handling_prolongation_claims (3).doc

8/10/2019 handling_prolongation_claims (3).doc

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ew South Wales Government

Procurement System for Construction

Procurement Practice Guide

Handling prolongation and disruption

claims

December 2!


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"mportant notices

Current version

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claims

Contents

1 Introduction......................................................................................... 12 Prolongation claims ........................................................................... 1

2.1 Definition .............................................................................................. 12.2 Establishing an entitlement .................................................................... 1

3 Evaluating prolongation costs........................................................... 2

3.1 For contracts with specified rates for delay costs.................................... 23.2 For contracts without specified rates for delay costs ............................... 33.3 On-site overheads .................................................................................. 33. Off-site overheads ................................................................................ . !3." #ubcontractors$ prolongation costs ...................................................... . 1%3.& Financing costs................................................................................... . 1%3.! 'laim preparation costs ....................................................................... 113.( )oss of profit claims ........................................................................... . 11

4 isruption claims.............................................................................. 12.1 Definition ........................................................................................... . 12.2 Establishing an entitlement ................................................................. . 12

! Evaluating disruption costs ............................................................ . 13

".1 For events with applicable specified rates for delay costs ..................... 13".2 For events without applicable specified rates for delay costs ................ 13


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December 2008 NSW Government Page i


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Handling prolongation and disruption claims

December 2008 NSW Government Page ii


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claims

# "ntroduction

*f claims for delay costs resulting from prolongation or disruption by the +rincipalare not handled appropriately, there are riss that ecessive costs will be incurred orcontract disputes will occur.

/he purpose of this +rocurement +ractice 0uide is to assist agencies and theirrepresentatives to respond appropriately to claims from construction contractors foradditional costs for prolongation or disruption.

2 Prolongation claims

2$# Definition

+rolongation claims are claims for additional time-related costs associated with delayscaused by the +rincipal. prolongation claim is a claim for delay costs .

2$2 %stablishing an entitlement

'ontractors sometimes attempt to establish prolongation claims in a variety of wayswhich are without basis in law or logic e.g. it too $ wees longer than planned,therefore it is the +rincipal$s fault and the +rincipal is liable for the etra costs thatresulted4. #uch approaches are not to be accepted. contractor must show that thecause of the delay is one that entitles the contractor to payment for the etra costsincurred.

/o establish an entitlement to prolongation costs, a contractor must demonstrate that5

a delay to completion of the contract has occurred6 and

the cause of the delay is either5

an action or inaction of the +rincipal or its agents4 which amounts to abreach of contract6 or

an event for which the contract specifically provides an entitlement forthe contractor.

/he claim must be supported by evidence of the facts on which it is based.

Evidence o" a delay

/o warrant the payment of prolongation costs, a delay must affect the critical pathand delay completion of the whole of the 7ors or a 8ilestone.

/he +rocurement +ractice 0uide Managing extension of time claims providesguidance for determining whether a delay has occurred, whether the contractor hasan entitlement for completion to be etended on account of the delay and whatetension of time should be granted. ny delay claim, including prolongation ordisruption claims, can be assessed using the principles given in the +rocurement+ractice 0uide Managing extension of time claims. 9ote in particular5

the principle of concurrent delays, which means that a contractor is not entitledto delay costs when there is a concurrent delay that is within the contractor:scontrol6 and

the ;but for< test, which eamines whether the contract wor would have beencompleted earlier ;but for< an event not within the contractor:s control.

#he cause o" the delay

contractor must show that the cause of the delay is one that provides thecontractor with an entitlement to etra payment, either under a term of the contractor for breach of contract by the +rincipal.

December 2008 NSW Government Page 1


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'lause "" of the GC21'ontract provides an entitlement to compensation for delayscaused by the +rincipal, including prolongation costs, at specified rates. /he

preamble to that clause "" states5

Where prescribed in the Contract, the Contractor may be entitled to payment ofdelay costs which are caused by a specified delaying event. Otherwise, the

Contractor is not entitled to extra payment for delay, disruption or interference ofany nature whatsoever caused by the Principal (including for a breach of theContract by the Principal.

=nder a GC21'ontract clause "".1.14, a contractor is entitled to delay costs onaccount of delays caused by the +rincipal5

for the number of days by which the time for Completion is extended because of adelay caused by!

