Business & Insurance Litigation Newsletter for Indiana

Construction Contract Damages Fall into Three Categories

In construction cases, there are three general categories of contract damages: (1) damages for failure to perform; (2) damages for defective workmanship; and (3) schedule related damages.

Failure to perform cases arise when one party to the contract simply fails to carry out the work. In such cases, Indiana law generally provides damages for a breach of a construction contract amounting to the "benefit of the bargain." Berkel & Company Contractors, Inc. v. Palm & Associates, 814 N.E.2d 649, 660 (Ind. Ct. App. 2004); INS Investigations Bureau, Inc. v. Lee, 784 N.E.2d 566 (Ind. Ct. App. 2003). Such a benefit is determined by the reasonable cost of completion of the contract or those damages actually suffered, and reasonable expenses incurred as a natural consequence of the breach, including "damages for delays, for economic loss resulting from breach of contract, for loss of full use and enjoyment of property occasioned by breach, and for probable cost for future repairs." Orto v. Jackson, 413 N.E.2d 273, 278 (Ind. Ct. App. 1980). On the other hand, an injured party must act to mitigate any damage incurred to the extent reasonable. Berkel, 814 N.E.2d at 660; J. E. Pierce, 607 N.E.2d at 729.

The overwhelming majority of claims for breach of construction contract involve cases where a contractor fully performs the contract, but the work allegedly contains defects. The damages for a breach of a construction contract due to defects in the performance of the contract are measured as the cost to reasonably repair the defective work and bring the work up to the level required in the contract. J. E. Pierce, 607 N.E.2d at 729; Gough Construction Company, Inc. v. Tri-State Supply Company, 493 N.E.2d 1283, 1284-85 (Ind. Ct. App. 1986). However, if repairs to the work are either not feasible or would constitute an "economic waste," the damages are the difference between the value of the contracted work had it been completed in accordance with the contract subtracted from the value of the work as currently done. J.E. Pierce, 607 N.E.2d at 729; Willie's Construction Company, Inc. v. Baker, 596 N.E.2d 958, 962 (Ind. Ct. App. 1992); Gough Construction, 493 N.E.2d at 1284-85. The measure for economic waste is whether the repairs would require the removal of a substantial portion of the structure to be rebuilt, in such a manner as that it would be more efficient to start the entire work over. Willie's Construction, 596 N.E.2d at 962.

Timely completion of large construction projects depends upon the correct sequencing and interfacing of the work of numerous contractors and trades, and when the project schedule is delayed or accelerated, owners or contractors often incur losses.

If a contractor is at fault for a delay in construction of the project, the owner may recover damages for the value of the use of the structure during the time the plaintiff was deprived of it, generally measured by air rental value of the structure. Johnson-Johnson, Inc., 108 N.E.2d at 639 (Ind. Ct. App. 1952). Additionally, an owner may seek damages amounting to those costs arising directly from the delay, such as the rental of alternate premises or equipment. Chicago College of Osteopathic Medicine v. George A. Fuller Co., 776 F.2d 198, 205 (7th Cir. 1985).

On the other hand, a contractor may bring a delay claim against another contractor or owner whose acts or omissions caused the contractor's work to be delayed. Indiana & Michigan Elec. Co. v. Terre Haute Indus., Inc., 507 N.E.2d 588, 602 (Ind. Ct. App. 1987). If the plaintiff can carry the burden of proving its performance was wrongfully delayed by the defendant, then plaintiff can recover the accumulated additional cost of performance occurring as of the date that the delay commenced. See Indiana & Michigan Elec. Co., 507 N.E.2d at 602; see also Amp-Rite Elec. Co. v. Wheaton Sanitary Dist., 580 N.E.2d at 673; Peter Scalamandre & Sons, Inc. v. Village Dock, Inc., 589 N.Y.S.2d 191, (N.Y. App. Div. 1992). Moreover, a contractor generally can recover overhead costs attributable to the operation of a field office during the period of delay. See Guy James Construction Company v. Trinity Industries, Inc., 644 F.2d 525 (5th Cir. 1981); and in certain circumstances, home office overhead can be recovered when properly attributable to a specific construction project. See Complete General Construction Company v. Ohio Department of Transportation, 760 N.E.2d 364 (Ohio 2002).

