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DD16: Quantifying delay costs – preliminaries – assessment on a basis other than cost – another...

Updated: May 6


Quantifying delay costs – preliminaries – assessment on a basis other than cost – another case law scenario



Introduction

My last article, DD15 provided a scenario based on previous case law where, even though the contractor’s entitlement was pursuant to the loss and expense provisions of the contract, the assessment was based on the rates included in the preliminaries section of the subcontract document.


The case law scenario also examined the evidence used by the subcontractor making the claim (a print-out of its accounts records) to support the claimed amount and whether that evidence was acceptable to the court.


This next article in this series, also a case law scenario, will further examine the assessment of delayed preliminaries on a basis other than cost and will also touch issues in relation to the applicable period(s) during which the contractor’s entitlement to financial recompense due to the delay costs should be assessed.


Subsequent articles will take a more in depth look at the applicable period(s) during which the contractor’s entitlement due to delay should be assessed.


Assessment on a basis other than cost

If the terms of the contract provide for delayed preliminaries to be valued pursuant to the variation provisions of the contract, even though the delay itself may not be a variation, a valuation of the delayed preliminaries items may be based on agreed rates in the contract, reasonable rates, or other rates as the contract may provide. The rates in the contract for preliminaries are generally the contractor’s estimates (including allowances for overheads and profit) and will often not reflect their actual cost. Whether actual cost, contract rates, reasonable rates or agreed rates apply, will depend on the applicable terms of the contract.


If the parties have agreed an ‘all-encompassing’ delay rate for the delayed preliminaries, either because they are specified in the contract or by subsequent party agreement, in this case the assessment of delayed preliminaries entitlement should be a relatively straightforward exercise once the applicable period of delay has been established; the contractor’s entitlement therefore being the agreed ‘all-encompasing’ rate multiplied by the period of delay.


If the delayed preliminaries are to be valued in accordance with the variation provisions of the contract, the parties should ensure that it is clear in the contract exactly what rates will be applicable. An example of where the applicable rates to be used were not so clear was in CMC v WICET.[1]


In CMC v WICET, several issues arose and two of those issues will be examined as scenarios in this and subsequent articles. The two scenarios are:

  1. Valuation of delayed preliminaries pursuant to the variation provisions of the contract; and

  2. The applicable period of delay for the assessment of financial recovery for the delay.


This article is in relation to the first scenario. In CMC v WICET, although the delay being assessed was not a variation, part of CMC’s claim for delay was the valuation of delayed preliminaries pursuant to the variation provisions of the contract; although it will also touch on the applicable period of delay for the assessment of financial recovery.


Clause 36 of the contract between CMC and WICET states:

“Where the Contractor has been granted an extension of time under Clause 35.5 for any delay caused by an event listed in clause 35.5(b)(i), the Principal shall pay to the Contractor such extra Direct Costs as are necessarily incurred by the Contractor by reason of the delay and for on-Site overheads attributable to the delay valued by the Principal’s Representative under Clause 40.5. The Principal’s Representative’s valuation shall exclude any off-Site overheads or profit.”


Therefore, under clause 36, CMC could recover:

(a) Such extra Direct Costs as are necessarily incurred by reason of the delay; and

(b) On-site overheads attributable to the delay valued under clause 40.5.

The above assessments pursuant to clause 36 exclude off-site overheads and profit.

However, clause 40.5(f) provides that if the valuation relates to extra cost incurred by the contractor for delay or disruption, the valuation shall include a reasonable amount for overheads but shall not include profit or loss of profit but unlike clause 36, does not expressly exclude off-site overheads.

Note also that clause 40.5(f) (see below) uses the word ‘extra costs’ incurred but the assessment of CMC’s financial entitlement pursuant to clause 40.5 is not based on cost at all. As will be seen next, clause 40.5 provides for financial entitlement to be based on one of the following, whichever is applicable:

· Prescribed rates or prices;

· Rates in a priced Bill of Quantities or Schedule of Rates to the extent that it is reasonable to use them; or

· Reasonable rates or prices.