." a #ariation, other than one for which, under clauses $".%, $&.$ and $$.',there is no payment for delays or

.& a breach of Contract by the Principal )

/hat is, in a GC21'ontract, the entitlement to be paid delay costs at the specified

rate depends on whether there is an entitlement to an etension of time for a breachof contract or a >ariation, with the eception that no entitlement eists where a>ariation is instructed5

as a result of #ite conditions, but the 'ontractor did not give the +rincipal the*urther +ite nformation within the time provided in clause 1."6

to resolve ambiguities, inconsistencies or discrepancies in the Contract-ocuments, but the contractor did not notify the +rincipal of the ambiguities etcat least 21 days before the 'ontractor proposed to use them, as re?uired byclause 2.16 or

when the 'ontractor is re?uired to accept full responsibility for design carriedout by the +rincipal before the Date of 'ontract, but did not notify the +rincipalof details of any *ault in the Principals -ocuments, as re?uired by clause

.1.1.*n a GC21'ontract, an etension of time claim must be valid before an entitlementto compensation for delays caused by the +rincipal arises under clause "". /heentitlement to delay costs will be determined when assessing the applicableetension of time. /he +rocurement +ractice 0uide Managing extension of timeclaimsprovidesguidance on determining these entitlements.

7here the contract does not specify a delay costs rate for eample the 9#70overnment Procurement +ystem for Construction Minor Works standard formcontract4, claims for etensions of time and claims for prolongation costs can bemade independently. delay may be caused by the +rincipal and a contractor maynot claim an etension of time, but this is no basis for refusing payment of the

prolongation claim. breach of contract by the +rincipal which resulted in a delay to

the wor could be a valid ground for a prolongation claim.

& %valuating prolongation costs

&$# 'or contracts with specified rates for delay costs

7here a contract specifies rates for delay costs that are applicable to the eventscausing the delay, calculating prolongation costs is straightforward once theappropriate etension of time has been determined. /he contractor is entitled to bereimbursed at the specified delay costs rate for the period by which the contract timewas etended, sub@ect to any eclusions stated in the contract.

*n a GC21'ontract, the +rincipal specifies a rate per day for delay costs 'ontract

*nformation item "14. Delay costs can be specified either for the whole of the

http://www.nswprocurement.com.au/psc/ppg/managing_extension_of_time_claims.ppghttp://www.nswprocurement.com.au/psc/ppg/managing_extension_of_time_claims.ppghttp://www.nswprocurement.com.au/psc/ppg/managing_extension_of_time_claims.ppg


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often referred to as ;on-site overhead< costs. /hey must be distinguished from thedirect costs of construction activities.

On-site overheads cover the cost of the items a contractor must provide duringconstruction, including5

1. salaries of site supervisory staff, including accommodation and

travelling epenses62. general wages employees employed in providing general services

and activities, including5

labourers engaged part-time on these activities6

chainmen, storemen, cleaners6

spare drivers, dogmen, crane operators6

maintenance scaffolders and carpenters who maintain siteaccess, platforms and other safety re?uirements46 and

clean-up gangs, attendance labourers.

3. general construction plant, including5 cranes, hoists, climbing scaffolds, compressors, generators, site

vehicles6 and

any ma@or temporary wors which cannot be readily allocateddirectly to wor items, such as de-watering e?uipment,ventilation fans, water supply etc6

. small tools and consumables6

". site services including power, water, air and telephones6

&. site offices, amenities, worshops and stores6

!. site office epenses including couriers, postage, copying6 and

(. insurances and security charges, 7or'over charges, long servicelevy charges.

/he test for inclusion of labour in the ;general labour< category is whether or not theemployee was present on the site for a longer time due to the delay6 or whether theemployee is one who is engaged on a specific wor activity and whose time on siteis governed by the rate of progress of that activity. For eample, a carpenter engagedon formwor is not on site for a longer period than anticipated at tender time unlessthe formwor activity is prolonged. On the other hand, a scaffolder responsible formodifying and ad@usting the climbing scaffold as wor progresses could be on sitefor longer if there is any delay at all which affects the critical path. #ome of the

personnel claimed in the delay costs claim may have carried out productive wor for

part of the delay period and their full cost may thus not be a legitimate claim./o establish whether a claim is @ustified, it may be necessary to sight subcontractagreements defining what services the contractor has agreed to provide tosubcontractors.

