Proving and Quantifying Contractor Impact Damages Resulting from Delay
This article outlines the complexities contractors face when claiming damages for losses resulting from employer-induced project delays.
It discusses the difficulties in proving and quantifying losses, particularly in areas such as loss of productivity, off-site overheads, and lost profit. The document highlights legal challenges in demonstrating causation and entitlement, noting that calculations often rely on hypothetical scenarios and strict evidentiary requirements to substantiate claims for both overhead costs and lost opportunities.
Challenges in Proving and Quantifying Contractor Losses Due to Delay
Even when a contractor is entitled to claim impact damages resulting from employer-caused delay, there are significant obstacles in both proving that the delay directly led to losses and in accurately quantifying those losses. Of the five categories of loss commonly referenced, three are particularly noteworthy: loss of productivity, off-site overheads, and profit.
Loss of Labour Productivity
Legally, loss of labour productivity is generally recoverable by contractors. However, demonstrating such loss is very challenging. A typical approach is to compare the actual time taken to complete tasks with the originally planned time. While this method is accepted, it remains difficult to prove causation. If damages (rather than just costs) arise from project prolongation, this entitlement extends to reimbursement for off-site overheads incurred during the delay.
Claims for Off-Site Overheads
Proving a causal link between project prolongation and off-site costs—such as head office rent or secretarial wages—is difficult, as these expenses are usually constant over time. The key argument is that, if not for the delay, the contractor could have undertaken additional projects that would contribute to off-site overhead funding. Therefore, such claims are inherently hypothetical, relying on assumptions about what might have happened without the delay. The SCL Protocol requires contractors to show that they have failed to recover reasonably expected overheads during the period of prolongation, and that this failure is due to their resources being “consumed” by the delay.
Calculation of On-Site Overheads
On-site overhead losses are more readily provable, as they include all costs necessarily incurred on the project due to the delay. For standing time or unproductive plant, hire rates may be used in calculations—but only if there is evidence of forgone profit opportunities. Without such evidence, only depreciation and maintenance costs can be recovered.
Claiming for Lost Profit
Claims for lost profit are similar in concept to overhead claims, as they are based on the contractor’s lost opportunity to earn additional profit, having been prevented from taking on extra work by the ongoing delay.
Principles of Compensation under the SCL Protocol
The SCL Protocol states that, unless the contract says otherwise, compensation for prolongation covers only actual work, time, loss, or expense to restore the contractor's financial position. Compensation is based on the real costof staying on site longer, not tender allowances for overheads.
Approaches to Quantifying Contractor Claims
Use of Formulae in Overheads Claims
Due to difficulties in proving that delay caused overhead costs, formulae are commonly used to quantify claims. The “Hudson” formula is frequently employed, though it is criticised for its reliance on assumptions and unclear percentage returns. Depending on the context, the formula may benefit the contractor or principal. For instance, if a delay affects only a small portion of a large contractor’s resources, it may not result in sacrificed contracts or reduced overhead return and profit as the formula suggests. Inflation during the delay period may also increase overhead costs without being reflected in the formula.
An alternative is the Eichleay formula, used in certain Federal Government contracts in the United States. This formula determines the daily overhead rate of the original contract, adjusted for actual contract performance days. The daily rate is then multiplied by the number of delay days to calculate reasonable unabsorbed overhead—the loss of opportunity to earn funds to cover overhead costs. Despite being more refined than the Hudson formula, the Eichleay formula is still subject to inaccuracies, such as assuming all overhead costs are fixed and including the delay period in calculations. Both formulae may be criticised for failing to quantify the actual loss caused.
David Byrne, Q.C., observed that formulae help contractors claim unprovable losses, such as profits from untendered projects, by using standard profit ratios. However, courts warn against their blanket use. In State of South Australia v. Fricker Carrington Holdings Pty. Ltd., the court held the Hudson formula requires agreement or evidence, and in Thiess Watkins White Construction Ltd v. Commonwealth of Australia, allocation of overhead must be justified, with actual loss demonstrated—though expert evidence isn't always needed. Other formulae like Eichleay have seen little judicial comment in Australia.
