This article is an introduction to the quantification of delay costs.
Delay costs
Generally, it is the contractor who claims delay costs from the employer due to delay caused by an employer-risk delay,[1] with the basis of the claim being that:
the work took longer to complete than it would have done had the alleged delay not occurred; and
the contractor incurred additional costs which it would not have incurred had it not been delayed.
It is more usual to assess the contractor’s financial entitlement due to delay on the basis of cost, that is, loss and/or expense under the contract or damages at common law. However, the parties may have instead agreed a ‘delay rate’ or ‘delay rates’ which are stipulated in the contract, or the contract may provide for ‘reasonable rates’ or other to apply, for example, where the delay is assessed pursuant to the variation provisions of the contract which require, for example, valuation in accordance with a schedule of rates, as opposed to the loss and expense provisions.[2]
I assume for the purposes of this article that the contractor’s entitlement is for loss and expense / actual cost.
Claim under the contract or for common law damages?
When a contractor makes a claim for delay costs, it may be necessary to distinguish between:
a claim made under the contract pursuant to a term, or terms, of the contract; and
a claim for a breach of contract where the contract does not provide a means of recovery, in which case, the contractor’s claim would be for damages at common law.
Most modern construction contracts provide a remedy by an express term which otherwise would have been subject to a contractor’s claim for common law damages for breach of contract. Clear words will be required in the contract to exclude a claim for common law damages[3] and contractual rights are generally in addition to a common law remedy.[4]
The purpose of damages is to, as far as money can, put the party who has suffered a breach of contract in the same position as it would have been in had the breach had not occurred.[5] Note, however, that the injured party is not entitled to an amount that would leave it in a better position.[6] Damages are therefore compensatory, although there is a limit to the amount of loss that can be recovered based on whether the loss is “too remote”.[7]
Duty to mitigate loss
A contractor suffering loss and/or expense due to delay has a duty to take reasonable steps, but no more, to mitigate its loss and/or expense. Insofar as the loss and/or expense could have been mitigated but was not, there is no entitlement to recover that loss and/or expense.[8] Any loss and/or expense incurred as a result of taking those reasonable steps may also be recoverable.[9] It is also for the employer to prove that the contractor failed to mitigate,[10] although it will obviously be prudent for the contractor to show that it did mitigate.
Critical and non-critical delay
A claim for delay costs may be in relation to critical and non-critical delay insofar as the costs claimed are recoverable.
Most, if not all, standard form construction contracts give the contractor an entitlement to an extension of time and delay damages where the employer causes delay to the project completion date. However, there may be delays not caused by the employer but, under the contract, the employer takes the risk for time but not for loss and/or expense suffered, for example, force majeure events.
Even though a contractor will not be entitled to an extension of time for delay to a non-critical activity (on the basis that there will be no delay to the project/contract completion date), a contractor may suffer loss and/or expense due to the increased time taken to complete that non-critical activity. This is because, although the date for completion may not have been impacted by the delay, the time-related resources in relation to that activity may have been affected. Many contracts do not give the contractor an entitlement to further payment for loss and/or expense due to non-critical delay and therefore the claim would have to be made for general damages at common law.
However, sometimes loss caused by delay to a non-critical delay can be recovered pursuant to the contract, for example, in CMC v WICET,[11] CMC was successful in its recovery of financial loss as a result of delay to a non-critical activity caused by a series of directions issued by WICET and valued as a variation.
Calculation of delay costs – the primary heads of claim
A contractor’s claim for delay costs can be made under the following primary heads, although this list is not exhaustive:
Labour;
Preliminaries (on-site overheads/indirect job costs);
Claims from subcontractors;
Off-site/Head office overheads;
Loss of profit;
Increased costs of resources/inflation; and
Finance charges and interest.
In a loss and expense claim under the contract, or a general damages claim at common law, a contractor is generally entitled to reimbursement of the additional costs and/or loss it has suffered and no more.[12] The contractor must demonstrate, on the balance of probabilities, the additional costs and/or loss it has suffered.
Keeping records
The contractor claiming loss and/or expense due to delay will need to identify and record the labour, plant and administration costs incurred in relation to the delayed activities and cross-reference these costs to the amounts claimed.
In relation to demonstrating the loss and/or expense incurred, it is therefore necessary for a contractor to set up its cost recording system in a way that will show the loss and/or expense suffered, and, importantly, ‘why’ the loss and/or expense claimed was incurred.
Modern construction accounting systems allow the contractor to record costs in such a way. The key is being able to assess the recoverable amount which is why a contractor needs to know ‘why’ costs were incurred and not just simply that costs were incurred.
It will be necessary for a contractor to be able to separately identify the head office, administrative and support costs caused by an instructed change and/or breach of contract where the basis of assessment is actual loss and/or expense suffered. If these costs cannot be separated from the costs the contractor would have incurred had there been no delay, the contractor will find it almost impossible to separate the costs it has incurred through its own mistakes and/or mismanagement. The contractor will therefore be unable, or at the very least find it very difficult, to demonstrate the amount it is entitled to and recover the amount for which the employer would otherwise be liable.
NEXT ARTICLE
The next article, article 013, examines the assessment of additional labour costs.
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[1] Delays for which the employer takes the time and financial risks under the contract. [2] See Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 [3] Holloway v Chancery Mead [2007] EWHC 2495 (TCC); (2007) 117 Con LR 30 at 57. [4] Modern Engineering v Gilbert Ash [1974] AC 689 (HL). [5] Victoria Laundry Ltd v Newman Ltd [1949] 2 KB 528 at 528 (CA). [6] C&P Haulage v Middleton [1983] 1 WLR 1561 at 1467 (CA). [7] Hadley v Baxendale (1854) 9 Ex 341. For further explanation on remoteness of damages see Stephen Furst and Vivian Ramsey, Keating on Construction Contracts (10th ed, Sweet & Maxwell, 2016), [9-004]–[9-017]. [8] British Westinghouse v Underground Railways Co [1912] AC 673 at 689 (HL). [9] British Westinghouse v Underground Railways Co [1912] AC 673 at 691 (HL). [10] British Westinghouse v Underground Railways Co [1912] AC 673 at 673 (HL). [11]Civil Mining & Construction Wiggins Island Coal Export Terminal [2017] QSC 85 [12] The rule as to what is recoverable as damages in contract is known as the rule in Hadley v Baxendale (1854) 9 Ex 341 and reference should be made to this case and Victoria Laundry [1949] 2 KB 528.
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