Prolongation Cost Heads in Construction Claims

When these delays arise due to factors outside the contractor’s control—like owner-caused delays, changes in scope, or unforeseen site conditions—they often create a strong basis for prolongation claims. These claims, aimed at compensating the contractor for time-related costs and lost opportunities, encompass various claim heads. A well-structured prolongation cost claim addresses each of these categories thoroughly, allowing contractors to recover expenses related to staff, machinery, and overheads, among other costs. This article will delve into each claim head, offering insights into how each type contributes to the overall prolongation claim.

1. Prolongation Cost Components: Breaking Down Time-Related Expenses

When a project extends beyond its initial duration, contractors incur additional costs across several resource categories. Key claim heads in this section include time-sensitive costs like staff and machinery, as well as essential on-site services. These costs are critical to ensuring continuous project operations.

1.1 Time-Related Costs: Resources That Drive the Project Forward

a. Staff: One of the most significant prolongation costs comes from the need to maintain essential personnel. These costs include salaries, benefits, and allowances for site-based and project management staff. Key staff members, such as project managers, site engineers, and administrative staff, play an essential role in day-to-day project functions and compliance with contract specifications. Since the contractor needs to retain these individuals for an extended period, the prolongation claim compensates for the extended staff costs.

b. Direct Manpower: Beyond staff, the labor force employed directly on-site incurs additional costs when a project is delayed. Laborers, foremen, and specialized tradespeople continue to require wages, and any extended period typically includes adjustments for wage increases due to inflation or statutory changes. Prolongation claims ensure that contractors recover these extra labor costs and account for increased wages resulting from longer-than-expected project durations.

c. Plant & Machinery: The costs of machinery and equipment represent another substantial portion of time-related expenses. These include both owned and rented machinery, each incurring unique costs when a project is extended. For owned machinery, contractors must consider depreciation, maintenance, and operating expenses. For rented equipment, prolongation claims may recover extended rental fees. Additionally, delayed machinery use may lead to opportunity costs, as equipment cannot be allocated to other projects, further adding to potential losses.

d. Site Facilities - Running Expenses: Maintaining site facilities over a prolonged period includes expenses like utilities, security, cleaning, and waste management. Extended delays mean that temporary facilities (like site offices, worker accommodations, and storage units) continue to consume resources. Running expenses also cover communication systems, safety equipment, and general upkeep, each of which adds up during an extended period. These facilities remain essential for compliance and project administration, ensuring uninterrupted work continuity.

1.2 Overhead Recovery for Extended Duration

a. Types of Overheads in Extended Duration

• Site Overheads: These are costs specifically tied to the project site, including site office rentals, site staff wages, security, utilities, and temporary facilities. Extended delays may lead to additional site overhead costs due to prolonged utilization of these resources.
• General (Home Office) Overheads: These represent the costs of running the contractor’s main business operations, including salaries for executives, legal and accounting expenses, IT services, and office utilities. Prolonged project timelines require continued support from the home office, increasing these costs over the delay period.
• Unabsorbed Overheads: When delays slow down work or lead to idle time, overheads initially allocated to the project are not fully utilized, leading to what’s known as "unabsorbed" overheads. Contractors may claim these unabsorbed overheads as a part of overhead recovery.

b. Calculating Overhead Recovery in Extended Durations

- Hudson Formula

The Hudson Formula calculates unabsorbed home office overheads during delays by proportionally distributing overhead costs based on the contract sum and delay duration. It’s simple but assumes a direct correlation between overheads and contract value.

- Eichleay Formula

The Eichleay Formula calculates daily home office overheads during delays, especially when work is suspended, and no replacement project can be undertaken. It’s precise but requires detailed financial data and a specific contractual context.

- Emden Formula

The Emden Formula, allocates overheads by adjusting for time spent on variations, making it ideal for projects affected by additional work or delays. It provides flexibility by considering contract variations that impact the project timeline.

1.3 Delayed Release of Retention

Clients usually withhold a percentage of the contract value as retention money, released after the project’s successful completion. If the client delays this release, it directly impacts the contractor's cash flow, as the withheld amount represents potential working capital. Prolongation claims for delayed retention release ensure that contractors recover costs associated with holding back their financial resources, enabling them to claim interest or damages for the delay.

1.4 Insurances, Bonds, and Bank Guarantees

Projects often require contractors to maintain various forms of insurance and financial guarantees, such as performance bonds and bank guarantees, which assure the client of project completion. Extended project timelines mean these instruments must also extend, incurring additional costs, premiums, or renewal fees. Contractors can include these extra expenses in their prolongation claims, ensuring they’re compensated for costs related to maintaining compliance and risk coverage over an extended project period.

