Claims on Prolongation Costs in Nutshell

It is common practice that time extension claim comes before the claim on prolongation costs. Once an extension of time has been granted, the evaluation of the additional prolongation costs is often related to the period between the contract completion date and the extended completion date. Prolongation cost is also calculated on time related preliminaries. The author contends that this line of thinking is illogical.

The intention of most construction contracts is for the Contractor to be reimbursed the additional cost which results from Employer delays. This involves a comparison between the actual costs incurred and what the cost would have been had no delay occurred. Where, for example, time is lost awaiting details which causes a two weeks delay to the critical path, evaluating the prolongation costs associated with the extra two weeks on site, following the revised contract completion date, would obviously not produce the correct answer. A more accurate evaluation would be achieved by reference to the costs incurred during the two weeks when the information was late in arriving. It is wholly a question of cause and effect.

The SCL protocol in UK, with regard to this matter, states that ‘the recoverable prolongation compensation is to be assessed by reference to the period in which the effect of the Employer Event Risk was felt.’ It is clearly intended that, once it is established that additional payment is due for prolongation resulting from Employer delays, the evaluation should relate to the period when the effect of the delay occurs and not to the overrun period at the end of the contract.

If the party (A) suffers a loss which he is entitled to compensation from the party (B) causing the ‘injury’ (for example a delay), the damages are to put (A) back into the position he was nominally in before the event. Hence, prolongation costs shall be the costs that actually incurred at the period the delay events impacted on the progress, instead of the period of extension. What must be priced is the effect of the delay, and it boils down to a clear analysis of the effects of the delay to ascertain the additional overhead resources which are incurred. It is only if, and when, the project as a whole is extended or prolonged beyond its programmed completion period as a result of the delay to the progress of works that the Contractor would be involved in the extra employment of resources over and above that allowed in the Contract Price. However, that certain resources could also be extended within the original contract period as a result of variations and those extended resources should, of course, be reimbursed to the Contractor.

Traditionally, prolongation costs had been priced by reference to preliminaries. The elements of fixed costs are usually only incurred once and not affected by a delay to the project; that element ought not to be claimed. The time related costs will, unless there is a full suspension of the site for instance, continue through any period of delay and can be claimed ‘at cost’. ‘Cost’ will be calculated in accordance with the terms of the contract. However as safe bet initially is to adopt the time related charge levels in the originally accepted bid, which is simple in approach that any one would prefer to adopt. However, during the 1980s this traditional basis fell into doubt, and that following various cases, standard forms of contract started to insist on the actual loss and expense incurred as a consequence of the Employer’s delay, may be because of the concerns if listed out as follows;

  • Rates quoted for preliminary items could be time, method or activity related or even in doubt as to what category a particular preliminary item would belong to, such as grouting as the tunneling proceeds or dewatering in off shore cofferdam or wet blanketing in a dam defect whenever priced under preliminaries.
  • They are forecasted values quoted in competition while being commercially viable. They are values that the Contractor thought might happen rather than actually happened.
  • They are subject to any pricing strategies such as front end loading, back end loading, or that gives maximum return at completion (in a re-measure contract).
  • Rates quoted for preliminary items, similar to other unit rates, contain a profit element. Actual costs should exclude profits as well as any risk margin.
  • The philosophy behind the compensation is to find the replacement value, like in a typical insurance scheme, in order to bring back the Contractor into the original position where he stood financially had there be no delay.
  • A party should not profit from another’s loss out of eventualities beyond control of either party, say in a prolongation due to adverse inclement weather. This is in line with the principle of good faith and fair dealing.
  • The impact due to prolongation may also depend on the site involvement. For instance, the actual costs on preliminaries at the beginning and end of the progress along with the S-curve may be not as big as in the peak. The amount of additional burden taken over by a prudent Contractor varies with the period as-impacted.
  • A contract may well have many hundreds of variations, and many dozens of these could be critical and contributing to the delay.  Pro rated preliminaries may duplicate the amounts for variations individually priced under clause 52.  If a variation causes standing time (say in shotcreting in rock stabilization), then the Contractor may successfully recover the costs of that standing time as a variation even if it could be shown that the Contractor had no alternative work in any event and would suffer no loss from his idle resources.
  • Concurrent delays are excusable but not compensable, as a principle. Time extension due to concurrent delays can not be payable even with time related preliminaries on pro rata basis.
  • In contracts of civil engineering nature such as mass excavation in a borrow pit, dredging work or in demolition, more than 90% of the cost would be on plant utilization that is priced in a unit rate, say in a rate per m3, apart from preliminary items. Payment on time related basis would be wholly inapplicable when such a contract is prolonged.
  • Time extension due to suspension of whole of the works or delay in site possession (that pushes ahead the planned program as a bunch) may not necessarily cost the preliminaries in full. It may sometimes cost more than what is catered for in the preliminaries.
  • As there is usually a short ad-hoc preliminaries bill, the use of the prelims bill for pricing prolongation is not complete in a sense. For instance, the items under preliminary bill are set out in line with the conditions of contract and specifications (as guided for instance in the Principles of Measurement International 1979). Some items are neither measurable nor priceable.
  • Tender price break up is usually subservient to the contract once obtained after the contract has been let and any particular inclusion or exclusion does not bind the parties in a prolongation issue.
  • The intricacy itself of the issues when they are inextricably intertwined has made more difficult in using preliminaries as the basis of prolongation costs.

