Prolongation Costs

Cost Claims: 11 Tips for Success

Cost claims can be tricky...and if you want yours to be a success, there are some important principles to follow. Not only that, you need to present your claim in line with good practice. This article discusses both.

Before we go further though, I'd like to mention that some contracts and legal jurisdictions refer to “costs” and others refer to “loss and expense”. Essentially, they mean the same thing, but here I will refer to “costs”.

Principles for Cost Claims

1. The general principle for cost claims: put the claimant in the position that he/she would have been in, had the breach of contract or claimable event not happened.

2. Most cost claims are related to extension of time claims. If there is an extension of time, the Contractor will incur costs to maintain his site and head office for longer than planned. These costs are generally referred to as “prolongation costs” and form the majority of cost claims.

3. Most contracts provide that cost is actual cost incurred. In other words, money that the claimant has spent or will have to spend.

4. In light of the above, you cannot calculate costs from estimated costs shown in the Preliminaries or General Items from the bills of quantities.

5. If there is true concurrent delay, i.e., where an Employer-responsible delay and a Contractor-responsible delay occur at the same time, and both affect the time for completion, then the entitlement to claim costs for the concurrent delay period is generally negated. Why? Because the Contractor would have incurred costs for this period had there been no Employer-responsible delay, so he/she may not profit from his/her own failure.

6. In some cases, the contract may allow for recovery of profit and costs. Check your contract and the clause that provides entitlement for this.

7. Calculate the cost at the time that the cost was incurred. In a claim for prolongation costs, the costs are incurred during the time of the delay and not for the extended period. If, for example, a delay of 30 days occurred in August and the delay analysis demonstrates that this delays the time of completion by 15 days, you need to calculate the cost for 15 days of time-related costs during August.

Good Practice

1. Prolongation cost claims will be for extra site overheads, i.e., time-related resources deployed to the project during the time of delay. You need to keep contemporaneous records of resources to show that the claimed resources were deployed to the project. You need to submit these with the claim as substantiation.

2. Show actual cost with reference to payroll information (invoices, etc.). Substantiate these records and submit with the claim.

3. Calculate prolongation costs based on a cost per calendar day. This will then relate directly to the extension of time period. If you try to allow for irregular work weeks or public holidays, the calculations will get complicated, difficult to understand and any revisions during negotiations will be difficult to make. Keep it simple.

4. Present cost calculations in a clear, well-explained manner. Explain the principles that you've based the calculations on in the claim narrative. If necessary, provide further explanation in the narrative of how you've done the calculations. The idea here is that any non-financial expert reviewing the claim can understand the calculations, audit them and ultimately, agree with them.

Want to learn more about cost claims?

Join me on 20th September for a talk on cost calculations that I'll be delivering as part of the Institute of Construction Claims Practitioners' upcoming online conference: Construction Claims and Dispute Avoidance - How to Achieve Successful Outcomes.

by Andy Hewitt