Prolongation Cost Claims

Prolongation Cost Claims
by
Gyanendra Prasad Kayastha

Background:
Once a Contractor has secured an extension of time and relief from liquidated damages, thoughts will quickly turn to recovery of the costs incurred due to the delayed completion date – i.e. “Prolongation Costs”. In Nepalese context, many projects are getting delayed due to the reasons attributable to the Employer and hence, the Contractor is entitled for the prolongation cost for the extended period provided that the claims are lodged in accordance with the contract. 

Definition of Prolongation Cost:

The term “prolongation” refers to the extra costs that a Contractor may incur as a result of the completion of works being delayed by an event that is the responsibility of the Client. Such events might include; failing to give the Contractor possession of the site on the date specified in the contract, delays in getting instructions and so on. The Contractor may incur additional costs as a result of having to remain on site for longer than anticipated, for example, additional labor costs, plant costs, off site costs overheads, fluctuations and so on.

How such costs should be determined and the answer is often an unequivocal statement that the rates and prices from the Preliminaries BOQ shall be divided by the original contract duration and the derived daily rate for preliminaries shall then be applied to the extended duration.

Other definition may even refine this logic with the requirement that the BOQ rates and prices should first be adjusted to remove fixed costs, mobilization and demobilization costs and overheads and profit.
Whilst both definition/answers are quite wrong, these approaches are often used in order to achieve an expedient, albeit inaccurate answer. The problem is that neither approach attempts to address the underlying question of what costs / losses were actually incurred by the Contractor as a consequence of the delaying events for which the Employer was responsible. The answer to this question cannot be found in the BOQ, but can (and should) be found in a detailed analysis of the Contractor’s cost records

Contract Interpretation:
The express wording of the contract will dictate which heads of claim are admissible, but in general terms an accurate understanding of Prolongation Cost entitlement can be derived by application of the following basic principles:

  • Identify the events that gave rise to the extension of time – as it is the cost / loss arising from these events that the Contractor is entitled to recover;
  • Identify the point in time that the delay occurred – a common mistake is to identify the costs that were incurred over the extended duration at the end of the contract period. This is incorrect. The delay may have occurred prior to full mobilization and thus the actual costs incurred at that time may be lower;
  • Identify the direct costs that follow from the compensable delay events – the Contractor is not entitled to costs arising from delay events for which it is responsible. Separation of the two can defeat arguments that the claim is global and includes elements of the Contractor’s own culpability;
  • Assess only time related costs and not one off capital costs – time related costs are those which necessarily arise as a consequence of additional time spent on the project and would typically include staff salaries;  insurance, rents, utilities, bonds, accommodation, office services, car leases & running costs, etc. but would not include purchase costs of offices, photocopiers, vehicles etc.
  • Exclude task related costs – a common mistake is to include task related costs (e.g. labor, plant hire or scaffolding costs) that would have been incurred in any event. These costs may only have been incurred at a later point in time and are therefore not additional. Such costs would need to be separately recovered through a properly formulated disruption cost claim;
  • Exclude profit – the purpose of the claim is to put the Contractor back into the position it would have been, but for the delay. ‘Profit’ is not ‘cost’ and thus any claim for profit can only be by way of a ‘loss of opportunity’ claim – which may be expressly precluded by the wording of the contract and would in any case have to be proved, i.e. that opportunities did in fact present themselves and were refused because key resources could not be released from the delayed project;
  • Allow for off-site costs – costs incurred in the Contractor’s head office (and elsewhere) may be as a direct result of the project delay. The fact that these costs were incurred off site does not mean that the Contractor is not entitled to receive them;
  • Avoid formulae for determining overheads (e.g. Hudson’s, Emden’s etc.) – unless you are a Contractor and you fully understand the basis of your ‘loss of opportunity’ claim and how to present it! By indentifying actual incurred overhead costs rather than rely on theory based formulae that commonly produce high assessments;
  • Interest / Finance Charges – remember that charging interest on a debt may be prohibited in your jurisdiction or by your contract. Most interest or finance claims suffer from a lack of facts and are commonly: unsupported, theoretical assessments of loss. However, a skilled claimant can often find ways to lend credibility to this type of claim.

C Conclusions:
It is therefore evident that the Contractor is entitled for the prolongation costs for the extended period due to the reasons attributable to the Employer. In Nepalese context, in recent times, hydropower projects/transmission line projects/water supply projects/road projects/irrigation projects are getting delayed due to the reasons attributable to the Employer and accordingly, the completion period has been extended. There has been many examples where the Contractors have requested for the prolongation costs for the extended period but the Employers have been refusing to compensate such costs. Due to this, disputes have arisen and these disputes are being referred to Adjudication/DB/Arbitration for the resolution of the dispute.

References:

  • Prolongation Cost Claims – Web Page
  • Prolongation in Construction Contract- Web Page
  • Handling of Prolongation and Disruption Claims- Procurement Practice Guide 2008 published by Government of New South Wales

 

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