#imilar principles apply to general construction plant. /he cost of on-site overheadincreases as a result of delays. 7hen these costs are incurred as a result of delays forwhich a contractor is entitled to reimbursement, the contractor is usually entitled torecover an amount to cover these costs.

On pro@ects where the level of construction activity varies significantly betweenvarious stages of construction, the appropriate costs will be those which relate to the

periods4 in which delay has occurred. /o adopt average daily or weely on-siteoverhead rates over the whole contract duration is not necessarily appropriate.

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/he weely cost of on-site overheads is related to the total wor activity beingundertaen on a construction site at any time and not only to wor on the critical

path. lthough a delay to critical wor may occur at a period of maimum siteactivity, the effect may be to prolong only relatively few activities for additionaltime. /he appropriate rate for calculation of site overheads is that related to these?uence of activities which were delayed, together with any conse?uential effectsattributable to the delay.

#ome non-critical activities will be delayed by a delay to critical activities on whichthey were dependent. /hey may still be non-critical, but they will be undertaen at alater time. /his shift in time may not result in additional site overheads overall. *tmay merely cause the overhead costs to be incurred at a later time.

Actual costs

One method of assessing on-site delay costs is to evaluate the actual costs incurred.*f cost information is provided by a contractor to @ustify a claim, then this must beaudited to eliminate all costs that should be included in the direct costs ofconstruction activities.

0enerally, there will be very few material costs in on-site overheads. n eception

could be time-related items essential for the maintenance of the overhead staff oramenities.

'osts that are not time-related would be deducted. For eample, mobilisation andremoval costs will be incurred irrespective of contract duration. /he eception could

be where e?uipment or staff may be demobilised temporarily at the beginning of along delay and remobilised at the end of the delay period in order to save the cost ofretaining these resources on the site for the duration of the delay period.

/he actual cost of staff and labour will generally be provided by wages or salarysheets and the cost of all eternal plant and services will be substantiated byinvoices. /hese invoices should be inspected to ensure that no operating chargessuch as repairs or replacement parts, fuel or other incidentals are included. /he delaycost is the e?uipment rental charge only. *n some cases, there will be reduced hire

rates or even no charge for standby or non-operational periods. 7here contractorowned plant is involved, invoices are not liely to be available, so an analysis of thecosts claimed will have to be made separately.

7here the +rincipal has maintained good site records, the checing of the actualtimes claimed against a contractor:s records is the ideal way of establishing costsand the best way of accurately assessing the costs.

contractor is re?uired to mitigate costs in the event of delay. Ecessiveependiture due to poor management or inefficiency, if proven, is not recoverable.#pecific instances of obvious waste or mismanagement would need to be identifiedin the costs or noted from site observations.

Eamples of actions that could be taen by contractors to mitigate losses include5

terminating hire of plant not being used or ;hire out< plant6 putting off worers who are not productive when this is possible6

putting on additional worers or subcontractors, with a nett benefit of a reduceddelay impact6

woring overtime6 and

re-organising wor programs and order of wors.

/he importance of site records to assist in recognising ecessive costs cannot beoverstated.

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Estimated costs

/o minimise the administrative effort re?uired to provide actual cost information insupport of on-site overhead costs in a delay claim, a contractor will often provideestimated daily or weely costs for the staff, plant and facilities involved.

*f good site records eist, it is usually possible to chec such claims in broad terms

and highlight inconsistencies in a contractor$s claims. /he onus is on the contractorto prove the amount of such claims. n eamination by both parties of cost recordsmay become essential.

Evaluating claims "or on&site overheads

On-site overheads are broadly related to the direct cost of the wor to be undertaen.For pro@ects with a high labour content, the cost of supervision will be greater thanfor pro@ects with a high plant or material content. )ess supervision is re?uired forwor where subcontractors are used compared with wor re?uiring unsilled labouror using the contractor:s employees. /he cost of engineering staff on civilengineering or comple multi-disciplinary pro@ects may be higher than on buildingcontracts.

