Delays to completion of construction projects are commonplace, as are claims from contractors to recover additional costs incurred as a consequence of those delays. Detailed judicial analysis or discussion of the principles upon which such claims might be advanced or valued, particularly of claims to recover the contractor's site running costs, is comparatively rare, largely because these claims tend to be settled through adjudication. The decision of the English Technology and Construction Court in Costain v. Haswell is of interest because it contained some detailed consideration of claims to recover contractor's site overheads arising from delays, of a “winter working” claim, and of extent of proof required for such claims. Whilst much of that decision depends on the facts, some statements of principle made in the decision, if followed, would suggest that significant changes are required to conventional understanding as to how claims for costs arising from delays to completion, also referred to as prolongation costs, should be assessed. Though the case is first instance and currently limited to the English and Welsh jurisdiction, the principles of damages recovery have common features across jurisdictions and for that reason, this discussion may inform a wider readership.
Claims to recover prolongation costs arise in a number of contexts, and hence it is of some importance for parties to understand the principles upon which such claims might be evaluated. First, such claims might be made by the contractor against the employer under the construction contract. Second, a claim might be advanced by a contractor against subcontractor or supplier to recover losses arising from delays. Third, such a claim, as occurred in Costain v. Haswell, may form part of a professional negligence action where the alleged negligence is said to have resulted in delays to completion of a project with the consequent need to settle claims for additional cost with the contractor.
In this paper, the term “prolongation costs” is used to describe the loss incurred by a contractor, and in particular the additional site running costs incurred, arising from delays to completion. This loss might be differentiated from more limited losses (sometimes termed disruption) arising from delays to discrete elements of work that do not lead to delays to completion of the works overall. A similar definition of delay in this context is used in the leading construction law texts Hudson's Building and Engineering Contracts ( Atkin Chambers, 2010 ) and Keating on Construction Contracts ( Furst and Ramsey, 2006 ).
What are prolongation costs
When a delay is incurred to a construction contract, assuming it is a critical delay meaning it will cause a delay to the date for completion, a number of consequences follow. First, the activity or activities most directly involved will be delayed. Other activities may be able to proceed unaffected. That may mean that some, but not all, subcontract works are affected. Second, the delayed activities will usually delay those which follow. This may mean that project work that was due to be completed during the warm summer months, for example, must necessarily be carried out in a winter season with less available daylight hours. The effects can be significant on projects that must be carried out within defined weather conditions or outside winter months, as frequently arises on civil engineering projects. Third, if the project's duration is extended, the site management team and plant and site accommodation will need to remain on the site for a longer period, through to the end of the project. Fourth, it follows that the date at which the site management team will be released to the next project will also be delayed. Fifth, there may be some increased involvement by head office staff in managing the consequences of the delays. Sixth, the contractor might propose, or instigate some programme or resource changes aimed to limit or reduce the likely delay.
The claims which may arise from a delay can be classified as follows:
Increased site running costs or “site overheads”. This is typically the cost of site-based staff, accommodation and some plant being retained on the site for a longer period. In Ascon v. McAlpine, there was some discussion about calculation and proof of claims for site overheads, but no detailed judicial discussion of such claims is evident more recently.
Increased costs to complete the works that would not have been incurred had no delay occurred. This might be presented as a claim for the additional cost of winter working, or adverse exposure to currency exchange fluctuations.
Additional work or “re-work”. This can arise where work done (such as painting) has to be repeated after a period of delay.
Increased cost of performing other work, also termed disruption. Typically, this is the cost effect of a delay or reprogramming on non-critical work or other subcontractors because the work affected is carried out less efficiently than would have been the case had no delays occurred.
Recovery of additional management costs, typically costs of staff based at a regional or head office whose time has been charged to the project due to specific issues. Recoverability of such costs were confirmed in Tate & Lyle Industries Ltd v. Greater London Council and Aerospace Publishing Ltd v. Thames Water Utilities Ltd discussed more recently in Tinseltime Ltd v. Eryl Roberts.
Lost contribution to head office overheads, where key staff or plant is retained on a delayed project and thus cannot be released to carry out new projects that could earn overhead contributions as part of the contract price. Discussion of this established category of claims, covered in Hudson ( Atkin Chambers, 2010, pp. 6-072-6-074 ), is beyond the scope of this paper.
Acceleration costs or other reprogramming measures taken to reduce or limit the period of delay. See, for example, Ascon Contracting v. Alfred McAlpine where the rationale for the claim for acceleration was reviewed and discussed. Discussion of this established category of claims, covered in Hudson ( Atkin Chambers, 2010, p. 6-079 ), is beyond the scope of this paper.The term “prolongation costs” is used variously by different texts and sources. At its widest, it can cover all of the above categories, but more typically it tends to be used to cover claims for increased site running costs only. Claims for site running costs and winter working costs were considered in Costain v. Haswell and are considered further below.
Some established principles for recovery of site overhead costs
Ordinarily provision is made within construction contracts for increases to the contract sum to be awarded so as to compensate the contractor for the effects of delay, in so far as money can do so. Such provisions are ordinarily conditioned so as to take effect only in respect of limited categories of causes of delays and upon the contractor fulfilling other conditions, such as providing notices or data or documents.
There are a number of approaches to assessing the value of additional site running costs:
Agreement to the effect that no adjustment to the price should be made in the event either of specific delays events or of any delays. This approach, whilst appearing to be an approach that no commercially minded contractor would countenance, is nevertheless seen in several guises. Examples include the “no damages for delay” clause found in some jurisdictions (see Hudson, Atkin Chambers, 2010, p. 6-084 ); target cost contracts where the pain/gain mechanism is structured so that 100 per cent of the pain is suffered by the contractor above a defined threshold; or under a “guaranteed maximum price”-based agreement. Contractors can secure insurance cover against some delay-related costs under delay to start-up policies, but the policies involved tend to operate under limited and carefully defined criteria.
Use of a pre-determined formula, whereby the amount payable to the contractor for delays caused by defined circumstances is an agreed sum per day or week. A formula approach, conceptually, is unsound because the extent of loss arising from a cause may differ significantly depending upon the stage of progress of the works, number of subcontractors involved at the time, etc. A delayed start to the project may involve negligible cost; a delay mid-project, however, may directly affect a multitude of subcontractors and works across the entire site. Notwithstanding this, provisions for payments at agreed rates – a liquidated amount that the contractor proposes within his tender – can be found in some standard forms: see, for example, clause 10.7 (delay costs) of Ireland's Public Works Contract for Building Works designed by the employer ( DFRI, 2010 ).
Recovery of overhead costs as part of the agreed contract rates and prices. Where additional work is to be valued at contract rates, the contractor may recover a contribution to overheads as part of the agreed rates. Hence, if a contractor is engaged for five weeks to build a wall 100 m long, and is asked to build an additional 20 m, one view is that payment for the additional 20 m of wall at the contract rates will compensate for the additional week required to build the additional 20 m of wall.
Addition for overheads calculated as a percentage of the value of additional work carried out. If additional work is required, the contractor might be paid at cost for those additional works with an additional...
