Article 013 examined the impact of delay on labour resources. As a result of delay, a contractor may also incur additional costs in relation to its other time-related resources which include, but are not limited to, the contractor’s preliminaries, that is, its on-site overheads.
This article 014 examines delayed preliminaries, often the most substantial part of a contractor’s claim for delay costs. A contractor’s entitlement to payment for delayed preliminaries is often based on cost, for example, a loss and expense assessment pursuant to the terms of the contract, or general damages at common law.
Under most, if not all, standard forms of construction contract, a contractor’s entitlement to financial recovery for delayed preliminaries most often depends on whether the delay is a critical delay.
The assessment of financial recovery due to delayed preliminaries is not always based on cost and the next article, article 015, examines situations where the assessment is on a basis other than cost, and subsequent articles will then examine issues in relation to the applicable period(s) during which the delay costs should be assessed.
I emphasise that the basis of entitlement, whether it be cost, pre-determined rates or other, will be determined by the applicable contract provisions, or, in the absence of applicable contract provisions, the applicable/governing law.
What are Preliminaries?
The term preliminaries, often referred to as job specific overheads or on-site overheads, are costs that sometimes comprise the first part of a bills of quantities,[1] in which there are items of cost that do not form part of the completed work. Some preliminaries items are fixed cost and relate to one-off costs such as site establishment (e.g., temporary office set-up) and demobilisation; the cost for these items will be incurred irrespective of any delays to the project.
However, many preliminaries items are time-related, for example, site staff, site accommodation running costs, and items of plant and equipment used to carry out the work.
If the work is delayed, some or all of these time-related preliminaries items will be required for longer periods, and, as a result, the contractor will incur additional cost. The amount of additional cost will depend, for example, on which preliminaries items have been kept on site for longer due to the delay, and, in some cases, whether the affected time-related items are hired or owned by the contractor.
Preliminaries should be differentiated from the contractor’s head office overheads which are associated with running the business that are not generally directly related to any specific project.
At times, however, there is no clear separation between preliminaries items and head office overheads. This may lead to a contractor inadvertently categorising costs as head office overheads which may in fact be preliminaries performed at the head office, or vice-versa. This could be an issue if, for example, entitlement under the contract for off-site overheads is a percentage addition to the delayed preliminaries costs.
If the cost would have been incurred in the operation or maintenance of the contractor’s organisation irrespective of the contractor’s specific construction project, then this would be a head office overhead. If, however, the work was required as part of the work done for a particular construction project, then this would be a preliminaries cost and should be included in the cost of that contract.
Normally head office resources are, for example, contract managers, estimators, and the like. However, the time for these resources may be charged to projects for specific services. Head office costs also include for its general administrative personnel and other indirect costs that are not attributable to a particular project, for example, clerical staff, plant workshops, yards, maintenance and depreciation of plant, office rent, advertising, marketing, periodicals, office supplies and other business operating expenses. Head office costs that are not attributable to any specific project(s) are usually form part of the contractor’s overheads.
Therefore, head office resources can be an overhead and/or charged directly to a project, or several projects.
These distinctions are important to recognise and are considered in further detail in later articles that examine head office overheads and profit heads of claim.
Valuation of Delayed Preliminaries Based on Cost
Where the contractor claims for delayed preliminaries pursuant to the loss and/or expense provisions of the contract, or where the claim is for general damages at common law, the contractor’s entitlement to additional payment will be based on actual reasonable costs incurred and evidence of these costs will be obtained from the contractor’s accounting system and/or other relevant cost records.
The actual cost to the contractor of providing its time-related preliminaries items during any period of delay can be demonstrated by producing evidence of paid invoices and/or other evidence of the amount paid by the contractor. This can be done by reference to the contractor’s accounts system and may include such documents as purchase orders, invoices, journal vouchers, payroll data, bank statements, final account statements, account ledgers and the like. However, if any of the delayed preliminaries items are owned by the contractor then recovery will be based on some other basis such as loss of opportunity to hire or depreciation.
Time-related preliminaries items will vary from project to project. For example, on larger projects, plant and equipment and attendant labour and site staff may become a bigger component of cost. In relation to site staff, it will be necessary to identify the functions of the staff being claimed and check and verify that their tasks undertaken correspond with the reason(s) for delay.
If an additional resource was required for a specified period, then this should be easy to identify in the contractor’s cost accounting system. However, the position is not so straight forward when resources have been partly utilised during the period of delay. In this case, records need to be kept in sufficient detail to be able to identify the additional resource cost due to the delay.
Very often, the biggest preliminaries cost is site staff, which can account for 60% to 70% of the additional costs of the delayed preliminaries. It must be emphasised that payroll costs relating to delayed staff resources is sentitive data which may need to be handled differently to other cost items. For example, it may be that an agreement is made between the parties for an independent third party to inspect the contractor’s accounts to verify that the costs claimed were in fact incurred.
Some site establishment costs for staff that are based off site may be incurred, in which case it will be necessary to distinguish these resources by using appropriate timesheets. Similarly, there may be head office staff based on site but who are working on more than one project. Again, identification of the resource(s) and their time needs to be recorded appropriately.
During the period of delay, plant and equipment may lie idle and/or be used less frequently. The additional cost to the contractor in this situation may be hire charges incurred if the contractor hired the plant and/or equipment.[2] However, the position is different if the contractor owns the idle plant and equipment.
Although contractors generally do not hire out its plant and equipment, some do. In this situation the contractor will need to demonstrate that it would have hired out the plant and/or equipment had it had the opportunity to do so but was unable to do so because of the delay.[3] If the contractor is unable to prove that it lost the opportunity to hire out that plant and/or equipment, its claim will need to be based on factors such as loss of interest on the idle capital, maintenance costs, tied up capital and/or depreciation,[4] if any of this type of loss was in fact incurred.
The burden is on the contractor to demonstrate that the costs claimed were reasonably incurred and that it has made a reasonable effort to keep the additional costs and/or loss to a minimum.
It will be necessary for the contractor, when preparing its assessment, to ensure that its cost/account data is arranged in a proper, logical, and auditable manner so that it can be easily and efficiently vetted by whoever the recipient is, whether that is the employer, main contractor, independent expert, third party tribunal or other.
NEXT ARTICLE
Articles 014 to 019 are a series of articles that consider how the additional costs due to delayed preliminaries are assessed.
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[1] A BQ is a document used in tendering which enables all contractors tendering for a project to price on exactly the same information subsequent to this, the BQ can be used for post-tender work such as material scheduling, construction planning, cost analysis, and cost planning.
[2] Shore & Horwitz Construction Co Ltd v Franki of Canada Ltd [1964] SCR 589 (Can SC). [3] Alfred McAlpine Homes North Ltd v Property and Land Contractor Ltd (1995) 76 BLR 59. [4] Alfred McAlpine Homes North Ltd v Property and Land Contractor Ltd (1995) 76 BLR 59; The Hebridean Coast [1961] AC 545 (HL).
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