THE NEW
“DELAY AND DISRUPTION PROTOCOL”
A COMMENTARY
– Part 3
In this article, we
continue our examination of the “Delay and Disruption Protocol”, released by
the Society of Construction Law, concentrating on head office overheads
and acceleration. The writer’s comments are given in
parentheses.
Head office
overheads
The protocol
distinguishes between “dedicated overheads” (ie attributed to a specific
compensable event and duly recorded) and “unabsorbed overheads” (eg rent,
rates, some salaries of non-specific staff etc). To successfully recover the latter, a claimant must be able to
show: (a) it has actually suffered reduction in overheads recovery during the
prolongation period, (b) it has been prevented from recovering overheads
elsewhere because resources were tied up by the prolongation.
If it is not
possible to demonstrate the precise under-recovery by means of specific
records, then a formula may be used, albeit with care. The Hudson formula is not recommended, because of its dependence on tender
inclusion and adequacy. Preference is given to the Emden or Eichleay formulae.
The Emden formula is : OHP/100 x contract sum/contract period x period of
delay. The OHP percentage is derived from
the claimant’s company accounts. The
Eichleay formula is more complex. To assist, the SCL have a spreadsheet
available on www.eotprotocol.com.
(All directors and staff should fill in a weekly timesheet, as a
matter of routine, so their time can be costed direct to relevant
projects. It is then easy to calculate
and prove resultant expense arising
from prolongation on any specific project. As to the remaining
“unabsorbed” overheads, it may be
possible to persuade the respondent to consider a simple “add on” percentage,
supported by an auditor’s letter. These
practical steps will greatly reduce need for reliance upon a formula
approach. A cautionary note should be
added regarding additional recovery of overheads due to growth in the final
account value. Any formula approach
should include an adjustment to reflect this factor. In some cases it may be
that the additional recovery of overheads from variations equals or exceeds the
loss due to prolongation. In such a case, a claim is hard to pursue. However, if the majority of the additional
recovery occurred during the original contract period, and/or if the
compensable events were unrelated to variations, then the claimant may still be
able to argue a case ).
Loss of profit
The protocol advises
that loss of profit on other projects is not generally recoverable under the
standard forms. If such a claim is allowed,
the percentage may be derived from the claimant’s audited accounts for the
previous three years, with adjustment to reflect absence of risk.
Alternatively, the parties may agree to use the claimant’s tendered
allowance as a basis. (I do not see
why the protocol frowns on loss of profit as a head of claim, provided the
claimant can demonstrate that it was capable of earning that profit within its
business at the period in question.
Since “direct loss and expense” is equivalent to damages at common law,
then loss of profit would appear to be within the contemplation of the parties
as a probable consequence of prolongation.
However, the addition of profit as an “add on” to loss and expense is
another matter, where the protocol’s advice is clearly valid).
Acceleration
The protocol
emphasises that the contractor cannot be compelled to accelerate to reduce
a client’s delay, unless the contract
conditions provide accordingly. Where
there are no such provisions, then the measures and financial arrangements
should be agreed before the acceleration is commenced. Having formulated an
acceleration agreement, the contractor is not entitled to claim loss and
expense for the period of delay which has been avoided by the agreement.
The protocol warns
contractors not to expect compensation for “constructive accelerations” (ie
where a contractor retrospectively argues that he had no option but to
accelerate, due to the client’s failure to award an extension of time). Contractors should deal with this situation
by referring the extension of time for dispute resolution.
(The better the
contractor’s notices and site records, the stronger will be his position in the
event of pressure upon him to accelerate. Such pressure should be resisted,
until the detailed measures, such as increased labour resources and weekend
working, have been assessed and reimbursement agreed in writing. Vague
assurances and “gentlemen’s agreements” are totally inadequate. In fact,
virtually all accelerations are later seen to be under-costed. When pricing the acceleration, the
contractor should take account of
factors such as premium time, importation costs, incentive payments,
loss of productivity due to extended working hours and increased gang sizes,
congested working, additional plant and accommodation. Another cost will arise from the need for
additional supervision to control the enlarged labour force and increase in
work faces. In fact, too many contractors fail to increase their supervision,
with disastrous results).
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John Russell
Construction Contracts & Training Consultants (Established
1984)
Cheshire CW4 7DP Tel : 07770 986444
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