Construction Law/Prolongation costs estimation
QUESTION: Dear Mr. Peter
What I know well; when a Contractor has been awarded an EOT due to delays attributable to the Employer, he becomes entitled to prolongation costs. What I know from practice, these prolongation costs are the recurrent indirect costs incurred by the Contractor during the time extended i.e. after the contract completion date gets finished and the EOT period continues. However; SCL protocol and other sources say that such costs are to be estimated referring to the actual period of delay that took place within the original time frame of the project:
1- I can't understand how come does this may be calculated? I need your help Sir to clarify this issue to me with supporting examples please . I really prefer to do it as I said first (in extended period) , since it is too much easier as the time is identified and remaining activities within extension are also identified.
2- is there any contradiction between this and the disruption costs that already compensated to the Contractor under the Contract when he faced interruption to his Work caused by the Employer?
ANSWER: Dear Khaled,
The purpose of any award is to compensate the Contractor for any extra costs due to the Employer's action or inaction or any Employer's Risks.
The EoT reduces the liability for delay damages.
1. Now for the extra costs. When does the Contractor incur these extra costs? During the period of delay, not during the period of the EoT. His resources, plant labour and site facilities, are standing idle during the period of delay. So the Contractor must be reimbursed for his expenses during the period of actual delay, not his costs during the period of the EoT. As delays and EoT are related to items on the Critical Path, so the costs are related to those items. The calculation of the costs is based on the plant labour and materials which are standing or non-productive due to the delays, plus the cost of time related charges such as site facilities and support (laboratory, vehicles, staff,offices, etc.) for the Engineer. If the delay occurs in the middle of a road contract, it is likely that the Contractor will have a asphalt batching plant on site. He may have demobilised this plant during the period of the EoT. It is fair that he is compensated for the cost of his asphalt plant during the period of delay, not during the period of EoT.
2. Compensation for disruption is different to compensation of extra costs during delay. As stated above, delay is based on critical activities. It could be that a non-critical item is affected which causes extra costs. The design of sign posts on a road contract may be changed. This change could disrupt the Contractor's efforts especially if the signs had been ordered or made, but not affect the time for completion. Alternatively an architect could change the colour or type of tiles to washrooms, causing similar disruption.
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QUESTION: Dear Mr. Peter
Thank you for your professional clarification However, please complete your support regarding the followings;
1-Sir; you referred to the costs of time related changes such as site facilities that to be compensated to the Contractor. DO these costs be also considered within the delay time not within the EOT period? If so, how come those costs be calculated?. It's typically , in practice, that the Contractor collects all his justifications resulted arisen due to Employer's Risk events during the project progress and submit them in a ti,e prior and closer to the completion date. These Employer's risk events would have happened in different times during the project and affected different parts of the project while, each time, the progress in the other parts of the projects was ongoing. I mean it is something very complicated comparing if we considered the costs of such recurrent facilities at the EOT period.
2- Our bespoke Contract contains a clause allows Contractor to Standby (idle) compensation. We have already used this clause to compensate the Contractors against over 350 cases of his work interruption due to reasons attributable to Employer (I am the CA of the Consultant works for the Employer). Most of these cases were not affecting the critical path but few cases were affecting it which were included within his justifications of EOT study. The clause allows to compensate the Contractor using time rates of equipment and manpower that include direct cost(salary)+indirect cost (accommodation,transportation, etc)+profit. now, and according to your explanation, with this clause no mot entitlement to prolongation costs or what?
Thank you Sir
The current philosophy is that claims should be resolved as soon as possible. Firstly so that the Employer can take action to mitigate any future delays. Secondly, so that the Contractor has certainty. Many current forms of contract include a time bar for claims, if the Contractor does not submit details within 28 days and the Engineer has to give his answer within 42 days of receipt. If the Contractor cannot, or will not, submit the necessary documentation, I suggest that pay an amount on account.
1. You cannot justify underpaying the Contractor, just because it is difficult to calculate the amounts. The periods of delay will be specified when agreeing the EoT. Now you just have to calculate the relevant costs for those periods.
2. It appears that you are reimbursing the Contractor for his idle plant already. So you have covered that part of any claims for costs due to disruption or EoT. The remaining costs will include any time related costs, such as the cost of insurance and bonds, financing charges due to reduced cash flow, off site overheads for head office staff (ordering, monitoring etc), support for the Engineer (vehicles, offices, laboratories etc).