Each case must scrutinise formula assumptions, such as whether a contractor could have taken new work if not delayed—a point impacted by economic conditions. Profit claims often presume a constant margin, but formulae are only estimates, not actual costs. The SCL Protocol advises relying on records for claims and using formulae only when necessary. Administrators should remain flexible, cross-check outcomes, and avoid rigidly applying formulae.
Methods for Delay Analysis
Overview
Delay analysis methods aim to assess causation and the effects of delay and disruption, thereby assisting in determining entitlements to extensions of time and additional costs. These methods fall into two broad categories:
Theoretical-based methods: Demonstrate the theoretical impact of delaying events.
Actual-based methods: Attempt to establish what occurred.
All methods rely to varying degrees on assumptions, subjectivity, and the accuracy of available information. Ultimately, they describe facts but do not prove entitlement.
Theoretical-Based Methods
As-planned impacted method: Analyses the theoretical effect of delaying events on the planned program and completion date. While quick and inexpensive, it does not establish actual causation and ignores changes in sequencing and schedules.
As-planned but for method: Applies contractor-caused delaying events to the as-planned program, comparing the resulting completion date to the actual date. The difference is attributed to principal-caused delay, but this method suffers from the same deficiencies as the as-planned impacted method.
As-built but for method: Works backwards from the as-built program, removing the impact of delaying events to simulate what could have occurred. However, this does not reflect actual progress.
All theoretical methods ultimately produce artificial analyses that do not represent actual events.
Actual-Based Methods
The most common actual-based method is the “as-planned vs. as-built” comparison. This requires adequate site records and compares the planned program to the actual program, factoring in changes in resource allocation. The reliability of this method increases if the original program was submitted to and approved by the superintendent, who may even have the right to order variations. In such cases, the contractor may use the program as persuasive evidence for its prolongation claim.
However, this analysis cannot account for concurrent delays, re-sequencing, mitigation, or acceleration. Ideally, the as-planned program should be periodically updated to reflect the contractor’s intentions and expectations. Due to its simplicity, this method is less suitable for complex projects.
Another approach is to rely on expert assessments of the typical time required to complete relevant works. In the absence of better methods, claims may be based on an arbitrary percentage of total labour or plant expenditure during periods of reduced productivity.
Advanced Delay Analysis Methods
Time-slice method: Employs critical path analysis to assess criticality, delay, and mitigation. The project is divided into time periods, with actual durations and progress imposed onto the as-planned program. Projected end dates for each period are used to trace the delay as it occurred.
Time-impact method: Adds causation analysis by contrasting identified delays with the contractor’s actual performance in each period, measured by production achieved. This method allows for analysis of concurrency, dominant causes, and mitigation.
The SCL Protocol advocates for the use of such thorough methods in almost all projects, recognising they are time-consuming and costly due to record-keeping requirements. However, the expense may be justified when compared to the burden of proving claims without comprehensive records.
Measured Mile Technique for Disruption Claims
To establish disruption, such as loss of productivity or interruption to progress, the SCL Protocol encourages the “Measured Mile” technique. This involves comparing productivity rates on unaffected portions of the project to those on impacted sections. This method accounts for unrealistic programs and inefficient work, as these factors are inherently included in the comparison. If adequate project records are unavailable, contractors may refer to other projects or model productivity curves for guidance. Importantly, only issues for which the employer is liable should be considered, and the contractor must efficiently manage its own changes.
Limitations of Actual-Based Methods
Actual-based methods are valuable in quantifying costs because they demonstrate, for example, the resources applied during specific periods. While they help establish causation and the effects of delay, they do not suggest ways to quantify losses, such as off-site overheads or lost profit. These methods may establish the principal’s responsibility for the delay and its duration but do not assist in quantifying lost opportunities to recover overheads or profit. The SCL Protocol recommends calculating lost profit using the contractor’s audited accounts from the years nearest to the delay events.
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