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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very useful article.
my question if the scope increased in variation with similar items already available in BOQ, the client can ask the contractor for a revised rate, like to reduce? similarly, the contractor is entitled to any compensation if the item is totally omitted or de-scoped more then 20% ?
In our Project, we have a Lump Sum preliminaries for a re-measurable works/boq. Project duration is now expired and project is delayed but the causes are attributable to our main contractor and us (subcontractor). Now they are de-scoping some works cost around 20% of the total project amount. Can they reduce the amount of preliminaries due to the de-scoping? I know for mobilization the cost will remain same. But for other items. Hoping for your positive response.
Hi, We had a similar experience where we had the contract awarded. We went ahead with the material and shop drawing submissions. We also brought the materials for the mock up. And then one fine day more than 85% of the work was de-scoped. Now we are not being compensated for anything. This was a re measurable contract. Can you please advise as to how to claim for loss of profit and if there any additional claims that we can make? Hoping for your positive response. Thanks.
Hi Sam, we had almost the same experience. May I know what happened in your case? Our Project has lump sum general items/preliminaries for a re-measurable works/boq. Now our main contractor is de-scoping some works from us which is about 15-20% of the total cost. I want to know what happened to your case and what did you do to mitigate to help me regarding our case. Looking forward on your for positive response Sir.
Hi,
My project was descoped by 64% after completion of a phase without due consultation or formal information from the main contractor. We intended going for the next phase of the project but was given FINAL Payment Certificate and was informed by main Contractor that the Client had descoped the project.
We later pressed for claim to cover our expenses and as compensation for losses brought onto us due to the circumstances.
We have invested so much in preliminaries and other miscellaneous and logistical requirements toward the contract.
Can you advice if we have a chance for claim and will appreciate if you have format for descope claim.
Thank You!
In the case of an engineering consultancy contract being reduced to 40% (fee value) of the original scope, could you comment on what recourse is available and the appropriate approach? Essentially my entire construction supervision scope had been omitted from our consultancy contract.
Look forward to your valuable guidance. Thanks
Dear Sir, this is a great article, however can you kindly send me any article that you have on omission under qatari law and if possible any case study reference to aid me, I will be most appreciative, thank you Sir.
Hi Olabisi – thanks for your comment. We don’t have any articles with specifics related to Qatati law though I’m afraid. Perhaps one of the Construction Law practices, such as Fenwick Elliott, may be able to assist you with this request. Website: https://www.fenwickelliott.com/international/middle-east
A very good case study and comments
Just a question that comes to mind;
Can time for completion be reduced following the reduced scope?
If the Contract noted that ‘the Contractor shall not be entitled to any financial compensation for a reduced scope’, does it not go by implication that the Employer shall similarly not be entitled to ‘rebates’ for any reduced scope?
There are several problems with this scenario and the comments.
Why do you have a BoQ with a Lump Sum project? What happens when there is a discrepancy between the BoQ and the other Contract Documents? Do you use the rate or the lump sum extension to price variations?
All variations have to priced using the logic of the Contract, not actuals. The Contractor may have erred in his estimate of prelims, or adjusted his price to ensure wining the Contract. Certainly, the Contractor made an error in his bid, or he would not won. The Contractor should have the documents used in his bid and these documents should be used for any variations.
In case if client send boq with only material and labor part in that contractor has no other choose rather than to include his preliminaries into material and/or installation price. So sometimes it is not contractor mistake at all.
If the Contractor calculates an Actual Preliminaries Cost on the final varied scope of works, then it does not make any difference whether the programme is less or the same due to the changes.
It seems fair and reasonable that the Contractor should be entitled to the Total Actual Preliminaries even though the scope of works was reduced and whether or not the programme duration changes as a consequence.
This would certainly follow the intent of the “Plus or Minus 20% Principle” that applies to Qatar Government Projects [providing it is correctly applied] whereby the Instructions to Tenders often includes words to the effect that if the variations increase or decrease the Contract Value by more than plus or minus 20% the Contractor is entitled to recover Actual Preliminary Costs.