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  • Robert J Gemmell

DD14: Quantifying delay costs – preliminaries – assessment based on cost

Updated: Mar 31

Introduction

My last article, DD13, examined the impact of delay on direct and indirect labour.

As a result of delay, a contractor may also incur additional costs in relation to its other time-related resources. Those other time-related resources will include, but will not be limited to, the contractor’s preliminaries.

This article will examine preliminaries, often the most substantial part of a contractor’s claim for financial reimbursement. A contractor’s entitlement to payment for delayed preliminaries is often based on cost, for example, a loss and expense assessment pursuant to the terms of the contract or general damages at common law.

Under most, if not all, standard forms of construction contract, a contractor’s entitlement to recovery for delayed preliminaries pursuant to the loss and expense provisions, will depend on whether the delay is critical, giving an entitlement to an extension of time, or non-critical.

The assessment of delayed preliminaries is not always based on cost and my next article will cover situations where the assessment is on a basis other than cost, and subsequent articles will examine issues in relation to the applicable period(s) during which the delay costs should be assessed.

I emphasise that the basis of entitlement, whether it be cost, pre-determined rates or other, will be determined by the applicable contract provisons, or in the absence of applicable contract provisions, the applicable/governing law.


What are preliminaries?

The term preliminaries, often referred to as job specific overheads or site overheads, are costs that sometimes comprise the first part of a bills of quantities,[1] in which there are items of cost that do not form part of the completed work. Some preliminaries items are fixed and relate to one-off costs such as site establishment (e.g. temporary office set-up) and demobilisation; the cost for these fixed items will be incurred irrespective of any delays to the project.

However, the majority of preliminaries items are time-related, for example, site staff, site hut running costs, toilets and items of plant and equipment used to carry out the work.

If the work is delayed, some or all of these time-related preliminaries items will be required for longer periods and as a result, the contractor will incur additional cost. The amount of additional cost will depend, for example, on which preliminaries items have been kept on site for longer due to the delay, and in some cases whether the affected time-related items are hired or owned by the contractor.

Preliminaries should be differentiated from the contractor’s off-site / head office overheads which are costs associated with running the business that are not generally directly related to any specific project.


Valuation of delayed preliminaries based on cost

Where the contractor claims for delayed preliminaries pursuant to the loss and/or expense provisions of the contract, or where the claim is for general damages at common law, the contractor’s entitlement to additional payment for delayed preliminaries will be based on actual reasonable costs incurred and these costs will be obtained from the contractor’s accounting system and/or other relevant cost records.

The actual cost to the contractor of providing its time-related preliminary items during any prolonged period can be demonstrated by producing evidence of paid invoices and/or other evidence of the amount paid by the contractor. This can be done by reference to the contractor’s accounts system and may include such things as, purchase orders, invoices, journal vouchers, payroll data, bank statements, final account statements, account ledgers and the like. However, if any of these items are owned by the contractor then recovery will be based on some other basis such as loss of opportunity to hire or depreciation. These factors are considered in more detail below when dealing with idle plant and machinery.

Time-related preliminaries items will vary from project to project. For example, on larger projects, plant and equipment and attendant labour and site staff may become a bigger component of cost. In relation to site staff, it will be necessary to identify the functions of the staff being claimed and that their tasks undertaken correspond to the reason(s) for delay.

If an additional resource was required for a specified period, then this should be easy to identify in the contractor’s cost accounting system. However, the position is not so easy when resources have been partly utilised during the period of delay. In this case, records need to be kept more precisely to identify the additional resource cost due to the delay.

Very often, the biggest preliminaries costs is site staff, which can account for 60% to 70% of the additional costs for the delayed preliminaries. It must be emphasised that payroll costs relating to delayed staff resources is sentitive data which may need to be handled differently to other cost items. For example, it may be that an agreement is made between the parties for an independent third party to inspect the contractor’s accounts to verify that the costs claimed were in fact incurred.

Some site establishment costs for staff that are based off site may be incurred, in which case it will be necessary to distinguish these resources by using appropriate timesheets. Similarly, there may be head office staff based on site but who are working on more than one project. Again, identification of the resources and their time needs to be recorded appropriately.

During the period of delay, plant and equipment may lie idle and/or be used less frequently. The additional cost to the contractor in this situation may be hire charges incurred if the contractor hired the plant and/or equipment. [2] However, the position is different if the contractor owns the idle plant and equipment.

Although contractors generally do not hire out its plant and equipment, some do. In this situation the contractor will need to demonstrate that it would have hired out the plant and/or equipment had it had the opportunity to do so but was unable to do so because of the delay. [3] If the contractor is unable to prove that it lost the opportunity to hire out that plant and/or equipment, its claim will need to be based on factors such as loss of interest on the idle capital, maintenance costs, tied up capital and/or depreciation, [4] if any of this type of loss was incurred.

The burden is on the contractor to demonstrate that the costs claimed were reasonably incurred and that it has made a reasonable effort to keep the additional costs and/or loss to a minimum.

It will be necessary for the contractor when preparing its claim to ensure that its cost/account data is arranged in a proper, logical and auditable manner so that it can be easily and efficiently vetted by whoever the recipient is, whether that is the employer, main contractor, independent expert or other.


Next articles

There will be a mini-series of articles that will address delayed preliminaries. My next article on delay costs will examine the contractor’s financial entitlement to delayed preliminaries on a basis other than actual reasonable costs incurred, and then a couple of articles that examine the correct period during which delayed preliminaries should be claimed.


Finally

If you have any queries in relation to any matter in these articles, or any other issue, please do not hesitate to contact us: robert.gemmell@ddquantumexpert.com


This and previous articles

This and previously published DD articles on the DD Quantum Expert website blog page are:

DD01: Why is it necessary to distinguish between delay and disruption? What’s the distinction?

DD02: A global claim is doomed to fail, unless…

DD03: Comply with the notice provisions in the contract, or else…

DD04: ‘Prevention’ causing ‘time at large’: what does this all mean?

DD05: Float: what is float, who owns the float and how is float different to contingency?

DD06: Construction project delays 101 – plus concurrency!

DD07: What is concurrent delay? An overview

DD08: Concurrent delay: it is not parallelism or pacing

DD09: Concurrent delay and the prevention principle

DD10: Approaches to assess contributory causes of delay and additional cost

DD11: Concurrent Delay and the AS Forms

DD12: Quantifying delay costs – an introduction

DD13: Quantifying delay costs – labour costs

DD14: Quantifying delay costs – preliminaries – assessment based on cost

[1] A BQ is a document used in tendering which enables all contractors tendering for a project to price on exactly the same information/ Subsequent to this, the BQ can be used for post-tender work such as material scheduling, construction planning, cost analysis, and cost planning. [2] Shore & Horwitz Construction Co Ltd v Franki of Canada Ltd [1964] SCR 589 (Can SC). [3] Alfred McAlpine Homes North Ltd v Property and Land Contractor Ltd (1995) 76 BLR 59. [4] Alfred McAlpine Homes North Ltd v Property and Land Contractor Ltd (1995) 76 BLR 59; The Hebridean Coast [1961] AC 545 (HL).

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