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DD19: Quantifying delay costs – preliminaries – approaches to assess a contractor’s financial...

Quantifying delay costs – preliminaries – approaches to assess a contractor’s financial entitlement due to compensable delay



Introduction

My last two articles, DD17 and DD18, examined how to identify the applicable period(s) of delay during which the contractor’s financial entitlement to delay should be assessed.


This article provides an overview of the some of the approaches that can be used to assess a contractor’s financial entitlement due to delay when the applicable period(s) during which the contractor’s entitlement to delay costs should be assessed has/have been identified.


A contractor’s financial entitlement due to delay is usually based on cost, that is, pursuant to the loss and/or expense provisions in the contract. However, as detailed in this article, this is not always the case.


Approaches to assess contractor’s financial entitlement due to delay

This article examines and provides a basic overview of the some of the methods to quantify the additional costs of delayed preliminaries under the following five broad approaches:

1. Global pro-rata approach;

2. Planned versus actual and modified planned versus actual approachs;

3. Weighted average delay rate approach;

4. Delay rate per-day approach; and

5. Resource-by-resource ‘but for’ approach.

Each of the five approaches are now examined in turn.

Global pro-rata approach

The global pro-rata approach was used in Ascon Contracting v Alfred McAlpine[1]as detailed in DD15.


In summary, Ascon Contracting conducted its assessment for delayed preliminaries as follows:

1. Total tender price for the preliminaries for the entire contract period;

2. Less the fixed-price preliminaries items leaving only the time-related items;

3. Divided by the contract period in days; and

4. Multiplied by the period of delay in days to arrive at the claimed amount.


The court, however, made some downward adjustments to Ascon’s assessment to allow for the alleged imprecision of Ascon’s average rate for preliminaries derived from the entire contract period and other parts of the detail of Ascon’s expert’s calculation as detailed in DD15.


Ascon Contracting’s global pro-rata approach could instead utilise the actual costs for preliminaires for the whole contract period if these costs could be obtained from the contractor’s accounting records. Using actual costs would bring the assessment more into line with the ‘loss and/or expense’ provisions in most construction contracts for the assessment of delay costs as the tender/contract rates for preliminaries very rarely, if ever, reflect actual costs.


The global pro-rata approach used in Ascon Contracting using the tender amount for preliminaires would be suitable where:

· The parties have agreed to the approach either in the contract or at any other time after entering the contract; or, if there is no such agreement

· Where the contract provides for the rates in the preliminaries section of the tender/contract BQ to apply; and

· The preliminaries project spend is a linear / even spend during the entire contract period from commencement to completion.


It should be noted that preliminaries across the whole contract period will fluctuate, particularly at the beginning and end of a project life-cycle. Therefore, if average rates are to be used, especially average rates derived from the entire contract period, they will most probably need to be adjusted as appropriate to take these factors into account.


In Ascon Contracting v McAlpine, the court awarded Ascon an extension of time of 14 days and the parties agreed that Ascon’s entitlement to delay costs for preliminaries is usually quantified in terms of a daily or weekly rate for reasonable expenses.


McAlpine suggested using, as the “safest route”, the rate implicit in Ascon’s tender to calculate Ascon’s entitlement. However, if enough evidence was available then a more precise assessment to reflect loss and/or expense or damages entitlement due to the delay would be to use actual costs incurred as the basis for the delay rate rather than the amount in Ascon’s tender.


McAlpine raised two main objections to Ascon’s assessment, the first in relation to Ascon’s evidence used to support the preliminaries rates, and the second, Ascon’s use of an average rate and these are examined DD15. In summary, the court accepted Ascon’s evidence of the rate used and also said, although there was some force in McAlpine’s argument criticising Ascon’s use of average rates, that neither party had provided the court with an alternative approach and also that McAlpine’s approach was itself an averaging approach. The court therefore proceeded with the averaging approach but made some broad adjustments to take McAlpine’s objections into account.

These adjustments are detailed in DD15.


