Part 1

Those involved in the region's construction industry will be well aware that over the last couple of years there has been a rapid expansion in the number of construction claims and disputes.

A head of claim that is often made by contractors against employers is for prolongation costs, i.e., those costs sought by a contractor for having to remain on site longer than it originally anticipated due to the actions of an employer.

Much has been written about the recoverability of head office overheads and, more specifically, whether such claims can be proven by way of reliance on a formula or whether actual cost data is required.

However, an important aspect of prolongation claims that is often not addressed by commentators on construction claims is the basis and evaluation of claims for additional preliminaries (or job site overheads as they are known in the United States). In short, preliminaries are comprised of fixed costs, time related costs, activity related costs and value related costs.

This article seeks to provide a brief overview of what to be mindful of when making or facing a claim for additional preliminaries.

When faced with any claim, an employer should always remember that the onus is on a contractor to demonstrate (i.e, prove) its entitlement to the relief being claimed. In short, it is not for an employer to disprove a contractor's claim; rather, it is for a contractor to prove its claim, both in terms of liability and quantum: he who asserts must prove. As basic as this restatement of the underlying principle of construction claims is, it is surprising how often it is overlooked by employers, contractors and their advisers.

All too often, and despite express contractual provisions that require the timely submission of detailed claims, a contractor will submit a claim for prolongation costs as part of its final account exercise and simply assert that because it suffered an employer caused delay to a critical activity (or series of activities) during the progress of the works the original completion date was missed; hence, it claims for its costs associated with its prolonged presence on site until such time as the works were finally completed. In theory, and provided the employer was responsible for any critical delay, there is no problem with bringing such a claim (subject, that is, to satisfying any procedural requirements). The problem, however, usually arises out of the contractor's method of valuing its losses arising from its prolonged presence on site.

It is common for a contractor to value its claim for additional preliminaries on the basis of the period that a project has overrun, i.e., from the original completion date to the actual completion date, by simply relying upon its preliminaries at the end of original contract period and continuing them during the extended period. This type of claim is colloquially known as a 'pro rata prelims claim'.

However, an employer may be ill advised to make payment of a contractor's prolongation costs claim on the basis of a pro rata prelims claim. Similarly, a contractor may be short-changing itself by claiming for its additional preliminaries in this way.

Whilst there may be occasions when the early settlement of a contractor's claim is commercially viable, it should be noted that a pro rata prelims claim is likely to be either inappropriate or wrong for the reasons set out below.

The first reason why a pro rata prelims claim is wrong is because it is dealing with the wrong period. A claim for additional preliminaries should be assessed at the date of the breach itself, i.e., when the delays actually occurred. Take a simple example, a small project has a 3-month contract period and during the first month delays occur which delay the final completion date by a further month. In this scenario the appropriate period for assessing the preliminaries to be claimed is the first month, i.e., the period when the delays actually occurred, and not the extended month.

Unfortunately, this problem is often compounded by reason of the fact that an employer will often pay a contractor for all of the claimed preliminaries over this delayed period without making an adjustment for the contractor's actual progress. By making such payment the employer exposes itself to a financial risk later in the project because at some future point all of the activity and time related preliminaries included in the contract price will have been paid by the employer, but the contractor will have not completed the works.

Another potential problem with pro rata prelims claims is the risk of double recovery. In short, if the cause of a delay to a project's completion has been the issuance of variations or the carrying out of dayworks then the employer should ascertain if the cost of additional preliminaries for carrying out those variations or dayworks has been included within the valuation of the same (though, this tends to be more of an issue in terms of a claim for head office overheads and profit). Therefore, employers should carefully scrutinise a pro rata prelims claim which is based on delays caused by variations.

A further potential problem with pro rata prelims claims (leaving aside arguments that the preliminaries figures in the Bill of Quantities may not represent a contractor's actual costs when the works are carried out) is that a contractor will often fail to apportion those costs included within its activity or time related preliminaries between those which are recoverable as part of a claim and those which are not. In other words, if a delay is suffered to a critical activity it may well be that some aspects of the overall preliminaries can still be put to good use on other activities during this period of delay. In a recent English case the risks of a party failing to properly apportion its preliminaries in this way were made all too apparent. In this particular case the learned Judge had this to say on the point:

"But the contractor will not recover the general site overheads of carrying out all activities on site as a matter of course unless he can establish that the delaying event to one activity in fact impacted on all the other site activities. Simply because the delaying event itself is on the critical path does not mean that in point of fact it impacted on any other site activity save for those immediately following and dependant upon the activities in question... But no evidence has been called to establish that the delaying events in question in fact caused delay to any activities on site apart from [critical buildings]. That being so, it follows, in my judgment, that the prolongation claim advanced by [the Claimant] based on recovery of the whole of the site costs of the [project] site, fails for want of proof."

The Claimant, or more properly its quantum expert and legal team, had failed to make any attempt to apportion between the preliminaries associated with those activities which were on the critical path and those which were not.

It is suggested that the above proposition of apportioning preliminaries ties in with the UAE principle of proof of damages. That being said, it is acknowledged that there may be circumstances in a particular case where no such apportionment can or need be carried out.

What is also interesting to note about this particular case is that when proceedings commenced the Claimant sought to recover GBP3.5million. However, during the course of proceedings it reduced its claim to GBP1.5million (for which the learned Judge believed the Claimant had exaggerated its initial claim and this had subsequent implications in terms of recovering its legal costs). The Claimant was actually awarded GBP163k! Given that the Claimant's legal costs in the case were approximately GBP1.6million and that the Defendant was ordered to pay approximately 40% of the Claimant's costs one can see how this became somewhat of a pyrrhic victory for the Claimant.

In summary, employers and their advisers should be wary of entertaining pro rata prelims claims. The onus is always on a contractor to prove its entitlement to a claim both in terms of liability and quantum. Clearly, if a contractor has suffered a loss then, as a matter of law, it should be compensated, but only insofar as it is able to properly demonstrate its loss.

NB: The above article does not constitute, and should not be interpreted or relied upon, as legal advice.

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.