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  • Robert J Gemmell

DD18: Quantifying delay costs – preliminaries – the applicable period and duration of delay for the

Introduction

My last article, DD17 provided a case law scenario based on Thiess Watkins White v Commonwealth of Australia[1] which examined the applicable period in which to conduct the contractor’s assessment for financial recovery due to delay.


This article takes a more in-depth look at the the applicable period(s) during which the contractor’s entitlement to delay costs should be assessed.


Applicable period(s) for the assessment of delay costs

The primary issue in the Thiess Watkins White v Commonwealth of Australia scenario examined in DD017 was in relation to where in the program the extra costs due to delay should be assessed. The Parties’, the Referee’s and the court’s positions on this point were:

1. In line with Thiess Watkins’ position, the Referee assessed the extra costs as if they had been incurred at the time of the relevant delay and the court hearing the appeal agreed; and

2. Commonwealth of Australia (“CoA”) argued that the extra costs only begin to bite when a contractor remains on site after the original date for practical completion as extended by reason of employer caused and neutral delays.


In the author’s view, the Referee and CoA are making different but interrelated points. However, it was the Referee who was found by the court to be correct in this case; that is, to assess the additional costs due to delay as if they had been incurred at the time of the relevant delay. However, exactly when additional costs are incurred because of delay is based on the facts of each case and, as the examples below will illustrate, this can vary from case to case.


To help illustrate when delay costs should be assessed and also when a contractor may ‘feel’ the additional costs being incurred because of the delay, this article will examine two types of projects that have been simplified to illustrate these points, and which in this article are referred to as:

  1. The ‘single-activity delayed project’; and

  2. The ‘multiple-activity delayed project’.

In relation to the ‘single-activity delayed project’, four scenarios are provided in figure 1 below. For all four scenarios, assume a ‘linear’ spend in that the contractor has not reduced or increased its daily preliminaries resource levels from the commencement until completion of the project meaning that its overall costs per day for preliminaries is consistently the same for the entire duration of the project. Also assume that no indirect labour, staff, plant and/or equipment was relocated to another project for the duration of the delayed activity/project.


The final assumption is that the contractor would have completed the activity/project as planned had there been no delay. If the as-planned duration is inaccurate, then the period of actual delay and the period of overrun will not be the same.

In relation to the ‘multiple-activity delayed project’, none of the assumptions for the ‘single-activity delayed project’ will apply.


The single-activity delayed project

Figure 1 below provides four single-activity project scenarios which are summarised as follows.

  • Scenario 1 shows the single-activity project leading to practical completion which has not been impacted by delay. The single activity in this scenario is a critical path activity.

  • Scenario 2 shows a period of actual delay of one month during which the work stopped, which in turn caused the one-month ‘period of overrun’ / one-month delay to practical completion.

  • Scenario 3 shows six periods of delay which total one month. The six delays intermittently delayed the critical path activity which in turn caused the one-month ‘period of overrun’ / one-month delay to practical completion.

  • Scenario 4 shows a period of slower working during which the contractor worked at 50% efficiency for two months which in turn caused the one-month ‘period of overrun’ / one-month delay to practical completion.


In relation to scenarios 2, 3 and 4 in figure 1 above, the contractor would obviously incur costs during the period(s) of actual delay, but the contractor may not suffer or ‘feel’ any additional costs due to the delay until the period of overrun. This is because, the costs incurred during the period(s) of actual delay, applying the assumptions for this scenario, would have been incurred by the contractor during that time even if there had been no delay.


Therefore, until the period of overrun, the contractor would not have incurred any additional cost.


Where there is a ‘linear’ spend throughout the activity in line with the assumptions made for the four scenarios in figure 1, and where there has been no disruption or any other impact to progress, the costs incurred by the contractor during the one-month ‘period(s) of actual impact’ and the ‘period of overrun’ should be about the same.

In scenarios 2, 3 and 4, unless the contractor increased or reduced resources during the period(s) of actual impact and/or during the ‘period of overrun’, the contractor would only ‘feel’ the additional costs being incurred during the period of overrun. However, where the contractor’s spend is more in line with the typical ‘S’ curve where higher preliminaries costs are incurred by the contractor during the middle stages of the project than at the beginning or end of the project, the contractor may then ‘feel’ the additional costs being incurred before the period of over run. The reasons for this are examined in later articles. This is a theoretical example for the purposes of demonstrating the outcomes in scenarios 2, 3 and 4. In reality, the expenditure of costs is extremely unlikely to occur on a straightline basis. Costs are almost always incurred in a typical ‘S’ curve basis as detailed below.