It is submitted that the global pro-rata approach should not be used by contractors as a first choice unless, for example, the contractor requires a quick ‘rough’ check of likely additional costs. However, with the appropriate adjustments made to the assessment to take account of factors such as fluctuating spend during the course of the project, the global pro-rata approach could be ‘indicative’ of the order of additional preliminaries costs incurred by the contractor because of delay.


However, as detailed in the next section on the planned versus actual and modified planned versus actual approaches, the global pro-rata approach is a ‘global’ type of assessment that lacks a forensic cause-and-effect analysis to properly attribute liability for any additional costs to the cause(s) of loss, and ultimately the party responsible. The same considerations as set out in the next section on the planned versus actual and modified planned versus actual approaches will therefore apply to the global pro-rata approach.

Planned versus actual & modified planned versus actual approaches

The modified planned versus actual approach is an extension of the planned versus actual approach so the two approaches are examined together in this section.


In the planned versus actual approach, the contractor compares its planned preliminaries costs for the baseline program durations for each of its preliminaries items being assessed with the actual costs for those items for the whole duration of the works. The basis of the assessment being that, had there not been compensable delay(s) (which caused the entire delay) then the contractor would have achieved its planned baseline duration and hence planned cost, and that therefore the employer is liable for all the delay over-and-above the planned duration, and therefore liable for all the additional costs which are attributed to the compensable delay(s) which caused the whole of the delay.


However, adjustments to the planned versus actual approach may be necessary, to take into account one or more of the following:

· The planned / baseline program preliminaries resources may have been insufficient to carry out the work as-planned; and/or

· The contractor may be responsible for some or all the delay; and/or

· The delayed preliminaries item(s) was/were not delayed due to a delay that gives the contractor an entitlement to additional payment; and/or

· Some of the delay costs claimed are attributable to non-critical delay which also does not give the contractor an entitlement to delay costs; and/or

· Others.


Where the contractor makes adjustments to its planned versus actual assessment to take into account any one or more of the above considerations, then this approach is often referred to as a modified total cost or modified global claim.


However, like the planned versus actual approach, it lacks the forensic cause-and-effect analysis to demonstrate that the additional costs claimed are due to a compensable delay, and simply subtracting amounts for which the contractor is liable from the total additional cost, is not a substitute for a properly conducted cause-and-effect analysis.


Contractors will often argue that it is sometimes not possible to fully particularise its claim for delay costs. However, to properly prove its claim, the contractor must establish how the loss and/or additional cost due to delay was incurred to demonstrate that the party against whom the claim is being made is liable for the costs claimed.


So, although calculating the amount of entitlement may be difficult, it is demonstrating the causal link between the delay event(s) and the related loss that poses the real problem for contractors.


However, it may be permissible to make a global claim for delay (and disruption) where it is impossible or impracticable to identify a specific nexus between each of the alleged events and the delay caused[2] and that this situation was not brought about by delay or other conduct of the contractor.[3] The contractor will have to demonstrate that:

· the employer’s breaches caused the addional costs and/or loss;

· the employer’s breaches represent the only causally significant factor responsible for the difference between the planned/expected cost and the actual cost; and

· that the breaches were the material cause of ‘all’ of the contractor’s additional costs claimed.[4]


This will involve an assertion that the employer’s breaches must have caused the whole of the additional costs because no other cause was responsible for any part of it.[5]

Commonly in construction and engineering contracts, a whole series of delay events occur which individually would form the basis for a claim. However, those delay (and other) events may inter-react with each other in very complex ways so that it becomes very difficult, if not impossible, to identify what loss and expense each individual event has caused. Notwithstanding this, the contractor still has to prove the causal connections between the delay event(s) and the loss claimed.


However, if all the delay events are events for which the employer is responsible, it may be unnecessary to insist on proof of which loss has been caused by each event.

It will therefore be essential to establish that the contractor was not responsible for any of the alleged causes of loss. This may be difficult to demonstrate, and, if the employer is able to prove that the contractor caused any of the costs claimed, then the global / total cost claim will almost certainly fail.