/he following guidance may assist in evaluating claims for on-site overheads5

1. Site Staff Costs

For site staff engaged on supervision, administration ormaintenance, names and responsibilities should be supplied for the

personnel included in the claim. 7here there has been turnover ofstaff, the dates of commencement and departure from the pro@ectshould also be provided. /he rate being charged for site staffshould be the actual incurred cost and it should be checed againstactual pay records or reasonable salary rates for that category ofemployment.

7here vehicles form part of the salary pacage of senior staff,additional allowance should be included if those costs are notseparately identified. ccommodation costs should be separatelyidentified.

Becruitment, training and any other costs which are not time-related should not be included.

2. Labour and plant

)abour should be included at the ;labour costing rate< whichincludes all payments made to the employee, and all entitlementsand statutory charges, but not overheads, profit or contingentallowances. *t is not appropriate to use labour ;nett rates


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beware of using internal ;sell rates< for plant for plant which,over the duration of the delay, could buy the plant several timesover.

0eneral plant is the most variable on-site overhead cost and mayform a high percentage of the total in some cases. /he test for

inclusion is whether the use of that plant item is time-related orspecific to a particular wor activity. *f specific to a particularactivity, it will only form part of a delay claim if that activity wasdelayed. /he cost of site establishment is not claimable as a delaycost unless, because of the duration of the delay, plant and facilitieswere disestablished and re-established to save costs.

#mall tools and consumables generally represent from 2C to &Cof the cost of labour, being greatest for bridge and wharf wor andleast for building wor where worers provide their own handtools and power tools are generally provided by subcontractors.

3. Site services including power, water, air and telepone

/he cost of installation and removal of services such as power,water and telephone is not time-related and therefore is notincluded. On-going costs such as rental of telephones andelectricity charges would be eligible for inclusion in delay costs./hese are generally not a ma@or cost and should reflect lesser on-site activity due to the delay.

!. Site offices, a"enities, worksops # stores

ere again, installation and removal costs are not a legitimatedelay cost, but weely rental costs for a site office, beingadditional time-related costs, would be considered. *n assessingsuch costs care must be taen that only costs which are reasonablyincurred due to the delay are @ustified. For eample, while the

delay to a critical activity may occur during a pea wor period,the effect may be to only prolong relatively few activities and siteestablishment related to these may be relatively small.

$. Site office e%penses & postage, cop'ing, etc

Etreme care must be taen, in admitting epenses such as postageor photocopying as delay costs, that they are in fact due to the

proven delay. For eample, why would additional copying costs beincurred @ust because of a delay caused by the +rincipal

(. )esting, procure"ent, inspection and consulting fees

contractor must establish, as for site office epenses, that testing,inspection or consulting costs were incurred as a result of the delayand wouldn$t have been incurred over a shorter frame4 if the delayhad not occurred. consultant testing service provided on an ;on-call< basis that would have been re?uired anyway irrespective ofwhen4, would not be admissible.

*. +nsurance and securit' costs

/he fees associated with maintaining insurance and securityunconditional undertaings4 for a longer period are a legitimatecost.

&$* (ff)site overheads

%ake&up o" o""&site overheads

7ithin the administrative structure of many contracting organisations, there is not aclearly defined separation between ;on-site overheads< and ;off-site overheads


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'osts claimed as off-site overheads may in reality be contract-related services whichare performed away from the site.

/he test of whether a particular cost or service should be classified as an on-site oroff-site overhead is simple. *f the service or cost would have been incurred in theoperation or maintenance of the contractor$s organisation irrespective of any specific

contract the contractor may have been awarded, then it is an off-site overhead. *f, onthe other hand, the service was re?uired to be performed as part of the wor done bythe contractor under a specific contract, then it is an on-site overhead and should beincluded in the total cost of the eecution of that contract.

For eample, contract managers, estimators, mareting personnel, safety andindustrial officers are normally off-site overheads, although their time mayoccasionally be charged to a particular pro@ect for specific services. *t is common toinclude these personnel because of the additional time re?uired in claims preparationand assessment.