The question “when were additional costs incurred due to delay?” is crucial to answer in order to properly determine not only how much the contractor is entitled to, but also to establish when the contractor’s entitlement to payment to the delay costs accrues. For example, damages and loss/expense entitlement is normally based on actual reasonable ‘costs incurred’. If the contractor has suffered delay due to the impacts during the ‘period(s) of actual impact’ and makes its claim for additional costs due to that delay before the commencement of the ‘period of overrun’, has the contractor actually incurred any additional costs at the time of making the claim? Arguably, although delay to progress has occurred and the delay analysis shows the period of likely delay to completion, the additional costs due to that delay may not have been incurred yet.

Whether or not the contractor suffers additional cost and/or loss may also turn on how the contractor is paid by the employer for preliminaries being on site. The contractual arrangements of the respective parties may mean that the contractor may have to pay its suppliers for the preliminaries items on a monthly basis but does not receive payment from the employer for those items being on site during the period of delay because no physical work has been completed for which payment that month can be claimed; the contractor would therefore suffer negative cash-flow in relation to those items soon after, or even during, the period(s) of actual delay. Although the contractor may not have incurred additional costs due to delay at this point, the contractor may have suffered a loss due to not being paid.

These and similar other issues are examined in further detail in later articles on loss and/or expense.

It should be noted that, other than on the simplest projects, all project preliminaries resources will not start and finish at the same time at the commencement and the end of the project. This scenario is for illustrative purposes only to emphasise the point that the time during which the actual delay occurs on site is not necessarily the time at which the contractor experiences, or ‘feels’, the additional costs being incurred.

We now turn to examine the ‘multiple-activity delayed project’ which more closely resembles most projects when they are critically delayed.


The Multiple-activity delayed project

Unlike the single-activity delayed project, there will be different and additional considerations when assessing delay costs on a project with multiple activities where the various preliminaries resources:

· Will be on site for different periods during the project;

· Some will be dedicated to one activity; and

· Some will be used on several activities.


In relation to the multi-activity project, it is important to emphasise that it is incorrect for a contractor to submit claims on the basis that the additional site overhead costs due to critical delay are those incurred during the period of overrun; that is, after the original contract/project completion date up to the extended (or actual) completion date.


The following example illustrates how delay costs may be significantly understated using this flawed assumption. The following example also illustrates why taking an average of the daily running costs incurred, or even an accurate assessment of daily running costs, during the actual period of actual delay and applying that rate to the period of delay cost entitlement may not be totally accurate.


Figure 2 below shows a qualifying cause of delay of one-month during the second month of work which has caused the completion date to be delayed by one month. The actual weekly running cost for the contractor’s time-related preliminaries is also shown in figure 2 below.


Figure 2 – Period(s) for the Assessment of Delay Costs

This scenario has been kept simple for illustarative purposes. In practice the exercise is much more complex and extensive where the project duration is much longer than three to four months and where there are hundreds, or even thousands, of activities and preliminaries items to assess.


In relation to the project scenario in figure 2 above, the costs incurred during the one-month period of overrun at the end of the project will be much lower than the costs incurred during the one-month period of actual delay during the second month of the project. The costs incurred during the period of actual delay often form the ‘basis’ of the contractor’s claim for delay costs and is a much more accurate approach than assessing the cost incurred during the period of overrun at the end of the project. However, the costs incurred during the actual period of delay may also not accurately reflect the ‘true’ costs of the delay. For example, the contractor may have appointed a commissioning engineer to start work on site during the third month of the project. There may be no other site at which the engineer can be relocated to and it may not be possible postpone the engineer’s engagement. However, the delay has caused the start of the commissioning engineering works to be delayed by one month in which case the contractor has to pay the salary of the commissioning engineer for one month during month three of the project when there is no work which requires the commissioning engineer. This additional cost is a direct result of the one-month critical delay during month two of the project. However, the additional cost of the commissioning engineer will not be captured in the costs incurred during the period of actual delay or the period of overrun. This could be the case for many of the preliminary resources, whether those resources are indirect labour, staff, plant, equipment and/or and other preliminaries items.


To overcome such problems, the contractor would need to show the periods for when each time-related resource was on site, their costs, and when those resources would have been on site had there been no delay. This is illustrated in figure 3 below.

Figure 3 – Resource-by-Resource Assessment

In figure 3 above, five resources have been used as examples. There are two bars per resource, the top bar shows how long the resource would have been on site had there been no delay, and the bottom bar shows the duration the resource was on site because of the delay which should exclude delay for which there is no delay cost entitlement.

