Construction Law/Prolongation Cost


Dear Sir,

i will keep bothering you as i find an opportunity to put myself wise by asking questions from you.

Does the prolongation cost includes Head Office Overhead Cost or it relates to Site Overhead Cost?

While preparing a bid we generally calculate direct cost then add indirect cost then tax and then profit and here we go with the Bid Price. Don t you think sir that we should calculate direct cost, then indirect, then assumed profit and then add tax because in practice we have to pay tax twice in Pakistan i-e one withholding tax @ 6 percent on each IPC EPC etc and the other is tax on profit declared by the directors of a construction company.

your elaborative answer is requested Sir.

Thank you for your new question. I have following comments in response.
1.   Prolongation claim is for contractor’s work that had to be done beyond the original completion date due to Employer’s action/inaction and for which contractor is not responsible. This way he has to prolong his stay and prolongation claim concerns this period to cater for additional expenses (after all mitigation efforts made diligently)incurred on account of site establishment, plant due to non utilization of dedicated plant, supervisory establishment, apportioned head office overheads and reasonable profit including financial compensation for late release of retention money and for keeping bonds and insurances for a larger period than what was originally envisaged.
2.   I am not very sure that I have understood your question regarding tax deduction clearly, but like to explain that income tax of a construction contractor in Pakistan is either deducted is under presumptive mode of taxation or on the basis of net taxable income (two stage deduction at source and then at the end of financial area). The grass amount of payment received from construction contract is treated as income for a lumsum deduction of 6 % tax rate from all receipts whether contractor sustains a loss nor required to pay further tax incase of high profits in the presumptive tax regime.
The tax payer has an option to follow either of these 2 arrangements but presumptive tax is preferred as in this case contractor is not required to keep lengthy records or have to prove any thing excepts his receipts from the Employer and is therefore normally followed by medium contractors to dispense with more formalities. The directors of the companies, however, pay a separate tax in the capacity of an individual on their earnings and is infact not a double taxation. The company and the individual are dealt with separately.  Lastly, it may be pointed out that with holding tax is not normally payable on Employer’s material and its amount is deducted from the taxable amount. It is because no profit accrues to the contractor on the Employer’s supplied material.

Revised Reply:
I have reconsidered my earlier response and find that it need further clarity as per following details. As my answer is based on "disruption" not identifiable separately. Normally delay events and disruption events can be identified separately and in that case prolongation cost are actually "loss and expense" only due to prolongation of the completion period for fault of the Employer. The disruption activities may additional happen and will cost "additional expense" over and above the "loss and expense". IF there has been any disruption, you should set out what has been suffered, identifying the trades and  activities affected, the period of duration of the disruption and the dates between which the disruption occurred along with cost attributable to each event. This is in addition to prolongation cost explained earlier.
This has occurred to be as i was preparing a similar claim for an organization and i realized that i have not explained my earlier reply adequately. I will be pleased to answer if you have any further question.
Liaqat Hayat

Construction Law

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Liaqat Hayat


I can answer questions based on FIDIC 4 and FIDIC 1999 [design-build] with particular reference to time extension , price adjustment and disputes. I am in particular more inclined for response to points pertaining to how claims should be framed and put up in case of technical or other contractual shortcomings. Regarding procurement matters I have spent over 5 years as procurement specialist for highway authority and dealt with numerous claims and disputes in the capacity of "The Engineer" .

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