Off-site overhead epenses include the general administrative and indirect costs of acontractor not attributable to a particular contract. /he following types of cost may

be considered in the category of off-site overheads5

Eecutive and clerical salaries6 Office occupancy costs rent, mortgage, services etc.46

dvertising, mareting, general administrative6

+rofessional fees, boos and periodicals6

Off-site vehicle epenses, office supplies, taes6 and

Other business operating epenses.

*n the case of engineering contractors, the off-site overhead may also include otheractivities associated with construction wor, but not attributable to any singlecontract. 'osts in this category may include5

design office overheads, testing facilities6

plant worshops, yards, storage areas6 and

general maintenance and depreciation of plant.

ll these categories of costs are usually identified in a contractor:s accounts asoverheads, and may be funded by the income-producing elements of theorganisation, namely, the contracts. 'are must be taen to ensure that only overheadsrelating to the construction operations are taen into account.

Evaluating o""&site overheads

*t is often asserted that when a contractor has several contracts in progresssimultaneously, each contract contributes a proportionate amount to this total off-siteoverhead based on the individual contract amounts and the durations of eachcontract. /his is rarely, if ever, true. One contract may contribute much more thananother contract and some contracts may contribute nothing and may cause a loss toa contractor.

7hen one contract is suspended or etended due to a delay, the overall off-siteoverhead continues to be incurred. *t is usually not increased or decreased as aconse?uence of the delay. *t is often argued that the contribution towards theoverheads anticipated to be earned from that particular contract is reduced. /his iseasily demonstrated to be untrue. 9otwithstanding that the contract is delayed, theamount of money earned by the contract is ultimately the same or even greater4 andhence the contribution towards the total off-site overhead cost will not be less. /heresult is that there is no loss of recovery of off-site overhead which can be attributeddirectly to the delay.



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Eactly the same false logic is often used by contractors to claim alleged loss ofprofits. +rovided a contractor recovers the direct cost of the delay, the profit earnedfrom a contract will not be diminished by the delay.

*f the delay occurs as a result of additional wor for which payment is made e.g.variations4 then part of these payments will usually include a proportion for off-site

overheads. 'are must be taen in evaluation to ensure ;double counting< does notoccur.

/here are two formulas commonly put forward by contractors for the purpose ofcalculating the alleged loss of off-site overheads due to delay5 the udsonformulawhich is widely used in most 'ommonwealth countries and the -iclea' formulawhich is commonly used in the =nited #tates. oth formulas are similar inapplication, although neither formula has any basis in ustralian law or logic. /heseformulas must not be used as a basis for calculating loss.

/he accurate assessment of head office overheads on any particular contract claim isvery difficult. *t is highly dependent on the structure of the particular organisation,the corporate overhead of the organisation, the degree of authority given by seniormanagement to the on-site personnel, the nature of the delay and the nature of the

direct cost of the delay.

*f there are direct costs, including payment of worers, etended hire of plant andincreased insurance, there will usually be some additional off-site overheads. /hesemay include additional computer time for the processing of payment claims, etrahours for head office clerical staff, an etended period of ban overdraft and evencosts for etra site visits by the 8anaging Director. /he salary of the 8anagingDirector will not be affected by the delay, but transport costs to pay etra site visitscould be an etra cost.

/he difficulty of eactly measuring the etra costs which are part of off-siteoverheads was the reason for including prescribed delay costs in GC21contracts and'lause 2 in S212!. /he #212 clause provides that ;the valuation shall includea reasonable amount for overheads< and does not distinguish between off-site andon-site overheads. 'alculation of a reasonable amount is less difficult thancalculation of the eact amount.

*t is in the area of off-site overheads that there is a real distinction between da"agesclai"s andClause !/.2 clai"s underS212!. *n respect of 'lause %.2 claims, acontractor does not have to prove actual overheads, but only what is a reasonableamount for overheads.

=nder a da"ages clai", a contractor must prove actual costs incurred foroverheads. lso, in respect of damages claims only, a contractor may be able torecover etra by way of common law damages if the contractor can prove that, if thedelay had not occurred, the contractor would not have suffered some loss that is notincluded in direct cost.