A brief explanation for each of the five resources now follows:

  • Project manager:

  • Had there been no delay the project manager would have been on site for three months;

  • Because of the one-month delay, the project manager was on site for four months;

  • The costs incurred by the contractor for the project manager during the ‘period of actual delay’ was the same as what the contractor would have incurred during this period had there been no delay; and

  • The contractor incurred the additional project manager’s costs during month four when it would not have incurred those costs had there been no delay.


  • Project engineer:

  • Had there been no delay, the project engineer would have been on site for two months and a few days;

  • Because of the one-month delay, the project engineer was on site for two month and three weeks;

  • As a result of the one-month delay, the project engineer was on site for just less than an additional three weeks (about one week less than the period of delay);

  • The costs incurred by the contractor for the project engineer during the ‘period of actual delay’ was the same as what the contractor would have incurred had there been no delay; and

  • The contractor incurred the additional project engineer’s costs during month three when it would not have incurred those costs had there been no delay.

  • Project supervisor;

  • Had there been no delay, the project supervisor would have been on site for approximately two and a half months;

  • Because of the one-month delay, the project supervisor was on site for about two months and three weeks;

  • As a result of the one-month delay, the project supervisor was on site for about an additional week (about three weeks less than the period of delay);

  • The costs incurred by the contractor for the project supervisor during the ‘period of actual delay’ was less than what the contractor would have incurred had there been no delay because the project supervisor was relocated to another project to mitigate costs;

  • The contractor incurred the additional project supervisor’s costs during month four when it would not have incurred those costs had there been no delay; however

  • About three weeks of the project supervisor’s costs that were incurred in month four because of the delay, would have been incurred in month two had there been no delay.

  • M&E engineer:

  • Had there been no delay, the M&E engineer would have been on site for just less than two months during months two and three;

  • Notwithstanding the one-month delay, the M&E engineer was still on site for just less than two months, but arrived on site one month later during month three; and

  • The contractor incurred the same costs, but incurred those costs one month later than they would have been if there was no delay.

  • Finishing supervisor:

  • Had there been no delay, the finishing supervisor would have been on site for just less than one month during month three;

  • Because of the one-month delay, the finishing supervisor was on site for just over one month from the end of month three;

  • None of the additional costs incurred by the contractor for the finishing supervisor were incurred during the ‘period of actual delay’; and

  • The contractor incurred the additional finishing supervisor’s costs during month four when it would not have incurred those costs had there been no delay.

This would mean that a daily rate ascertained from the contractor’s actual running costs during the period of actual delay and applied to the period of delay cost entitlement may not be the most accurate approach if the above scenario in figure 3, or similar, applies.


However, where the duration of the project is for say several years, then it may be the case that most of the preliminary resources are on site during the period of actual delay and have also been delayed for the same period as the period of actual delay. In these circumstances a daily rate ascertained from the costs incurred during the period of actual delay and applied to the period of delay cost entitlement would be appropriate.

The author emphasises that, although the above examples in figure 3 focusses on indirect labour/staff resources, the same principles will also apply to site accommodation, plant, equipment and other time-related preliminaries items depending on when these items.


Therefore, what is the most accurate and appropraite approach to assess delay costs? To an extent, it will depend on how the additional costs were incurred together with other factors such as time available to conduct the analysis and budget with which the analysis has to work within. There are several approaches used by practitioners and quantum experts, and each approach has its strengths and weaknesses. The general approaches can be summarised as follows and will be considered in detail in later articles.

  1. Based on the global pro-rata assessment approach as used in Ascon Conatracting v Alfred McAlpine[2] (“Global pro-rata assessment”);

  2. Planned versus actual assessment;

  3. Modified planned versus actual assessment;

  4. Weighted average rate for daily running costs incurred during the period of actual delay applied to the period of delay cost entitlement (“Weighted average delay rate approach”);

  5. Detailed assessment of actual daily running costs incurred during the period of actual delay applied to the period of delay cost entitlement (“Detailed delay rate approach”); and

  6. Resource by resource assessment comparing the period the resource was on site because of the delay versus how long the resource would have been on site had there not been the delay (“Resource-by-resource assessment”).

Next article

My next article will examine the various approaches that can be used to assess delay costs.


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.


Access to articles

This and previously published DD articles 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

DD17: Quantifying delay costs – preliminaries – the applicable period and duration of delay for the assessment of delay costs

DD18: Quantifying delay costs – preliminaries – the applicable period and duration of delay for the assessment of delay costs continued

[1]Thiess Watkins White Construction Ltd v Commonwealth of Australia (1998) 14 BCL 61 [2]Ascon Contracting Ltd v Alfred McAlpine Construction Isle of Man Ltd 1999 WL 1610677.



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