The primary issue between CMC and WICET examined in this scenario was how the on-site overheads were to be valued in accordance with clause 40.5 of the contract. Clause 40.5 prescribes a cascading regime for the valuation as follows:

“40.5 Valuation

Where the Contract provides that a valuation shall be made under Clause 40.5, the Principal shall pay or allow the contractor or the Contractor shall pay or allow the Principal as the case may require, an amount ascertained by the Principal’s Representative as follows:

(a) if the Contract prescribes specific rates or prices to be applied in determining the value, those rates or prices shall be used;

(b) if Clause 40.5(a) does not apply, the rates or prices in a Priced Bill of Quantities or Schedule of Rates shall be used to the extent that it is reasonable to use them;

(c) to the extent that neither Clause 40.5(a) or 40.5(b) apply, reasonable rates or prices shall be used in any valuation made by the Principal’s Representative;

(f) if the valuation relates to extra costs incurred by the Contractor for delay or disruption, the valuation shall include a reasonable amount for overheads but shall not include profit or loss of profit;”

A review of the court’s considerations on the application of clauses 40.5(a), (b), (c) and (f) now follows:


Clause 40.5(a)

CMC’s primary submission was that clause 40.5(a) applied and argued that the contract prescribed a specific rate to be applied in determining the value of its on-site overheads.


CMC considered that this specific rate was in schedule C-4.2 of the contract entitled “Schedule of Daywork Indirect Personnel and Facilities Rates”.[2] Item 21 of the “Schedule of Daywork Indirect Personnel and Facilities Rates” stated “Overall Composite Daily Rate (includes staff and facilities) - $38,000”.


Notwitstanding the intent of the contract between CMC and WICET, daywork rates are generally supposed to be used for piecemeal type work incidental to the whole work and therefore daywork rates are not really in keeping with being used as an overall composite daily rate. However, the parties are free to agree what they like.


CMC considered that the appropriate amount for delay costs was therefore 208 days for the extension of time multiplied by $38,000 per day giving a total valuation of $7,904,000.

The court said that the Overall Composite Daily Rate was not a specific rate prescribed by the contract to be applied in valuing on-site overheads attributable to delay in achieving practical completion.


The first difficulty the court had with CMC’s position was that schedule C-4 related to rates for pricing variations and that a delay claim pursuant to clause 36 is not a variation.


The court also went on the say that the Schedule of Daywork Indirect Personnel and Facilities Rates, which contains the Overall Composite Daily Rate of $38,000:

· was located between schedule C-4.2 and schedule C-4.3 in the contract, and

· it was not headed as a C-4 schedule but it does constitute an item for a schedule which itemises “Daywork Indirect Personnel and Facilities Rates.”


The author has referred to the C-4 schedules which are appended to the judgment and notes that the C-4 section entitled “Rates for Pricing Variations” comprises:

· “C-4.1 Unit Rates” (3 pages);

· “C-4.2 Daywork Rates” (2 pages);

· “Schedule C-4.2 Schedule of Daywork Labour Rates” (1 page);

· “Schedule of Daywork Indirect Personnel and Facilities Rates” (1 page);

· “Schedule C-4.3 – Schedule of Daywork Constructional Plant Rates” (2 pages); and

· “Schedule of Plant and Equipment Stand Down Rates” (2 pages).


It appears that the Schedule of Daywork Indirect Personnel and Facilities Rates may be a continuation of Schedule C-4.2 for labour, but what has made this unclear is that the full schedule headings have not been continued from the front sheet of each schedule to subsequent sheets, and also the schedule headings are inconsistent.


The court also emphasised that daywork rates are typically inclusive of profit and off-site overheads, but clause 36 when read together with the definition of Direct Costs and clause 40.5(f), permits CMC to claim on-site overheads exclusive of off-site overheads and profit.


