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.