In a global claim approach, proof of causation will mostly, or totally, be by inference. To establish the inference, it will be necessary to provide the material facts relied on. On some occasions, the effect of a delay may be self-evident, and the inference easily drawn. However, in circumstances where it is unclear what effect the alleged causes would have had, and how they may have caused delay, it will be necessary to better particularise the argument as the inference will be more difficult to draw.


The more factual the evidence is of actual delay, the more likely a planned versus actual, or modified planned versus actual approach, is to succeed. When using either the planned versus actual or modified planned versus actual approach, whenever possible, the contractor should try to find evidence of actual delay costs at a micro level by way of packages of evidence using contemporaneous project documents. The contractor should also demonstrate that the scope and cost of the work not affected by the delay was reasonable.


To do this, the contractor should demonstrate how it planned to carry out and resource the work. This will require the contractor to provide evidence of its planned preliminaries resources, planned method and sequence of works, and the reasonable cost of carrying out the works on this basis within the time stipulated in the contract. If this exercise shows that the works were under-priced, the amount of under-pricing must be deducted from the amount claimed so that the causal inference does not fail. The contractor must demonstrate that all the loss claimed was caused only by the alleged delay events.


The contractor will need to demonstrate and support the actual reasonable preliminaries costs to complete the delayed work, demonstrating the actual preliminaries items and resources required, the actual method and sequence of work and the additional costs required.

The contractor then contends that its additional costs is the additional work required due to the compensable delay.


The NSW Court of Appeal in Mainteck Services v Stein Heurtey SA,[6] made it clear that Australian courts:

· Require proof of causation in the context of a global claim; but

· Recognise that a contractor may advance a global claim where it is impractical to disentangle the composite loss attributable to a series of causes; and

· That situation was not brought about by the contractor; and

· It is unlikely that a global claim will succeed if other causally significant events exist for which the defendant is not responsible – in such circumstances it is likely that the claim will fail in its entirety.


Like the global pro-rata approach, if the criteria in Mainteck Services v Stein Heurtey SA cannot be satisfied, neither the planned versus actual or the modified planned versus actual approaches should be used by the contractor to quantify additional costs for delayed preliminaries.

Weighted average delay rate approach

In the weighted average delay rate approach, a weighted average rate for preliminaries is applied to the period of delay cost entitlement. It may be necessary, or preferable, to use this approach, for example instead of the ‘delay rate per day approach’ detailed in the next section, because the specific period(s) of delay cannot be precisely identified. This may occur, for example, where the delay has been intermittent, or the contractor’s progress on site has slowed for a sustained period of say five months but has manifested into a compensable delay of say two months. In these circumstances it may be necessary to take the average preliminaries rate over the five months and apply it to the applicable two-month period of compenable delay entitlement. In this case, there would no specific two months from which to identify appplicbale delay rates.


The weighted average delay rate approach was part of the global pro-rata approach used in Ascon v McAlpine as detailed in DD15. The approach in Ascon is the ‘broadest’ of the average approaches and provides the least accurate delay rate to apply to the relevant delay period. This is because the average daily rate applied to the period of delay was derived from an average of the preliminaries tender price for the entire contract period divided by the entire contract duration. The duration for which the average rate is derived from should ideally be the period in which the delay occurred and to which the average rate will apply. It is important with the weighted average delay rate approach that these two periods correspond. This was one of the issues faced by the parties and the court in CMC v WICET. [7]


The Court in CMC v WICET[8] said that a difficulty it had in ascertaining the amount for on-site overheads / preliminaires 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.


Both CMC’s and WICET’s experts valued onsite overheads for the period closer to when the period of actual delay occurred. However, the court’s interpretation of the contract was that CMC was entitled to on-site overheads attributable to the period of extension time at the end of the project during the period of overrun.


A further difficulty the court said it had was that the rate in CMC’s exhibit 427 did not constitute a ‘weighted average’.