1.5 Acceleration Costs

In some cases, clients may request accelerated work to meet revised deadlines following delays. Acceleration measures often involve overtime labor, additional machinery, and strategic scheduling adjustments. Acceleration costs are incurred when contractors employ resources to compress work schedules or increase productivity rates. Through prolongation claims, contractors can recover the additional costs associated with meeting tight deadlines after delays.

2. Claims Due to Breach: Addressing Indirect Losses

Prolongation costs also encompass claims due to breaches of contract or other failures by the client. These indirect losses include lost profit, price escalations, and other opportunity costs associated with delayed project completion.

2.1 Loss of Profit

Extended project durations mean the contractor cannot pursue new projects, thereby impacting potential revenue streams. Loss of profit claims aim to compensate the contractor for lost opportunities by calculating potential revenue based on the contract’s original profit margin. This type of claim ensures contractors receive compensation for profits they might have earned on new projects that were delayed due to project extension.

2.2 Price Escalation

Price increases in labor, materials, or equipment add significant costs over prolonged project durations. Escalation claims, particularly in multi-year projects, account for increased costs arising from inflation, changing market rates, and statutory wage changes. A comprehensive prolongation claim addresses these escalations, ensuring contractors are compensated for costs beyond their control.

2.3 Losses on Supplier Advances

Contractors often provide advances to suppliers, expecting timely returns upon project completion. Extended timelines may leave these advances stranded, with interest costs accumulating or the need for renegotiated terms with suppliers. Prolongation claims account for such losses, covering costs for unproductive advances and their impact on contractor cash flow.

2.4 Idling of Resources

When delays prevent project progress, resources such as labor, machinery, and subcontractor services may sit idle, incurring costs without contributing to project progress. Idling claims address the losses associated with these dormant resources, allowing contractors to recover expenses for labor and equipment that remain on-site but unused due to unforeseen project delays.

2.5 Invoked Bank Guarantees

When delays occur, clients may invoke bank guarantees, which results in financial and reputational losses for the contractor. In addition to penalties, invoked guarantees affect the contractor’s creditworthiness, impacting future project financing. A prolongation claim addressing these costs allows contractors to recover losses stemming from invoked guarantees, protecting their financial standing.

3. Other Claims: Comprehensive Cost Coverage

The "Other Claims" category covers a wide range of additional expenses that contractors may face due to prolonged project timelines or client actions. These include costs related to payment delays, legal actions, and extended administrative expenses.

3.1 Pending Bill Payments

Interim payments, known as Running Account (R.A.) bills, are crucial for contractor cash flow. Delays in bill payments can lead to severe cash flow shortages, forcing contractors to take on high-interest loans to meet immediate expenses. Prolongation claims can include interest or penalty costs for delayed payments, compensating contractors for their financial strain.

3.2 Legal Expenses

Claims often lead to disputes, requiring legal expertise to ensure the contractor's rights are protected. Legal fees, court costs, and arbitration expenses all add up, especially in complex or prolonged cases. Contractors may claim these legal expenses as part of the prolongation cost claim, ensuring that all costs related to claims resolution are covered. Certain jurisdictions may restrict such claims.

3.3 Claim Preparation Charges

Preparing a comprehensive prolongation claim requires thorough documentation, cost analysis, and expert consultation. Costs associated with claim preparation are recoverable, as contractors invest time and resources into substantiating their claims. Certain jurisdictions may restrict such claims.

3.4 Loss of Business

Extended commitment to one project can mean the contractor misses out on future contracts or expansion opportunities, resulting in lost business revenue. Contractors can claim compensation for lost business by calculating potential profits based on their anticipated project pipeline.

3.5 Final Bill Interest Due to Delay

Delayed project closures often lead to delays in final bill settlement, affecting cash flow. Contractors may claim interest for delays in final bill payments, ensuring they’re compensated for lost financial value due to late payments.

3.6 Recoverable Variations in Service Tax

Tax regulations can shift during extended projects, resulting in service tax variances. Contractors may recover these variances through claims, ensuring they’re compensated for additional tax burdens.

3.7 Rental Charges for Detained Machinery

Extended project durations mean that contractors may incur rental charges for machinery that’s detained on-site longer than expected. Prolongation claims cover these extended rental fees, ensuring contractors recover expenses for machinery rental.

Disclaimer

This article provides general information on the various heads of prolongation costs in construction claims and is intended for informational purposes only. The content here is not tailored to any specific project, contract, or jurisdiction. Prolongation claims can vary significantly based on contract terms, local laws, and project-specific circumstances. Readers are encouraged to consult qualified professionals for advice tailored to their specific project needs or legal requirements. The author and publisher disclaim any liability for any reliance placed on the information provided in this article.