Prolongation Costs – A Non Global Approach
Prolongation or delay costs must reflect the actual losses incurred by a claimant unless otherwise stated in the contract.
More often than not, claimants derive prolongation costs by determining an average daily rate taken from the preliminaries and/or indirect costs listed in the contract and multiplying that rate by the number of days delay.
Steps to quantify prolongation costs
A claimant must firstly identify the actual days of delay a respondent is culpable. The appropriate method to identify actual days of delay is to complete a cause-and-effect delay analysis.
Next, the claimant's actual days of delay need to be identified to quantify the costs incurred on those days.
Finally, the claimant should then analyse its cost records relating to the periods of delay, which are the respondent's responsibility.
To demonstrate a causal link and substantiate the cost claimed, the claimant should reconcile records of the indirect and direct costs such as daily reports and/or timesheets to the days claimed. In addition, the claimant can put forward other records such as invoices, etc., if they can be proven that they are recoverable.
Assuming actual days of delay have been identified and the actual costs have been quantified and separated into indirect and direct costs, the claimant is also required to evidence that the costs claimed were on the project. Substantiation in the form of (but not limited to) daily progress reports, daily diaries and sign in/out registers is required. Without this type of contemporaneous evidence, it would be difficult for a claimant to prove the costs they are claiming were related to the delay event(s).
Indirect costs
Generally, the claimant can claim only time-related indirect costs incurred during the period(s) of delay identified and costs can only be claimed for the days that are not the claimant's culpability. These costs typically include staff salaries, insurance costs, bank guarantees and reoccurring site running costs. The claimant cannot include purchase costs or capital costs such as vehicles, plant and office equipment.
Direct costs
Direct costs that the claimant can claim are those direct costs that naturally flow from the identified delay events. It is reasonably straightforward to work out the direct cost by reviewing an as-built program that demonstrates what direct costs were on the critical path at the time of the delay. Records such as timesheets, sign in sheets and payroll data will provide evidence the direct costs were incurred during the delay period.
A general example of a claim for direct costs is when a three-day respondent delay event occurs and therefore delays the critical electrical commissioning team on a power station. The commissioning personnel and associated plant and equipment could not carry out any work on the project and the costs could not be mitigated by demobilisation and remobilisation. This means the cost for the personnel, plant and equipment will be increased by a further three days as there will be an additional three days spent on the project to complete the electrical commissioning works. The claimant would be able to demonstrate the electrical commissioning work is on the critical path by way of a CPM programme and would need to prove by way of daily reports, daily timesheets and sign in/out registers the personnel and equipment was on site when the delay occurred.
Generally, unless stated otherwise in the contract, profit cannot be claimed as part of a prolongation claim as it is not a ‘cost’. Profit would need to be claimed separately as a loss of profit claim (depending on the jurisdiction).
Key points to remember
The key points to remember when quantifying prolongation costs are as follows:
Identify the actual days of non-culpable delays.
Only quantify reoccurring indirect actual costs incurred (unless the contract allows for pre-agreed rates to be used)
When claiming direct costs, demonstrate these costs are on the critical path and only claim the actual costs incurred (unless the contract allows pre-agreed rates to be used)
Maintain records of the actual personnel, labour, plant and equipment effected by the delay event.
Do not determine prolongation costs by using an average daily rate determined by the preliminaries contained within the contract (unless expressly allowed under the contract).
Do not divide the total loss incurred by the number of days of delay as this is at best a total loss or global claim approach. – (see our article on Untangling Quantum and Delay Claims)
Disclaimer: This paper does not in any way constitute any type of legal or professional advice whatsoever and in no way should be relied upon by any party whatsoever in any jurisdiction.
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