In summary therefore, during the trial, there were issues for the court to decide in relation to:

1. The applicable period of delay in that:

a. Is the applicable period to which the delay rate will apply the period of actual delay; or

b. Is the applicable period to which the delay rate will apply the period of overrun at the end of the project?

2. The applicable delay rate in that:

a. Should the delay rate be the rate(s) in the ‘Schedule of Daywork Indirect Personnel and Facilities Rates’; or

b. Reasonable rate(s)?


The experts quantifying delay costs did not know the court’s position on either question until the court made its findings on the points later in the proceedings – after the quantum experts had already spent considerable time quanitifying CMC’s financial entitlement due to delay.


The weighted average approach is often used by practitioners and experts and is effective when it is clear(er) than in CMC v WICET what the applicable period of delay to which the rate will apply is, and also where it is clear(er) what the basis of the rate is. Although there may be some differences between the parties, when these points are clearer, fundamentally, there is general agreement in principle to the approach to be taken. This was not the case in CMC v WICET.


In CMC v WICET, [9] the court said:

“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.”


Towards the conclusion of the trial, the court in CMC v WICET directed the experts to quantify the financial entitlement to delay based on reasonable rates that are applicable to the period of overrun at the end of the project.


An alternative to the weighted average approach to quantify a contractor’s financial entitlement to delayed preliminaries because of delay that would consider the parties’ and other other possible scenarios like those in CMC v WICET, is the ‘delay rate per-day approach’ and the resource-by-resource ‘but-for’ approach as detailed in the next two sections.

Delay rate per-day approach

In the delay rate per-day approach, an assessment of actual daily preliminaries costs incurred during the project duration is conducted. The period(s) of compensable delay is/are identified and the applicable daily rates are applied to the actual days of delay for which the contractor is entitled to recover its delay costs.


The basis of this approach being that the costs incurred during these compensable delay periods would not have been incurred had there been no compensable delay.


The quantum experts using the delay rate per-day approach could produce an overall matrix of all the preliminaries costs for the duration of the project. The matrix could be prepared in such a way that identifies detail such as:

· Each time-related prelimaries item that has been impacted by the compensable delay event(s);

· The costs incurred each month for each of the impacted time-related preliminaries items from the commencement of the project to completion;

· The monthly costs for each preliminary item is divided by the number of days in the month to give a daily rate;[10] and

· It will then be possible to identify the daily rate for each time-related preliminaries item, or any combination of preliminaries items, for any date or dates from the commencement to the completion of the project.


When the applicable period(s) of compensable delay is /are identified, the daily costs incurred during that/those period(s) can be readily identified. Further, some cause-and-effect has been illustrated as follows:

· Cause: compensable delay as identified in the program delay analysis; and

· Effect: the costs incurred during those periods of compensable delay that would not have been incurred had there been no compensable delay.[11]


It would be necessary when carrying out this exercise that the contractor’s preliminaries cost allocation to a particular month or months is correct and to decide whether some costs need to be redistributed to take into account differences in timing between when the item was procured, invoiced and paid etc. This exercise may not be necessary when using a weighted average approach if the period for which the average is taken covers the period from when the item was procured, invoiced, paid and installed into the works.


Also, account will need to be taken where delayed resources are not be captured at the time of the actual delay (or during the period of overrun if this happens to be the applicable period to which the delay rate applies). The example of the commissioning engineer in DD18 illustrates this point. However, a quantum expert will be able to make the appropriate adjustments to the matrix of daily preliminaries costs to take this into account.


By applying the detailed daily rate approach to CMC v WICET, the matrix could, for example, comprise all impacted/delayed time-related preliminaries in the vertical far left-hand column and the applicable daily rate for each of the preliminaries items and resources[12] along the horizontal rows. The court and/or the quantum experts would then be able to apply its findings in relation to the applicable period(s) of delay and rate(s) to arrive at, with relative ease, CMC’s entitlement to additional payment. The matrix could be prepared so that an assessment of any of the alternative positions can be made.


