Prolongation cost calculation
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- Prolongation costs refer to costs incurred by a contractor due to a delayed project completion date for which the employer is responsible. - Simply using rates from the preliminaries bill of quantities (BOQ) divided by the original duration is incorrect, as it does not address what costs were actually incurred due to the delay. - A proper analysis of prolongation costs requires identifying the delaying events, when the delays occurred, direct costs from those events, time-related costs excluding capital and task costs, and excluding profit. It should also account for off-site costs and be supported by records rather than theoretical formulas.
Prolongation cost calculation
- 1. Prolongation cost calculation RRGS BANDARA
- 2. 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”.
- 3. If you ask an Employer’s QS how such costs should be determined 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.
- 4. The sharp witted Employer’s QS may even refine this logic with the caveat that the BOQ rates and prices should first be adjusted to remove fixed costs, mobilization and demobilization costs, overheads and profit. Whilst both answers are quite wrong, these approaches are often used in order to achieve result, despite the 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.
- 5. 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 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;
- 6. -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;
- 7. -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.
- 8. -Exclude task related costs – a common mistake is to include task related costs (e.g. labour, 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;
- 9. -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;
- 10. -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; -If possible, 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.
- 11. Calculation of Costs. Once the contractor is granted an extension of time with costs, the computation of the recoverable items must also be substantiated with properly maintained records and invoices. Normally, the contractor should prove actual loss from records. Only where this is not possible, and as an exception rather than the rule, will calculation be allowed by reference to formulae such as the Eichleay formula, and the Hudson or Emden formulae. The formula is applied to assess loss where certain things have been established proving that the contractor did actually suffer loss. The contractor must show that it would have secured work on another contractor and would have been recovering overheads from this other project, and that there was profit capable of being earned elsewhere and there was no change in the market thereafter affecting profitability of the work.
- 12. It must also be established that the contractor was unable to deploy resources elsewhere and had no possibility of recovering the overheads from other sources, e.g., from an increased volume of work. Thus such formulae are likely only to be relevant and of value if the event causing the delay has the characteristic of a breach of contract.