Archive for the ‘FIDIC’ Category

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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New Top Tips Paper! Application of Dispute Boards on Construction Projects

Most contracts have provisions whereby the Engineer, or his equivalent under other forms of contract, is required to make a fair determination of the claim. They also include a requirement that the parties attempt to reach amicable agreement in situations where either party does not accept the Engineer’s determination. (more…)

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How to Make Sure Your Claims are Accepted

If you wish to ensure that your claims are accepted, you need to bear in mind EC Harris’ (now ARCADIS) report Global Construction Disputes Report. This report cites incomplete and/or unsubstantiated claims as one of the major reasons for construction industry disputes.

A typical scenario that I have experienced on many occasions is when a contractor submits a badly prepared or ‘inadequately expressed’ claim to the engineer for evaluation and the engineer rejects the claim on the basis that the contractor has not proved his case. The engineer is quite correct to do this, because the onus is on the claimant to prove that the claim is just and in such a case, the Contractor has not done so. The Contractor, however, believing that he has good basis for the claim, then refers the matter as a dispute. (more…)

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Increased Costs of Fixed Price Contracts

Are there circumstances whereby a contractor may claim increased costs of materials on a fixed price contract? As usual, this would depend on the particular contract, but if we take FIDIC as an example, yes there are.

Consider the following situation: (more…)

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Omission of Items Included in the Bill of Quantities, but not Shown on the Drawings

I recently received a request for advice from one of our course attendees. I have been asked for advice about this topic on several occasions so I thought it worthy of a blog. The situation and query was as follows: (more…)
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