How to Calculate the Recovery of Preliminaries on a Reduced Scope of Works

I was recently contacted by a blog reader who requested some advice on a project in Qatar where the Employer omitted a large part of the Works and also wanted to deduct money from the Contractor’s preliminaries as part of the price adjustment.

I thought that this would make an interesting case to share with the rest of our readers so, the scenario was as follows:

The Contract Price is a Fixed Price Lump Sum.

The Contract Bill of Quantities contains all-inclusive rates which include preliminaries, overheads and profit. No separate prices for preliminaries are included.

After approximately 75% of the works were completed the Employer omitted a large portion of the balance works, which will not be completed by others.

Whilst the Contractor recognises that the Employer is entitled to a saving for the omission, the Employer wants to evaluate the omission at the full Bill of Quantities rates for the omitted items which, include for preliminaries.

The Contractor believes that whilst the Employer is entitled to a saving for the omitted Bill of Quantities items, the Contractor should be entitled to a proportion for the prelims costs incurred up to the date of the omission and based on the fact that 75% of the works were completed.

The Contract notes that the Contractor shall not be entitled to any financial compensation for a reduced scope, but remains silent on costs incurred for preliminaries.

This is not an unusual situation and again seems to be a case of the Employer wanting to have his cake and eat it, or maybe it’s just a lack of appreciation of the situation. My advice was as follows:

I think that the Contractor is on the right track as you have described things.

You did not mention how the contract period has been affected by the large reduction in scope. This is not necessarily a problem, but you need to bear in mind that the calculations that I am about to suggest will be affected if the contract period is reduced.

Firstly, the rates include for preliminaries and general items, but presumably these cannot be separately identified. It would however be possible to price the preliminaries as a separate calculation and it would be even better if the calculation is based upon actual costs, rather than an estimate, as would have been the case at the time of tender.

The calculation should be based on the following:

Mobilisation costs – this could be based on actuals;

Time related costs – again, much of this could be based on actuals and should include:

Site management and admin staff;

Non-productive staff – HSE, time keepers, drivers, store men etc.;

Site establishment – offices, workshops, stores, phones, stationary, etc.;

Non-productive plant, vehicles and equipment;

Bonds, guarantees, financing costs;

Head office overheads;

Demobilisation costs.

Mobilisation and demobilisation costs would remain fixed for both the original and the reduced scope.

Time related costs should be based on the original contract period.

You can then calculate the value included in the lump sum price for the preliminaries.

It would then be a simple matter to calculate the recovery that is required for the above and to then check if the value of the reduced scope provides full recovery. If not, the difference should be claimable as a cost incurred due to the reduced scope.

Had the Contractor not signed away his rights, there would also be a good argument or the recovery of lost profit.

I hope that sheds some light on this topic and helps you if you’re faced with a similar situation on a project. Experienced a similar situation? Comment below, share your experiences and how it was resolved.

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