The court considered that the $38,000 rate should not be considered as a contractually prescribed rate under clause 40.5(a) for the purposes of clause 36 because, in addition to the delay claim not being a variation, as a matter of construction, it is not clear whether the rate included CMC’s profit and off-site overheads. Clause 36, read together with clause 40.5(f), excludes an entitlement to profit and off-site overheads. The court said:[3]

“[815] … Schedule C-4.2 (page 12) deems that the specified rates for Labour, Construction, Plant and Subcontractor, Services all include profit. Schedule C-4.2 is silent as to whether the rates in the Schedule of Daywork Indirect Personnel and Facilities Rates exclude profit and off-Site overheads. The pre-contractual negotiations, to which I refer below, do not reveal how the $38,000 rate was calculated and whether it excludes profit and off-Site overheads. Further CMC alleges that schedule C-4 is a “Schedule of Rates” as defined. I have determined that it is not. If it was however, clause 49 of the General Conditions provides that any rates to be applied in calculating the Contract Sum and rates in any approved Schedule of Rates includes the Contractor’s profit and off-Site overheads. It follows that if Schedule C-4 is a “Schedule of Rates” the $38,000 rate would include CMC’s profit and off-Site overheads, neither of which may be included under clause 36. The rate cannot therefore constitute a contractually prescribed specific rate for valuing a delay claim under clause 36 as it includes profit and off-Site overheads. Whilst I do not accept CMC’s contention that Schedule C-4 is a “Schedule of Rates”, clause 49 does highlight that the $38,000 rate cannot be treated as a contractually prescribed rate in valuing a delay claim for the purposes of clause 40.5(a).”


CMC alleged, however, that at the time CMC and WICET entered into the contract, the parties agreed that the $38,000 rate was the rate to be used for its on-site overheads if CMC was granted an extension of time. CMC argued that the description “Overall Composite Daily Rate (includes Staff and Facilities)” on its face was not self-explanatory as it did not clearly identify in what situation the $38,000 rate was to be applied. CMC considered that the ambiguity and the description allowed account to be taken of the surrounding circumstances in which this item was incorporated into the contract. The court did not accept this argument.

The court therefore considered that the rates in the Schedule of Daywork Indirect Personnel and Facilities Rates were not to be used for quantifying CMC’s entitlement for on-site overheads pursuant to clause 40.5(a).


Clause 40.5(b)

The court’s next consideration was whether clause 40.5(b) applied. Puruant to clause 40.5(b) an amount is ascertained by reference to the rates or prices in a Priced Bill of Quantities or Schedule of Rates where it is reasonable to use them.


The court decided that schedule C-4 did not constitute a “Schedule of Rates” for the purposes of clause 40.5(b), and also for the further reasons given when dealing with CMC’s Earthworks Claim,[4] found that clause 40.5(b) did not apply.


Clause 40.5(c)

The court then concluded that CMC’s claim should be valued by the application of reasonable rates pursuant to clause 40.5(c) and said:

“In quantifying the on-Site overheads in respect of each Delay Event by the application of reasonable rates, there is little difference in the result arrived at by [CMC’s expert] and [WICET’s expert]. The difficulty with the experts’ analysis is that they proceeded on a wrong interpretation of clause 36 by looking at on-Site overheads attributable to the delay to a particular activity rather than the overheads attributable to the period of the extension of time.”

The court noted that the experts differed as to what was recoverable as on-site overheads and said that WICET’s expert proceeded as follows:[5]

“(a) He identified the overhead resources used during the execution of the Contract;

(b) He allocated CMC’s resources on the job into three categories being “General”, “Civil” and “Structural”;

(c) He then allocated each Delay Event a resource category (that is either General, Structural or Civil); and

(d) He then proceeded to allocate those resources to the delays in accordance with the category to which the delay relates.”

CMC submitted that there was no basis for allocating CMC’s overhead resources in categories to which specific delays relate because an extension of time applies to the date for practical completion of the whole of the project and not to individual activities on the program; the court clarified as follows:[6]

“That is, the entirety of CMC’s overhead resources were indirectly impacted because the entirety of CMC’s overhead resources are time-related resources which, because of the delays were detained on site for longer than they otherwise would have been. But for the delays, CMC’s resources would have demobilised from the Site on the original date for Practical Completion.”


