Prolongation cost calculation

RRGS BANDARA

Once a Contractor has secured an

extension of time and relief from liquidated

damages, thoughts will quickly turn to

recovery of the costs incurred due to the

delayed completion date – i.e.

“Prolongation Costs”.

If you ask an Employer’s QS how such

costs should be determined the answer is

often an unequivocal statement that the

rates and prices from the Preliminaries

BOQ shall be divided by the original

contract duration and the derived daily rate

for preliminaries shall then be applied to

the extended duration.

The sharp witted Employer’s QS may even refine this

logic with the caveat that the BOQ rates and prices

should first be adjusted to remove fixed costs,

mobilization and demobilization costs, overheads and

profit.

Whilst both answers are quite wrong, these

approaches are often used in order to achieve result,

despite the inaccurate answer. The problem is that

neither approach attempts to address the underlying

question of what costs / losses were actually incurred

by the Contractor as a consequence of the delaying

events for which the Employer was responsible.

The answer to this question cannot be found

in the BOQ, but can (and should) be found in

a detailed analysis of the Contractor’s cost

records The express wording of the contract

will dictate which heads of claim are

admissible, but in general terms an accurate

understanding of Prolongation Cost

entitlement can be derived by application of

the following basic principles:

-Identify the events that gave rise to the

extension of time – as it is the cost / loss

arising from these events that the Contractor

is entitled to recover;

-Identify the point in time that the delay

occurred – a common mistake is to

identify the costs that were incurred over

the extended duration at the end of the

contract period. This is incorrect. The delay

may have occurred prior to full mobilization

and thus the actual costs incurred at that

time may be lower;

-Identify the direct costs that follow

from the compensable delay events –

the Contractor is not entitled to costs

arising from delay events for which it is

responsible. Separation of the two can

defeat arguments that the claim is global

and includes elements of the Contractor’s

own culpability;

-Assess only time related costs and not

one off capital costs – time related costs

are those which necessarily arise as a

consequence of additional time spent on

the project and would typically include

staff salaries; insurance, rents, utilities,

bonds, accommodation, office services,

car leases & running costs, etc. but

would not include purchase costs of

offices, photocopiers, vehicles etc.

-Exclude task related costs – a

common mistake is to include task

related costs (e.g. labour, plant hire or

scaffolding costs) that would have

been incurred in any event. These

costs may only have been incurred at a

later point in time and are therefore not

additional. Such costs would need to

be separately recovered through a

properly formulated disruption cost

claim;

-Exclude profit – the purpose of the claim

is to put the Contractor back into the

position it would have been, but for the

delay. ‘Profit’ is not ‘cost’ and thus any

claim for profit can only be by way of a

‘loss of opportunity’ claim – which may be

expressly precluded by the wording of the

contract and would in any case have to

be proved, i.e. that opportunities did in

fact present themselves and were

refused because key resources could not

be released from the delayed project;

-Allow for off-site costs – costs incurred in the Contractor’s head

office (and elsewhere) may be as a direct result of the project

delay. The fact that these costs were incurred off site does not

mean that the Contractor is not entitled to receive them;

-If possible, avoid formulae for determining overheads (e.g.

Hudson’s, Emden’s etc.) – unless you are a Contractor and you

fully understand the basis of your ‘loss of opportunity’ claim and

how to present it! By indentifying actual incurred overhead costs

rather than rely on theory based formulae that commonly produce

high assessments;

-Interest / Finance Charges – remember that charging interest on

a debt may be prohibited in your jurisdiction or by your contract.

Most interest or finance claims suffer from a lack of facts and are

commonly: unsupported, theoretical assessments of loss.

However, a skilled claimant can often find ways to lend credibility

to this type of claim.

Calculation of Costs. Once the contractor is granted an extension of time with costs, the computation of the recoverable items must also be substantiated with properly maintained records and invoices. Normally, the contractor should prove actual loss from records. Only where this is not possible, and as an exception rather than the rule, will calculation be allowed by reference to formulae such as the Eichleay formula, and the Hudson or Emden formulae. The formula is applied to assess loss where certain things have been established proving that the contractor did actually suffer loss. The contractor must show that it would have secured work on another contractor and would have been recovering overheads from this other project, and that there was profit capable of being earned elsewhere and there was no change in the market thereafter affecting profitability of the work.

It must also be established that the

contractor was unable to deploy

resources elsewhere and had no

possibility of recovering the overheads

from other sources, e.g., from an

increased volume of work. Thus such

formulae are likely only to be relevant

and of value if the event causing the

delay has the characteristic of a breach

of contract.