/here are difficulties in establishing such a claim, including principles of mitigationand foreseeability. /he contractor most liely to succeed is the very small contractorwho, because of the delay, is prevented from undertaing other wors and henceincurs a loss of income. )arger contractors will usually be able to recruit other staffor subcontractors to perform the other wors and will, therefore, not be preventedfrom undertaing the other wor.

/he Department of Finance and #ervices: eperience is that after ensuring that all?uantifiable overhead costs which are related to Gon-siteH activities have been taeninto account, additional head office overheads off-site overheads4 of some 3C areusually reasonable, e.g. for a I1,%%%,%%% contract over "% wees, a head officeoverhead rate of I&%% per wee would apply.

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&$+ Subcontractors, prolongation costs

#ubcontractors may well have an entitlement to delay costs from a contractor. *nturn the contractor may consider that such delays were caused by the +rincipal and;pass-on< these claims to the +rincipal.

#ubcontractors$ delay claims may include delay costs due to actions of the contractorand the +rincipal. /he +rincipal must ensure that these claims are separated and mustinsist that the contractor:s claim does so. 'ontractors are often reluctant to providesuch a ;brea-up< and endeavour to recoup all of a subcontractor$s delay costs fromthe +rincipal.

*t often happens that in the subcontract there is no specified program and thesubcontractor has agreed to carry out the subcontract wor in accordance with there?uirements of the progress of wor under the head contract. *n that event it may beetremely difficult to prove that a particular act caused delay, since there would benothing by which to measure delay.

/o evaluate such claims, it is necessary to5

have the contractor establish the @ustification and amount of any claim in the

same manner that would be re?uired for the contractor$s own claims6

have a copy of the subcontracts between the contractor and the subcontractors,to chec what claims are @ustified6 and

have the contractor certify that the subcontractor has been paid the entitlementdue or give a direction for the +rincipal to pay the subcontractor. 9ote that thereis nothing the +rincipal can do if the contractor falsely certifies that asubcontractor has been paid.

#ubcontractor site overhead costs are generally less than those of a head contractor,which is generally responsible for most site services and facilities.

Damages claims from subcontractors are liely when the delayed subcontract was a

substantial part of the subcontractor$s earnings for that time period and thesubcontractor was prevented by the delay from undertaing other profitable worduring the delay.

s for any claim, a contractor has to establish that reasonable steps have been taento mitigate losses. #ubcontractor claims can often be avoided by the subcontractorundertaing other wors. /his is the nature of the operations of many subcontractorsin that they have many clients at the one time and proper planning by them can bothsignificantly mitigate losses and maintain their pro@ected turnover to recoup whatsmall head office overheads they may have.

7hether a subcontractor is nominated, designated or selected by the +rincipal doesnot change the fact that there is a contractual arrangement direct between thecontractor and the subcontractor. /he same principles apply as for any subcontract

claim.&$- 'inancing costs

/his is an area where claims have little or no @ustification. #ometimes, however, acontractor can genuinely incur an etra cost for financing charges.

n eample demonstrates where financing charges could be payable. ssume that inthe first wee in pril a 'ontractor is delayed for one wee and incurs a cost ofI1,%%% for labour which is idle. /his is a direct etra cost which would not have

been incurred, but for the delay. /he I1,%%% is paid by the contractor by, say, !thpril. *f it is claimed in the payment claim on 3%th pril assuming that the+rincipal is liable to pay the etra costs as a result of the delay4 the +rincipal will

pay the contractor not later than 2(th 8ay. /he contractor will have been out of

pocet by I1,%%% for @ust over ! wees and may have paid interest at overdraft rates



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on I1,%%% for those ! wees. /his is a direct cost resulting from the delay. *f the+rincipal does not pay the I1,%%% on 2(th 8ay, then interest start to accrue on late

payments. Overdraft interest is no longer applicable after 2(th 8ay because of theinterest accruing under the late payments provision of the contract. On 3%th pril,the contractor could only claim overdraft interest from (th pril. On 31st 8ay, inthe net progress claim, the contractor could claim overdraft interest from 3%th prilto the date of payment of the I1,%%% or 2(th 8ay, whichever is the later.

*f the contractor does not include the I1,%%% claim in the net progress claim 3%thpril4, the contractor cannot recover financing charges overdraft interest4 after thedate when the I1,%%% would have been payable had it been claimed on time.

