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Construction Law/omissions and loss of profit

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Question
Dear John

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

Answer
Dear Raja,

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.

Kind regards,
John Dowse

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John Dowse

Expertise

Legal; contract interpretation; quantum; delay analysis. Practitioner in arbitration, adjudication and mediation.

Experience

Thirty-three (33) years experience in building and construction, at all levels both within contracting and consulting organisations. Practising arbitrator, adjudicator, and mediator. Faculty approved trainer for the Chartered Institute of Arbitrators. Lecturer on construction contract forms and dispute resolution practices.

Organizations
Chartered Institution of Civil Engineering Surveyors Chartered Institute of Arbitrators Institute of Directors Society of Construction Arbitrators

Publications
Various UK and International construction and legal publications.

Education/Credentials
LLB (Hons), Pg Dip (Legal Practice), MCInstCES MCIArb MIOD Barrister

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