Acceleration claims arise when a contractor or owner acts in such a manner as to induce a company to complete the project ahead of the scheduled completion date. The mere existence of acceleration in performance is insufficient to establish that the other party acted to induce the acceleration, and absent evidence to the contrary, the acceleration is presumed to be a voluntary action. Stelko Elec., Inc. v. Taylor Community Schools Building Corp., 826 N.E.2d 152, 158 (Ind. Ct. App. 2005).

With actual acceleration claims, the period for performance relied upon in cost estimating is compressed because either the original target date for completion is advanced, the start date is delayed with the completion date remaining fixed, or the scope of the work to be performed within the fixed period is expanded. An order to accelerate may be explicitly stated in the form of a command to complete the project at a time ahead of that provided by the contract, or may be a constructive order. Anjo Constr. Co., 666 A.2d at 757. For example, in Tombigbee Constructors, a government "request" to perform a task in a manner different from that agreed on in the terms of the contract was deemed to be equivalent to an order that the scope of the project be altered. 420 F.2d 1037, 1046 (Ct. Cl. 1970).

Every actual legal theory or claim has its "constructive" counterpart. Constructive acceleration claims provide relief for contractors where both the initial time-frame and the scope of work to be performed have remained the same, but circumstances beyond the contractor's control support a finding that performance was constructively accelerated. Typical construction contracts allow a contractor faced with unavoidable delays an extension of the contract performance date. Sherman R. Smoot Co. v. Ohio Dept. of Adm. Serv., 736 N.E.2d 69, 78 (Ohio Ct. App. 2000). The failure of the owner or prime contractor to grant a justified extension, instead holding to the original timeline of the project, gives rise to a constructive acceleration claim. Id.

The existence of an unavoidable delay is a question of law. Norfolk Southern Corp., Norfolk Southern Tower v. Main Financial Associates, L.L.C., 2001 WL 34038611, *3 (Va. Cir. Ct. 2001). If a contractor bears the risk of loss over a subject in the contract, that subject cannot be the basis for an unavoidable delay by that party. See Mt. Olivet Baptist Church, Inc. v. Mid-State Builders, Inc., 1985 WL 10493 (Ohio Ct. App. 1985).

In the event that a contractor accelerates performance on the project to meet the initial start date despite an excusable delay without requesting relief, the acceleration is deemed voluntary and the costs of the acceleration are not recoverable. See generally, Nello L. Teer Co. v. Washington Metro. Area Transit Auth., 695 F. Supp. 583 (D.C. 1988); see also Envirotech Corp., 715 F. Supp. at 190; 5 Phillip L. Bruner & Patrick J. O'Connor, Jr., BRUNER AND O'CONNOR ON CONSTRUCTION LAW §15:94 (2004). Likewise, efforts to induce performance of the contract by the original target date do not give rise to an acceleration claim when the cause of the delay is solely the actions of the performing party. Siefford v. Hous. Auth. of the City of Humboldt, 223 N.W.2d 816, 819 (Neb. 1974).

Damages for acceleration claims are limited to the additional costs incurred to complete the project pursuant to the shortened schedule beginning on the date the acceleration order was issued or when a proper request for an extension was denied. Anjo Constr. Co., A.2d at 757. These costs may include such amounts as the hiring costs and salaries of additional workers, overtime pay increases, additional costs of materials due to the shortened time span, etc. Anjo Constr. Co., 666 A.2d at 757-58; Siefford, 223 N.W.2d at 819. Consequential damages are not recoverable in an acceleration claim. Sherman R. Smoot Co., 736 N.E.2d at 78; Anjo Constr. Co., 666 A.2d at 757.