Australia: Construction delay: whose breach?

Last Updated: 5 June 2016
Article by Murray Thornhill

If rainy weather prevents you from getting the job done on time, virtually all construction contracts will allow you to claim an extension of time (EOT). In fact, for reasons we will consider in another blog, your head contractor or principal may benefit from granting you an EOT so that it can claim liquidated damages if you do not practically complete your works by the extended time for completion.

However, contractors often want to take their delay-claim a step further by also seeking to be compensated for the losses that they suffer by having to "man-down" or keep their labour and machinery idle on site while they wait for delayed head works to catch up to them. This kind of loss is commonly known as "prolongation costs".

Prolongation costs and EOTs are often seen as going hand-in-hand because they deal with the same problem for contractors: the negative financial impact of delayed works on construction contractors. However, from a contractual point of view, there is an important difference. That difference has to do with how construction contracts typically allocate risk between contractors (including subcontractors) and principals (including head contractors).

Typically, the contractor agrees to complete the whole of the contractual scope of work (as varied) for the agreed contract price (as varied) by the agreed time for completion (as varied). The risk of incomplete, defective, unprofitable or late delivery of the works is allocated to the contractor under the contract.

Construction contracts typically contain certain "safety valves", however. An important one of these is the EOT clause. EOT clauses typically prescribe certain events beyond the contractor's control, such as rainy weather, as qualifying the contractor to claim an EOT.

If the contractor exercises this right and the time to complete the works is extended, this does not mean that the contractor can make a claim against the principal for the losses that the contractor suffers because of the extra time it has to spend on site. This is because the contract has allocated the risk of not finishing on time to the contractor, not the principal. There is no basis in the contract to shift the loss caused by the delay from the contractor (which contractually bears the risk of that loss) to the principal.

All an EOT does is ensure that, to the extent that delay is not the contractor's fault, the contractor does not become liable for the losses caused by delay to the principal. In other words, as long as the contractor exercises its right to claim EOTs properly and on time, the EOT clause ensures that the contractor only has to compensate the principal for delay that the contractor has caused in breach of its contractual obligation to practically complete its works (as varied) by the agreed time for completion (as varied).

The same goes for the principal. The contract may, for example, provide (or imply) that the principal will ensure that the site will be ready to receive the contractor's works immediately, or that the project will keep pace at all times with the contractor's program. In that event, if the head works fall behind causing delay to the contractor, the contractor may claim that the delay has resulted from the principal's breach of the contract. In that case, the delay may not be treated as part of the risks that the contractor agreed to take on under the contract: it may be treated as a breach of contract instead, which may then entitle the contractor to be compensated for its "prolongation costs".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Murray Thornhill
 
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