Requirements for the cost calculation reference to the overheads and profit for the extended project

1. Prolongation cost calculation
RRGS BANDARA

2. Once a Contractor has secured an
extension of time and relief from liquidated
damages, thoughts will quickly turn to
recovery of the costs incurred due to the
delayed completion date – i.e.
“Prolongation Costs”.

3. If you ask an Employer’s QS how such
costs should be determined the answer is
often an unequivocal statement that the
rates and prices from the Preliminaries
BOQ shall be divided by the original
contract duration and the derived daily rate
for preliminaries shall then be applied to
the extended duration.

4. The sharp witted Employer’s QS may even refine this
logic with the caveat that the BOQ rates and prices
should first be adjusted to remove fixed costs,
mobilization and demobilization costs, overheads and
profit.
Whilst both answers are quite wrong, these
approaches are often used in order to achieve result,
despite the inaccurate answer. The problem is that
neither approach attempts to address the underlying
question of what costs / losses were actually incurred
by the Contractor as a consequence of the delaying
events for which the Employer was responsible.

5. The answer to this question cannot be found
in the BOQ, but can (and should) be found in
a detailed analysis of the Contractor’s cost
records The express wording of the contract
will dictate which heads of claim are
admissible, but in general terms an accurate
understanding of Prolongation Cost
entitlement can be derived by application of
the following basic principles:
-Identify the events that gave rise to the
extension of time – as it is the cost / loss
arising from these events that the Contractor
is entitled to recover;

6. -Identify the point in time that the delay
occurred – a common mistake is to
identify the costs that were incurred over
the extended duration at the end of the
contract period. This is incorrect. The delay
may have occurred prior to full mobilization
and thus the actual costs incurred at that
time may be lower;
-Identify the direct costs that follow
from the compensable delay events –
the Contractor is not entitled to costs
arising from delay events for which it is
responsible. Separation of the two can
defeat arguments that the claim is global
and includes elements of the Contractor’s
own culpability;

7. -Assess only time related costs and not
one off capital costs – time related costs
are those which necessarily arise as a
consequence of additional time spent on
the project and would typically include
staff salaries; insurance, rents, utilities,
bonds, accommodation, office services,
car leases & running costs, etc. but
would not include purchase costs of
offices, photocopiers, vehicles etc.

8. -Exclude task related costs – a
common mistake is to include task
related costs (e.g. labour, plant hire or
scaffolding costs) that would have
been incurred in any event. These
costs may only have been incurred at a
later point in time and are therefore not
additional. Such costs would need to
be separately recovered through a
properly formulated disruption cost
claim;

9. -Exclude profit – the purpose of the claim
is to put the Contractor back into the
position it would have been, but for the
delay. ‘Profit’ is not ‘cost’ and thus any
claim for profit can only be by way of a
‘loss of opportunity’ claim – which may be
expressly precluded by the wording of the
contract and would in any case have to
be proved, i.e. that opportunities did in
fact present themselves and were
refused because key resources could not
be released from the delayed project;

10. -Allow for off-site costs – costs incurred in the Contractor’s head
office (and elsewhere) may be as a direct result of the project
delay. The fact that these costs were incurred off site does not
mean that the Contractor is not entitled to receive them;
-If possible, avoid formulae for determining overheads (e.g.
Hudson’s, Emden’s etc.) – unless you are a Contractor and you
fully understand the basis of your ‘loss of opportunity’ claim and
how to present it! By indentifying actual incurred overhead costs
rather than rely on theory based formulae that commonly produce
high assessments;
-Interest / Finance Charges – remember that charging interest on
a debt may be prohibited in your jurisdiction or by your contract.
Most interest or finance claims suffer from a lack of facts and are
commonly: unsupported, theoretical assessments of loss.
However, a skilled claimant can often find ways to lend credibility
to this type of claim.

11. Calculation of Costs. Once the contractor is granted an extension
of time with costs, the computation of the recoverable items
must also be substantiated with properly maintained records and
invoices. Normally, the contractor should prove actual loss from
records. Only where this is not possible, and as an exception
rather than the rule, will calculation be allowed by reference to
formulae such as the Eichleay formula, and the Hudson or Emden
formulae. The formula is applied to assess loss where certain
things have been established proving that the contractor did
actually suffer loss. The contractor must show that it would have
secured work on another contractor and would have been
recovering overheads from this other project, and that there was
profit capable of being earned elsewhere and there was no
change in the market thereafter affecting profitability of the
work.

12. It must also be established that the
contractor was unable to deploy
resources elsewhere and had no
possibility of recovering the overheads
from other sources, e.g., from an
increased volume of work. Thus such
formulae are likely only to be relevant
and of value if the event causing the
delay has the characteristic of a breach
of contract.