WICET argued that clause 36 did not contemplate that all overheads were recoverable merely by reason of the fact of the delay and that it required that the delay had caused additional overhead, or that overhead claimed otherwise be attributable to the delay. WICET further argued that for the overheads to be recoverable, it must only be time related, but the delay must have caused the overhead to be prolonged. However, the court responded:[7]

“I accept CMC’s submissions. The causal inquiry raised by clause 36 is whether the on-Site overheads are “attributable” to the delay. The relevant delay is CMC achieving Practical Completion. CMC is, pursuant to clause 36, entitled to the on-Site overheads for each of the 208 days of the awarded extension of time.”


The appropriate daily rate – a ‘weighted average’ by reference to reasonable rates

The court said[8] that the difficulty it had in ascertaining the amount for on-site overheads is that neither of the parties’ quantum experts had identified an appropriate daily rate reflecting CMC’s on-site overheads for the relevant period of 208 days.


Delay events were valued by both parties’ experts but for a different earlier time period. CMC’s expert’s report contained information which permitted an assessment of CMC’s on-site overheads following an earlier time period. CMC’s exhibit 427 identified the relevant delay events which occurred near or after the earlier period, their duration and CMC’s expert’s valuation conducted by reference to the schedule C-4.2 rates arriving at a daily rate of $24,587.09.


The court said that it had two difficulties with CMC’s exhibit 427.[9] The first problem was that it used C-4.2 rates rather than reasonable rates pursuant to clause 40.5(c). CMC’s expert used reasonable rates in an alternative valuation. WICET’s expert also used reasonable rates but only for specific resources he considered incurred an additional cost by reason of the delay assessed by CMC’s delay expert. The court required further submisisons and assistance to have CMC’s exhibit 427 re-calculated to reflect CMC’s expert’s use of reasonable rates.


A further difficulty the court had with CMC’s exhibit 427 was that it did not constitute a weighthed average. The court noted that the total duration of the relevant delay events referred to in exhibit 427 was 180 days and CMC’s expert’s valuation was approximately $3,683,287 giving an average daily rate of $20,463.00; down from $24,587.09.


The court concluded:[10]

“The adoption of a weighted average to arrive at an average daily rate is in my view correct. This weighted average should therefore be applied in calculating the average daily rate once the relevant valuation is calculated by reference to [CMC’s expert’s] reasonable rates rather than the C-4.2 rates.”


In summary

The contract between CMC and WICET was far from clear in relation to the applicable rates to be used to value CMC’s delay claim. Drafters of construction contracts should take note of how much this must have cost the parties in lost time and legal and expert costs to resolve.


Further, in the court’s opinion, the quantum experts did not proceed on the correct basis by not looking at the site overheads attributable to the period of extension of time – was the court correct in coming to this conclusion? This issue, among others, will be examined in future articles.


Next article

My next article on the contractor’s entitlement to financial compensation/recompense due to delay will again be based on a case law scenario and will examine in further detail issues in relation to deciding the applicable period(s) during which the delay costs should be assessed.


The case law scenario in my next article, DD17, will be based on Thiess Watkins White Construction Ltd v Commonwealth of Australia (1998) 14 BCL 61, following which I will revisit CMC v WICET.


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

DD15: Quantifying delay costs – preliminaries – a case law scenario

DD16: Quantifying delay costs – preliminaries – assessment on a basis other than cost – another case law scenario

[1] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 [2] Schedule C-4.2 is provided in the relevant extracts of the CMC v WICET judgment. [3] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 at para 815 [4] These further reasons are provided in paragraphs 98 to 265 of the CMC v WICET judgment. [5] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 at para 832 [6] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 at para 833 [7] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 at para 834 [8] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 at para 835 [9] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 at para 836 [10] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 at para 837

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