On the practice of adjusting for the duplication in recovery of additional overheads, such overheads are recovered in both payment for variations and in the pricing of prolongation costs. This is premised on the basis that the overheads in the BQ rate should not be adjusted where the variation may cause a critical delay when it would not be adjusted if the variation has not caused delay. To deduct this allowance in the BQ rate because the Contractor has incurred a delay would place the Contractor in a worse position than it would have been absent any delay. Usually, the overheads in the BQ rates which are used to price variations are not adjusted. However, it is the loss and expense which is adjusted, not the BQ rate. Not to do so would mean that the Contractor would be paid twice for some element of his additional overheads, which is not intended in contract?

Let us assume an interim claim in a road widening project to a cut off date say, 31 Dec 2006 (effects are continuing as per the Contractor so that the Contractor can submit any number of claims till the effects cease). It has two components; extension of time and additional cost due to disruption occurred in selected areas and it excludes the cost of unproductive working (ie, loss of productivity). The Contractor says delay events are widespread and extensive and only the main events have been considered, (altogether meaning that the Contractor intends to submit further claims). He may amend or update the contents at a later time whether the same is contained in this submission or otherwise, as he deems strategic. However, the source of claim is the disruption (although disruption does not necessarily cause delay in scheduled completion) resulting from existing utilities that were in excess of utilities indicated in contract drawings, utilities not in the locations indicated in these drawings, inadequate service corridor space provided in the Employer’s design, existing utilities already situated within the corridors, unforeseeable underground cavities, re-design of pump stations, encroachment on the Contractor’s ROW to an underpass, prevention of trial excavations and utility relocation and excavations withheld.

Hence, it is important to look at the entire scenario from a broad perspective. Despite, the Engineer’s assessment has been based on preliminary items. This is not contractual also because each issue shall be evaluated on its own merit as addressed under various contractual provisions in which we find the phrase ‘proper and reasonable expense’. Since preliminaries are not ‘expenditure properly incurred or to be incurred’, the actual expenditure needs to be determined. This would eventually include time-related preliminary items, (for instance, the costs to be incurred in keeping the performance bond and insurance on extra premium) shall also be payable to the Contractor.

Where the Employer is responsible for disruption to the progress of works i.e., where he has disturbed progress to items on the critical path so that the Contractor is delayed in the completion of work and suffered additional costs in completing the works, the Contractor may claim the cost of wasted or increased overheads incurred as a consequence of the disruption. As with other claims, the principle problem with providing evidence in support of such claims is not so much in identifying the actual cost incurred but in satisfying the Engineer that any additional cost claimed arises as a result of the event relied upon. In other words, the challenge is to satisfy the Engineer that, but for the disruptive event, the cost to the Contractor would have been less than it actually turned out to be and that the difference arose as the result of extension because of disruption.

Once established that the delay was unforeseeable, uncontrollable, critical and causative, the Contractor does get the extension of time but he is only entitled to any loss and expense incurred as a specific consequence of the Employer-caused delay. This basically means that if the Contractor is able to identify extra costs at the activity or event level, he recovers these but not the general running costs of the project. 

Also, the author prefers the term ‘actual loss’ instead of ‘actual cost’ for clarity. The Contractor should be entitled only for the actual loss and not the actual cost (in other words, the difference between the actual cost incurred in delay and the cost that would have incurred under normal circumstances as planned for which the contract rates are inclusive of basic cost, overhead and profit). The sum so arrived will eventually cover up any escalated component in prices of materials and labor and any loss of productivity. This will avoid possible over-compensation. All the cost items shall only be defensible with site records and other documentary evidence. The extent of entitlement and then the quantum has to be decided on the foregoing principles.

In nutshell, it is eligibility that follows quantum. The use of preliminaries on pro rata basis would not truly result the actual loss in prolongation. The level of compensation is what is reasonable in the circumstances. Each case shall be evaluated on its own merit. If the cost difference can be seen as being not too remote from the original event it may be recoverable. The industry has accepted that the correct means of evaluating prolongation costs is by reference to actual expenditure, justifiable upon contemporary records.  

Unless otherwise the parties have taken on board by contract the risk of pro-rata application of time related preliminaries, the author is scared of recommending so-called ‘preliminary’ method, instead any method that is capable of finding the actual loss is admissible and the answer is ‘it depends on the issues’ where the expertise of the quantity surveyor triumphs.  Seldom does one size fit all.

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