9ote that some prolongation costs for eample payments to subcontractors4 maynot have been paid out by the head contractor at the date of a payment claim, andhence overdraft interest could not be properly included in the claim.

*f financing charges are claimed, the contractor should be re?uired to provide proofof the dates upon which amounts were allegedly paid out. an statements with

payments identified may assist. +roof of payment of interest by the contractorshould also be re?uested. /he account may be in overdraft and it may only be

necessary to have proof of the overdraft rate. *nterest from the date when the moneywas paid out until the net date thereafter for a payment claim is then calculated.

&$. Claim preparation costs

/he cost of preparation of a prolongation claim is not payable as a separate head ofdamage. /he cost is part of overheads. contractor is not entitled to additional

payment because the contractor chooses to mae a separate claim or to use a claimsconsultant.

Just as a contractor is not entitled to etra for preparing claims, the +rincipal is notentitled to recover from the contractor the additional cost of reviewing claims, evenif they are totally without substance.

&$! /oss of profit claims

*n respect of claims arising from breach of contract, profit is never payable. /he lawpermits an award of the actual loss arising from a breach of contract, but not profiton the loss. )oss of profit may be recoverable in rare instances, as part of a claim forloss of income. /he loss of income is income, not from the contract breached by the+rincipal, but from other sources. /he breach by the +rincipal must be shown tohave prevented the contractor from earning income which the contractor would haveearned if the breach had not occurred.

For eample, a small plumbing contractor may only have the resources to tae onone contract at a time. *f the contractor has contracts lined up, one after the other, sothat there is no time in between, it may be that one wee$s delay by the +rincipal onone contract will mean a permanent loss of income e?uivalent to one wee$s incomeof the contractor.

+rovided that the contractor has mitigated the loss, by utilising the manpower andresources as much as is reasonably possible during the delay, by putting off staffwhere reasonable, terminating hire where possible, etc., there may be a permanentloss in income which is recoverable from the +rincipal as damages. *t is irrelevantwhether the income lost is profit or overheads or categorised in any other way. *tonly has to be shown to be income lost.

*n such instances, the real cause of the loss of income is that the contractor is tied upby the delay. /he delay prevents the contractor from earning income. *f, however,the +rincipal pays for the contractor:s resources during the delay period, the lostincome is reimbursed through those payments and there is no basis for a claim.

contractor$s income will vary from time to time and although the delay on one

contract may reduce the income from that contract in one financial year, the income



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from that contract will be received in the net financial year, and there is nopermanent loss of income.

>arious devices have been invented to show that if a contractor is delayed on acontract, there is a loss of profit and overheads which, if the delay had not occurred,would have been earned from other contracts. /he udsonand -iclea'formulas

are two such devices. /hese formulas and other similar formulas have never beenaccepted in ustralian courts as methods of proving damages and should not be usedto assess claims.

* Disruption claims

*$# Definition

disruption claim is a claim for alleged disruption or loss of productivity resultingfrom the acts or omissions of the +rincipal or the +rincipal:s agents. Disruptionclaims are sometimes included with delay claims but are fundamentally different.Disruption may not result in delay. 'ontractors claim that they could not achievetheir planned output because of the +rincipal:s actions and hence that the damages or

etra costs are payable.

Disruption loss of productivity4 results in a delay to the wor being carried out andnot necessarily to completion of the 7ors. /he wor produced is not changed, itsimply taes longer to complete.

*$2 %stablishing an entitlement

/o @ustify a disruption claim, a contractor must establish that5

actual progress of the wor has been interrupted6 and

the cause of the disruption was either a breach of contract by the +rincipal or anaction for which the contract provides for the reimbursement of etra cost.

contractor may claim disruption costs independently of an etension of time

claim, where the contract maes provision for this.Evidence o" a delay

/o warrant the payment of disruption costs, a contractor must identify the particularwor activities that were affected by the disruption or loss of productivity anddemonstrate that the disruption caused the contractor to incur additional costs.

/he fact that there are many variations, no matter how many, does not give rise to anentitlement to a claim for loss of productivity.

For a disruption claim to be valid, a contractor must demonstrate disruption toactual progress, not plannedprogress as is often claimed. ;wor-as-eecuted

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