Where there is dispute about the applicable rate(s) and the period(s) of delay to which the rate will apply, this approach would provide the court with a matrix of all the daily rates, including alternative rates, for each delayed preliminaries items. The court would then able to identify the relevant delayed preliminaries items, the relevant delay period(s) and the applicable rate(s). Some adjustment may be required to the assessment to take into account impacted resources that would not be captured during the period of delay for which there is financial entitlement and these adjustments can be carried out as a standalone separate exercise on a case by case basis.

Alternatively, a resource-by-resource ‘but for’ approach’ as detailed in the next section could be undertaken.

Resource-by-resource ‘but-for’ approach

The resource-by-resource ‘but-for’ approach compares the period each preliminaries resource was on site because of compensable delay with how long the resource would have been on site had there not been compensable delay.


This approach takes into consideration the issues such as that, on occasions the time when the contractor suffers compensable delay, the costs incurred during the actual period of delay do not accurately reflect the ‘true’ delay costs incurred. Article DD18 provides the example of a commissioning engineer which, due to delay during the second month of the project, started work on site during the third month of the project, worked for an additional month because of the delay, but whose additional costs would not be captured in the additional costs incurred during either the period of actual delay or the period of project overrun.


To overcome such problems, the contractor needs to show the periods for when each time-related resource was on site, and when those resources would have been on site had there been no compensable delay as illustrated in figure 3 in DD18.


The resource-by-resource ‘but-for’ approach essentially compares the cost to the contractor for:

1. The period(s) in which the contractor’s preliminaries resources were on site because of the compensable delay(s)

with

2. The period(s) which the contractor’s prelimimaires resources would have been on site had there not been the compensable delay(s).

Note that this is not the same as the planned versus actual approach.


The period(s) in which the contractor’s preliminaries resources were on site because of the compensable delay will be less than the actual period the resources were on site if the contractor caused some of the delay. The resource-by-resource ‘but for’ approach is not an exercise of simply identifying the duration of the contractor’s own delay and subtracting that from the actual duration and comparing this with the planned duration as this would simply be the modified planned versus actual approach.

Summary

The above five approaches provide an overview of the general approaches that can be used to assess a contractor’s financial entitlement to delayed preliminaries due to compensable delay.


In reality, the most appropriate approach may be a hybrid /combination of two or more the five approaches outlined above, or another equally suitable approach, and the most appropriate approach must be decided on a case-by-case basis based on the particular constraints the analyst may face, for example: time available to conduct the assessment, available records, budget, amount in dispute, forum etc

Next article

My next article will examine the contractor’s entitlement to additional payment for off-site / head office overheads and profit where there has been critical delay to the progress of the works.

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

Access to 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

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

DD19: Quantifying delay costs – preliminaries – approaches to assess a contractor’s financial entitlement due to compensable dealy

[1] Ascon Contracting Ltd v Alfred McAlpine Construction Isle of Man Ltd 1999 WL 1610677. [2] Nauru Phosphaste Royalties Trust v Matthew Hall Mechanical & Electrical Engineers Pty Ltd [1994] VicrP 67; [1994] 2 VR 386. [3] John Holland Construction & Engineering v Kvaerner RJ Brown Pty Ltd (1996) 8 VR 681 at [14], [20], [23]. [4] John Holland Construction & Engineering v Kvaerner RJ Brown Pty Ltd (1996) 8 VR 681 at [15] [5] John Holland Construction & Engineering v Kvaerner RJ Brown Pty Ltd (1996) 8 VR 681 at [15] [6] Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184 [7] Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85. [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 837 [10] Because a contractor usually books its costs on a monthly basis, it will be necessary to divide the costs incurred by the number of days in the month to arrive at the daily rate for that month. [11] Further analysis / investigation will need to be carried out to demonstrate that this is in fact the case. [12] Daily rate is the monthly cost/rate (as applicable) for each preliminaries item divided by the number of days in the month.

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