Loss and expense – are you missing out?
Most standard form construction contracts provide for the contractor to recover the costs incurred as a result of certain “employer risk delay events”. In the JCT suite of contracts this is known as “loss and/or expense” whereas NEC3 users will be familiar with the term “compensation events”, which deal with both extensions of time and costs consequences.
In our experience a contractor will usually recognise that they may have an entitlement to additional cost as a result of delay or disruption of the works, however often they fail to properly present that claim. This may result in a reduction in the value of their entitlement or in some extreme instances a complete failure to recover.
The purpose of this note is to summarise some of the key themes arising from contractual loss and expense claims (as opposed to a breach of contract claim). Each case will differ in its contractual wording and application; specific advice should be sought accordingly.
1. Time doesn’t always equal money
It is important to note that just because an employer risk delay event arises, that does not automatically give rise to a right to claim loss and expense. For example there are certain events for which an extension of time may be granted, without cost (“exceptionally adverse weather conditions” under the JCT suite being a prime example). It is therefore crucial to check your contract to ensure the cause of the delay entitles the contractor to recover any associated costs.
Further, the contractor will ordinarily still have to demonstrate an element of cause and effect before he will be entitled to recover his loss and expense, i.e. the employer risk delay event actually caused the contractor to incur the costs being claimed.
2. Beware of conditions precedent and time-bar clauses
Check your contract and comply with any notice provisions relating to loss and expense. Some standard form contracts make the provision of notices a condition precedent to the recovery of loss and expense and others go further by imposing time bars in the event that the contractor does not issue a notice or submit the relevant information within a specified time. This could be fatal to a contractor’s entitlement to loss and expense and must be carefully monitored. Internal pre-contract meetings should be used to flag up any such clauses.
3. Beware of using “prelims”
One of the most common failings we see in contractor’s claims for loss and expense is the reliance upon a simple pro rata of its time related (“prelim”) costs as set out in the tender. Unless the contract specifically provides for this approach (which is unlikely) then the true measure of loss and expense is likely to be the loss and expense actually suffered by the contractor, which often bears little or no resemblance to that which it is set out in the prelims.
That is to say that prelim rates are generally a fixed-rate applied across the duration of the construction phase and therefore does not take into account the fluctuating costs associated with a construction project. During times of high productivity (generally in the middle third of a project) the costs associated with running the site are likely to be higher than at the very beginning or very end of a project. During that high cost period the application of a prelim rate to the period of delay may therefore result in the contractor recovering significantly less than its actual cost.
4. When to measure the incurred cost
Another common mistake we see contractors make is to calculate the amount of loss and expense by reference to the duration at the end of the programme by which the completion date is extended. As explained above, the time related costs of running the site are likely to be lower during this period than at the time when the effect of the delay was felt on site.
The correct approach is to assess the loss and expense by reference to the period of the delay on site rather than the period “dotted on” at the end of the project.
5. Heads of claim
Once an entitlement has been established, the notice provisions have been followed and the period of delay identified, the next step is for the contractor to set out its heads of claim. The following are the most commonly used in loss and expense claims:
This head of claim can be split into two distinct categories, on-site overheads and head office overheads / loss of profit.
On-site overheads are the costs associated with running the site for a longer period than the contractor anticipated and will include items such as labourers, site accommodation, plant, temporary works, fencing and security, scaffolding, temporary services and insurance. These costs should be relatively easy to demonstrate by reference to invoices and should be readily available.
Head office overheads / loss of profit may be recoverable on the basis that the contractor cannot divert resources to other projects which would have resulted in a contribution to its head office overhead and profit. Such costs are ordinarily recovered either by evidence of the actual overheads incurred or by reference to a percentage uplift to the increased cost (often calculated using a formula such as Hudson’s or Emden’s). In relation to loss of profit, the contractor may be required to demonstrate that it turned away tender opportunities as a result of the delay – records of missed and lost tender opportunities will be persuasive evidence for this head of claim.
In circumstances where the contractor is borrowing money to fund the project, there may be finance charges which are prolonged as a result of the delay, these may be recoverable as loss and expense.
The rationale behind this head of claim is ordinarily that acts of the employer have hampered the contractor’s efficient use of its plant and labour. The most common way of demonstrating this head of loss is the “measured mile” method whereby the contractor’s ordinary levels of efficiency on other parts of the works are compared against the disrupted element, giving rise to a difference in productivity which can be converted into loss and expense.
The costs of compiling a claim
In some circumstances a contractor may be able to recover the costs of compiling its claim, on the basis that but for the delay and/or disruption it would not have incurred those costs.
6. Records, records, records
It is difficult to overstate the importance of good record-keeping when it comes to loss and expense claims. Accurate records of the following information will greatly increase a contractor’s ability to substantiate and corroborate its claim:
- Invoices and proof of payment
- Site diaries
- Site reports of progress and activities
- Site measures
- Day work records
- Photographic surveys (including date, time and location)
- Labour allocation sheets
Finally, clarity of information and presentation is an important part of a successful loss and expense claim. The person assessing such a claim is likely to be more receptive (and the contractor’s prospects of recovery are therefore enhanced) to information which is well presented and clearly explained, whether it be the Architect/Contract Administrator/Employers Agent/Quantity Surveyor in the first instance or an Adjudicator/Arbitrator/Court in the event that a dispute arises.