Claims for Preliminary Costs — What is Included?
When a contractor experiences delays caused by the employer, it's crucial to assess the financial implications of this extended period on-site. While an extension of time may be granted, the additional costs incurred due to the delay can significantly impact the project's profitability.
In this blog, we take a closer look at some of the key principles you should consider before submitting a prolongation claim.
The importance of actual costs in construction claims
The first key principle is that recoverable costs must reflect the actual costs incurred by the contractor. These costs cannot be based on initial estimates of preliminaries, or the amounts listed in the contract's bill of quantities. The costs must be real, tangible, and supported by evidence.
But why go through the trouble of calculating actual costs when you already have an agreed weekly rate in the contract? The reason lies in the legal principle of cost recovery. This is to put the claimant in the position they would’ve been in had the breach of contract not occurred.
If you rely on initial estimates, one of two outcomes is likely. Either the contractor is penalised because their actual costs are higher than the estimated, or they are overcompensated because their actual costs are lower.
To fairly restore the contractor to the position they would’ve been in if not for the breach, cost recovery must be based on actual, incurred costs.
Understanding the impact of a specific period of delay
The second key principle is that costs should be calculated for the specific period of delay, not the extended project period. For instance, if a 12-month project is delayed by one month in month six, only the costs incurred during month six are recoverable—not the additional month (month 13). This distinction is important because preliminary costs typically decrease toward the end of a project. Therefore, the cost impact of the delay period may differ significantly from that of the extended time.
Common costs claimed in the event of a construction delay
When a construction project is delayed, contractors may be entitled to claim compensation for additional costs incurred. Some common examples of cost include:
- Site establishment: Expenses related to managing the site, including staff, office facilities, storage, and security.
- Head office overheads: Indirect costs incurred by the contractor's main office, which can be challenging (if not impossible) to allocate to specific projects. Courts often accept the use of formulas like Emden and Hudson to calculate these overheads.
- Attendant labour and plant: Costs associated with resources that support the project but are not directly involved in productive work, such as site supervisors or equipment operators.
The importance of evidence and documents for prolongation claims
Like any other claim, costs must be substantiated with records. Since prolongation claims are based on actual costs, there’s no excuse for not having the right records—after all, if the costs were real, there’ll be a record of the expense somewhere.
Contractors need to provide supporting evidence, such as:
- Timesheets: To document the hours worked by staff.
- Invoices: For plant, materials, and other purchases.
- Payroll records: To verify labour costs.
- Detailed site diaries: To record daily activities and events.
Maintaining detailed records is crucial for construction contractors. Not only does it strengthen your claims, but it also helps prevent unnecessary disputes. By focusing on actual costs and the specific impact of delays, contractors can achieve fair compensation.
As our final word, remember the power of solid record-keeping —without it, even valid claims can be difficult to prove.
This article was written by Aqeel Haque LL.M, Dip.Law, MRICS.
Claims for Additional Preliminaries as a Result of Variations
Variations - something that comes up a lot in our courses. One question crops up time and time again. Does the contractor have entitlement to payment for additional preliminaries arising from variations?
The short answer to the question (as usual) is that it depends.
What Are Preliminaries?
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.Read more
‘Thickening’ of Preliminary Items
It is generally accepted that when a contractor is entitled to an extension of time, they are also entitled to claim for time-related costs for the period of delay. Time-related costs include expenses for providing site management, site establishment, plant and equipment, insurances, additional financing costs, head office costs, and similar items, which are usually priced in the preliminaries section of the bill of quantities.
However, are there situations where a contractor may legitimately claim for additional resources, as opposed to simply extending the existing resources for a prolonged period? The answer is yes, and this is known as ‘thickening.’
Consider a situation where the Employer has instructed the Contractor to carry out a substantial amount of additional work, but still needs to meet a completion date that is earlier than what would be achieved with the extension of time to which the Contractor would otherwise be entitled. In such a case, it would be necessary to deploy additional labor, plant, and machinery to carry out the work, for which the Contractor would receive payment under the contract rates and prices when evaluating the additional work. However, if the Contractor deploys additional resources, they may also need to mobilize additional site supervision, management, administration staff, and the like. Mobilization and demobilization of both productive and non-productive resources will probably cause the Contractor to incur additional costs. The staff may also require supplementary site facilities in order to carry out their duties, but such costs would not be recovered through the rates and prices. This is what is referred to as thickening, and it is claimable by the Contractor.
If it were not for the requirement to accelerate in order to meet the Employer’s desired completion date, the Contractor would be entitled to an extension of time, for which the Employer would incur prolongation costs. The savings from avoiding prolongation may therefore possibly offset or contribute towards the thickening costs.
Want to learn more about how to write, present, respond to, and manage construction claims with skill and effectiveness? Study with Claims Class via Intensive Training, Distance Learning, or e-courses.
Variations and Additional Preliminaries
One of our Distance Learning students raised an interesting question on preliminary costs (preliminaries) and variations recently, which was:
'If a variation causes the contractor to incur additional preliminary costs, should these be claimed as part of the variation, or should a separate claim be submitted?'Read more