out the equipment they need for specialized work. If the project experiences delays and they consequently need to rent or store that equipment for longer, it can create an added prolongation cost. 

• Overhead

  Firms are responsible for various site-related costs such as security, insurance, site management, etc. On top of that, they have to manage the payroll, employee benefits, and more that come with maintaining the team required for the project in question. All of these overhead costs go up the longer a project goes on. 

With several categories to consider, general contractors need to establish set processes when it comes to how to calculate prolongation costs. 

How To Calculate Prolongation Costs

Most contracts will dictate how the prolongation cost gets categorized and paid out. For example, the contract might allow for contingencies up to a certain dollar amount. It might also specify an approval process as far as how any cost overruns get handled.

In some cases, the GC is encouraged to create a change order that is billed per time and material (T&M) terms.  This way, the owner gets clarity into the precise cost surrounding the prolongation cost. Specifically, they can see how much time addressing the delay took (and the labor costs associated) and the cost of the required materials.

Billing solely on T&M can leave the GC eating some of the delay’s cost, though. As a result, it can behoove them to add an overhead fee that factors in the cost of staff and temporary hires required for the project. 

Any firm benefits from figuring out how to calculate prolongation costs. At the same time, it needs to figure out how to best interact with stakeholders while managing that delay. 

How To Mitigate Relational Damage During Delays

While calculating and billing for the prolongation cost helps general contractors protect their bottom line, that’s not the only aspect firms need to consider. They also need to protect their relationship with the owner and their team. Doing so boosts the firm’s reputation and makes it easier for them to land future work.

Communicate

Transparency and communication are key. It’s important to keep people informed about delays so they can update the project’s schedule of values (SOV). The earlier key people can start to pivot to accommodate for prolongation costs, the easier they can work those costs into the SOV and plan around them. 

Sweeping things under the rug can lead to much bigger problems down the road. Educating the owners around potential delays and the root causes behind them help to protect the relationship. Open communication paired with multiple paths forward helps to foster good relationships with the owner. Keeping them apprised of both the situation and their options puts them in the driver’s seat, something most project owners prefer. 

Be Proactive

For clarity and direction here, being proactive makes a big difference. Firms can benefit from documenting the jobsite and the work that happens so they can pinpoint where changes stem from. Photography, videos, and notes all play a critical role. In fact, some firms even contract out to documentation teams to take photos at specific cadences. 

Document, Document, Document

When armed with appropriate recordkeeping, firms can approach owners with clarity around the root cause of the delay. But to further protect the relationship, they shouldn’t stop there. They also need to come in with a plan to resolve the issue.

Say, for example, that some milestone was supposed to be met by Date X. Because of some outside forces or unforeseen conditions, the new completion date has been pushed back. Rather than just letting the delay sit, the firm can be proactive. They might approach the owner and give them several options:

• The milestone can be completed a few days past Date X with cost $A.
• The milestone can be completed by Date Y with cost $B.
• The milestone can be completed by Date Z with a cost $C. 

Assuming costs scale up from C to A, presenting the owner with a variety of options shows them that they have choices while also empowering them to choose what’s best for their budget. Some owners are willing to spend more money to avoid added delays, while some would rather wait for the project to be completed rather than take on the added cost.

Make Time for Training

Regular in-person meetings go a long way. Things can slip through the cracks via email. Monthly meetings with the owner and GC’s stakeholders build communication into the process, making it easier to protect relationships even when the project comes up against any prolongation cost. 

An Example of Prolongation Cost Management

Look to a case study undertaken by the City of San Francisco to provide an example of managing prolongation cost categories and relationships. The City wanted to retrofit a historic building, making it seismically safe while adapting it to modern uses. 

This project experienced significant delays due to issues outside the control of the owner (the City) and the general contracting firm. When a wall was opened up to add plumbing or electrical, for example, a surprise room was discovered — on not just one but multiple occasions. 

Fortunately, the firm had already enacted the process of regular owner, architect, and engineer meetings to talk through the schedule. Additionally, the contract terms allowed for T&M billing for any change orders from the GC. 

That made any prolongation cost that arose easier to manage from a financial standpoint. But it didn’t necessarily protect the relationship between the GC and the owner. 

To safeguard that relationship, the GC needed to deliver at least part of the first two floors by a specific date. That area housed a theater that the City of San Francisco had started to book out. With thorough communication and a willingness from the City to take on the prolongation cost required to get that area completed by the first booking, the firm was able to meet the deadline. Just as importantly, transparency throughout the process helped to protect the owner-GC relationship even on a highly visible project that experienced significant delays. 

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