Construction claims: quantifying loss and/or expense (part 1)

In the last four articles within our construction claims mini-series, we have covered the starting point of a claim, which is entitlement, and then followed this with an exploration of delay analysis-related issues with articles on as-planned programmes, as-built programmes and critical path analysis.

The issue of construction claims is broad, and the practical tips and guidance will vary depending on the legal and factual matters. We have covered some of the basics, which should stand you in good stead for future issues, and the only issue left is, arguably, the most important: the money!

Now I say it is the most important because ultimately you are not making the claim because you feel like it; you probably want to be paid something, and that is the reason you have embarked on this arduous process. In reality it isn’t the most important aspect because while the icing on the cake needs to look good, the icing won’t look good without a solid base, which matters of entitlement and delay analysis provide.

We will cover quantum in two articles; this first article will cover prolongation costs, and the second will cover acceleration costs.

What is prolongation?

The RICS guidance note Ascertaining loss and expense 2nd edition, says that the costs for prolongation are generally borne from the costs of additional on- and off-site overheads occasioned by a delay to construction works caused by the other party to a construction contract.

This head of claim is distinctly different from disruption costs, which generally relate to losses (e.g. production losses) caused by non-critical delay impact.

An example of prolongation costs might be recoverable where the employer fails to give the contractor possession of the site for two months from the date specified in the contract and the contractor incurs time-related costs for that period, which are recoverable under the contract.

These time-related costs generally relate to the contractor having to remain on-site for longer than anticipated, hence incurring additional staff and supervision costs, plant and site set-up costs, and off-site overheads

Practical challenges

The basic principle of a contract is that you are entitled to recover damages caused by the other party's breach.

In normal civil law this can be straightforward; if someone bumps into your car, then, in a simple case, they are liable for the repair costs. However, this becomes more challenging on construction contracts where the impact is not always easy to prove that it was caused by the breach.

In the example of a delayed start to a site that is, in theory at least, fairly straightforward. However, what you will often encounter is multiple events happening at the same time, making it difficult to ascertain which breach caused damage and what damages were caused. As we have covered previously, this is where your delay analysis needs to serve you.

When you have the delay analysis in hand, as the claiming party, you still bear the evidentiary onus of proving that the cost was caused by the breach and that the cost was incurred.

Causal link

When it comes to proving a cost was caused by the breach, it is not normally enough to say that a resource was on site longer, you incurred the cost, therefore it should be recovered. You will often have to do a bit more to demonstrate the relationship between the cost and the breach.

For some costs this will be fairly obvious because, for example, it is the project manager’s cost, and, given that person has responsibility for the overall project, it is normally reasonable to say that a day of critical delay would cause that person to be on site for an extra day.

However, for other resources, there may not be a connection, or the connection may not be obvious. For example, if you have a critical day of installation, then why would it follow that your procurement or design resources are prolonged? It may well be the case that you have had to redesign or reprocure something, but you need to demonstrate and prove that causal link.

Substantiating costs

Whilst you may calculate your valuation of prolongation in an Excel spreadsheet, the presentation of that calculation is unlikely to be enough to substantiate the costs.

Your calculation will be comprised of two things: quantities and rates. So the question is, how do you substantiate the quantities, and how do you substantiate the rates where, typically, people or equipment resources are claimed?

For people quantities, you are looking to demonstrate that the people claimed worked on the project at the allocation included in the calculation. Ideally, the proof you put forward is detailed and contemporaneously prepared timesheets describing what the person did each day and signed as a true record by a line manager. The reality is often different, so evidence might be a patchwork quilt of information from cost systems, organisation charts and other contemporaneous records to build the picture.

For people rates, you need to prove the costs you have incurred. If the people resource is employed as a consultant, then invoices should be sufficient to prove the rate. However, for directly employed staff, it can be more challenging due to data protection laws restricting access to sensitive information such as payroll. There are different ways businesses overcome this, and that is their prerogative, so describing how your cost system works, how the costs are allocated, what the process is, who is involved, etc., can go a long way to demonstrate to someone that your claim reasonably reflects the costs incurred (i.e. rule out the prospect that you stand to gain if the valuation is agreed).

When it comes to equipment, the usual evidence is purchase orders and invoices for the equipment.

Final reflections

When I set out writing this article, I thought it would be fairly simple because prolongation costs are usually one of the more straightforward heads of claim to prove.

However, when writing it, it reminded me how many different combinations of a prolongation claim are possible and how most businesses will not have systems set up to perfectly prove those claims, so whilst the basic ingredients are the same, there are always nuances. caused by the contract form, business systems, the delay analysis performed, the records available, etc., that result in the valuation being a very skilled exercise.

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