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.
10 Things Construction Gets Wrong When it Comes to Claims
Inadequately expressed claims are one of the leading causes of time-consuming and costly disputes. Avoid common mistakes to ensure acceptance of claims.
In this post, we set out ten common reasons that claims end up as disputes and offer best practice tips so you can ensure you do better. Take a look at the following, have you fallen foul of them? Are you constantly looking out for them so you can avoid them?
Common Mistakes
- Contractors wait until the end of the project to submit claims, instead of submitting claims when entitled to, as the project progresses.
- Contractors include several delay events into a single consolidated claim instead of preparing separate claims for each delay event.
- Contractors do not give notices of claim within contractual timeframes, and notices do not contain necessary information.
- Claims do not contain an adequate examination of cause, effect, and entitlement to justify the claim.
- Claims are not adequately substantiated to prove that the claim is just.
- Engineers and contract administrators do not follow their contractual obligations to respond to claims and attempt to reach agreement.
- Both claims and responses to claims are poorly expressed, so the recipient has difficulty in understanding the claimant or respondent’s positions.
- Delay analyses to demonstrate extensions of time are not performed following good practice.
- Cost claims are poorly demonstrated and substantiated.
- Those tasked with preparing and responding to claims are inadequately trained and qualified.
Whilst very common mistakes, these are all avoidable. They are all things you can keep an eye out for and minimise or even eliminate to ensure project success.
If you would like to learn how to submit successful claims and achieve quick resolution on projects, take a look at our e-courses.
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.
What Qualifies As Force Majeure Under FIDIC?
One of our blog subscribers requested advice on Force Majeure under the FIDIC Red or Yellow books. The good news is that Force Majeure clauses are similar under the Red, Yellow, Silver and Gold forms of FIDIC. Therefore, this applies to all of them.Read more
Claiming Prolongation Costs when there is no Entitlement to an Extension of Time | Can it be done?
It is generally accepted that, in a situation where a contractor is entitled to an extension of time, they are also entitled to claim for time-related costs for the additional time they were obliged to remain on site. Such costs are usually referred to as prolongation costs.
Are there situations, however, where a contractor may legitimately claim for the payment of costs when an extension of time is not warranted? Well, yes, there are. Consider the following example:
The contractor is constructing a high-rise building and has a tower crane on site, which their programme shows is to be removed on a certain date. The contractor, however, receives a variation order to change the specification of the air-conditioning chiller, which is located on the roof of the building and needs to be hoisted into position by the tower crane. The change to the chiller requires modifications to be made at the factory where the chiller is being manufactured, and this will delay the delivery of the chiller to a date later than the date by which the contractor had planned to remove the crane.
The contractor will therefore incur additional costs for keeping the tower crane on site from the time that they should have been able to remove the crane, to the date that they were able to hoist the chiller into position.
Such costs would be claimable.
Want to learn more about construction claims? Study from home, in your own time with just your laptop and an internet connection; check out Claims Class e-courses.
How to Audit Prolongation Costs
On our Claims Class courses we explain that it is important to substantiate everything in a claim document. This also applies to the calculation of prolongation costs.Read more