Quantifying Inefficiency: Comparing Comparisons Part I
As discussed in the introductory post to this series on inefficiency, when a contractor’s operation experiences a reduction in productivity the result is usually the expenditure of more labor and/or equipment hours than it originally estimated. These additional labor and/or equipment hours, in turn, can result in significant losses that will negatively affect a contractor’s profitability. Often, the impacts responsible for contractor’s inefficiency were not within its control and, as such, the contractor may be entitled to recover its additional costs resulting from the inefficient operation.
The contractor’s ability to recover its additional costs resulting from the inefficient operation can be determined by the contract. If the contract is silent, then typically the contractor would have to determine who or what was responsible for the impact that caused its operation to be inefficient. Typically, if the impact was a force majeure event, then the contractor may not be able to recover additional costs from the owner. However, if the contractor can demonstrate that the impact and its expenditure of additional labor and/or equipment costs was caused by the owner or could be attributable to the owner, then the contractor should be able to recover its additional costs.
However, in order to determine the extent to which its operation was inefficient and to calculate the additional costs that it may be entitled to recover, it is crucial to understand how to measure inefficiency. Again, to measure inefficiency, we use a simple formula which serves as a comparison of achieved productivities between unimpacted and impacted time periods of the same or very similar work operations:
For example, let’s assume Subcontractor X, who is performing the drywall scope for a project, is averaging about 1,200 square feet of drywall hung per day. However, because of a resequencing of the work required by the General Contractor in hopes of expediting the project, Subcontractor X was required to work in more congested spaces alongside the mechanical, electrical, and plumbing trades. Following the General Contractor’s resequencing, Subcontractor X found that it was now only achieving 900 square feet of drywall hung per day as a direct result of working in the more congested spaces. Using the formula above, we see that the Subcontractor X’s productivity became inefficient by 25%.
This example is commonly accepted in the industry as the most preferred method of calculating inefficiency after the work is completed, and it is known as a “Measured Mile” analysis. The measured mile analysis is the most preferred method of analysis because it compares achieved productivities of the same operation in two different time periods on the same project, thus minimizing the number of variables that could be the cause of a contractor’s reduced productivity. By comparing productivities on the same project, the measured mile analysis eliminates from consideration inefficiencies for which the contractor may be responsible such as errors in the bid, deficiencies in labor and management, or equipment problems.
Another advantage of using the measured mile analysis is that it ensures that the achieved productivities being compared experienced similar or the same circumstances and conditions, but for the alleged cause or causes of the reduced productivity. Such circumstances and conditions include but are not limited to locale, climate, means and methods, materials, crew composition, management, and subcontractors.
Consider our example project above. By comparing Subcontractor X’s performance before and after the ordered resequencing using the measured mile analysis, we can be sure that the loss of efficiency of Subcontractor X’s performance was not due to the differences in a crew or superintendent, different equipment, different geological conditions, or different climate. Therefore, we can conclude that the loss in efficiency was most likely directly related to the only variable that differed during Subcontractor X’s operation: the ordered resequencing of work that resulted in a congested work space.
However, a limitation of the measured mile analysis is that it requires that there be an unimpacted or minimally-impacted period of the project. As detailed above, the calculation of inefficiency is simply the comparison of achieved productivities. Naturally, the closer the achieved productivities are to one another, the lower the percentage of inefficiency will be.
Thus, when performing a measured mile analysis, if the analyst selects a productivity as the baseline of the comparison that itself was impacted, the comparison of the productivities will result in an inefficiency percentage that is lower than what was actually experienced on the project. Therefore, analysts performing the measured mile analysis should always be careful to select the baseline productivity that is unimpacted, or as minimally impacted as possible, to produce the most accurate inefficiency percentage.
However, what if the entire operation or project was impacted? In our next blog, we will tackle the next best option for comparing productivities when the measured mile analysis is unusable.
If you have any interest or questions about this topic, please feel free to contact me at bill.haydt@traunerconsulting.com.
