Construction Law/omissions and loss of profit
I am the Resident Engineer on a Contract based on the FIDIC 1999 Red Book and a situation has come where the Employer has removed part of the works from the contract. The Works omitted amounted to USD M2.75 out of a Contract of USD M22,58. The contractor has submitted a claim of loss of profit under Sub-Clause 12.4 calculated as follows: Reduction amount * (%for their overhead + % for their profit). Would be grateful if you could guide me as to whether the Contractor is entitled to such a Claim and can Sub-Clause 13.1 be applied in this case as the Engineer has a right to vary (omission of any work). If the Contractor is entitled to a Claim, what would be the appropriate method of calculating his loss of profit.
Thanking you in Advance
Thank you for this question.
In theory with such a sizeable omission the Contractor may be entitled to claim an element of profit on the omission; however this is limited. You have not stated the nature of the omission. I will assume that it is general work rather than one specific item.
Firstly sub-clause 12.4 does not cover loss of profit. More correctly in my opinion the Contractor's claim ought to be under sub-clause 12.3.
Looking purely at the loss of profit element, if the variation of omission is counter-balanced (at least in part) by other variations giving additions to the Works then the Contractor cannot claim the entire lost profit by the omission.
Whether or not there is any counter-balancing additions as noted in my last sentence, it is for the Contractor to prove loss of profit and that he does not have an opportunity to earn the profit elsewhere. A similar requirement exists for the overheads he is claiming.
The formulaic approach adopted by the Contractor is acceptable in some cases. Whether it is acceptable in the present case should be considered in relation to the facts.
In the final analysis it is likely that the Contractor will be open to negotiating this claim and, therefore, the Engineer can use his authority under sub-clause 3.5 to bring the Employer and Contractor together to try to negotiate settlement.
I hope that this assists you.
Follow me on Twitter: @CernoOrg
For my regular industry newsletter e-mail to email@example.com, stating SUBSCRIBE in the subject line
Training and consulting services are available, bespoke to companies and individuals.
John Dowse can be contacted by e-mail to firstname.lastname@example.org (When e-mailing, please include “AllExperts” in the subject line.)