Securing your entitlement to relief for delay - Part 2: what a successful delay costs claim looks like

In our first article of this two-part series, we focused on successfully obtaining an EOT. While an EOT offers protection from liquidated damages levied by the principal, it does not guarantee recovery of additional costs incurred as a consequence of delay to completion of the works (i.e. crane hire, foreman salary etc.). In this article, we will explore the next steps in recovering delay costs.

Compensable cause of delay

Delay costs are a creature of contract. If a contract does not address delay costs, any claim for delay must be classified as a claim for damages, which cannot be determined by an adjudicator. Accordingly, contractors must ensure they have a clear contractual entitlement to delay costs for principal-caused delays. Clause 34.9 of AS 4902-2000 provides that, where an EOT has been granted and the EOT is for a ‘compensable cause’, the contractor is entitled to ‘delay damages’ for every day of the EOT provided they submit a claim in accordance with clause 41.1. A compensable cause refers to an act, default or omission of the superintendent, the principal or its consultants, agents or other contractors (not being employed by the contractor).

Principal-friendly contracts will often limit the definition of ‘compensable cause’ to encompass only breaches of contract by the superintendent, principal and its agents. A principal may argue that because clause 34.9 uses the term ‘damages’, it is only natural that they relate to a breach of contract. However, that is not the intended objective of the delay costs entitlement. The entitlement serves to compensate a contractor for costs resulting from a delaying event caused by the principal (i.e. principal directed changes in the works). Contractors should insist on the unamended definition of ‘compensable cause’ and use the term ‘costs’ in place of ‘damages’ in clause 34.9 in order to preclude the suggestion that the claim is purely for ‘damages’ as in relation to a breach of contract.

In addition to your EOT claim, you will need to submit a delay costs claim under clause 41.1 of the contract for any costs that have resulted from a ‘compensable cause’ of delay. Clause 41 of most principal-friendly AS4902 contracts:

1. require the contractor to submit a notice of claim (for claims other than EOTs and variations) within 10 business days of the date on which the contractor became aware, or should have become aware, of the events on which the claim is based; and
2. provide that a failure to submit a notice of claim will invalidate the contractor’s claim.

Your delay costs claim should refer to your EOT claim. The notice should identify the cause of delay event, explain how the event qualifies as a ‘compensable cause’, and demonstrate your additional costs, with all supporting documentation. All claims must be for costs incurred by the contractor as a direct result of the delay and within the period of the EOT.

Delay vs. Disruption

Delay and disruption often coincide, but there are important distinctions to be made between the two. Delays are specific, singular events that result in particular works starting or completing later than originally planned. Disruption refers to reduced efficiency in a contractor’s works due to disturbance or interruption caused by individual or multiple delays. Often, it is difficult to confine a disruption claim to the EOT and delay cost provisions under a construction contract.

Contractors should avoid referring to ‘disruption’ costs in their delay costs claims. As a general rule, disruption costs associated with inefficiencies have a lower prospect of success at adjudication versus claims for preliminaries and other direct delay costs. Respondents to claims under BIFSOPA will typically argue that disruption claims cannot be awarded by an adjudicator because they are damages claims.

Quantifying your delay costs

In formulating delay costs claims, contractors often adopt their tender rates for preliminaries items and multiply the rates by the period of over-run. Claims formulated this way often do not reflect the true cost incurred during the period of delay and are vulnerable to arguments that the quantum of the costs is purely theoretical.  

Alternatively, a contractor might take their preliminaries as a whole, deduct fixed items and then divide by the duration of the project in order to arrive at a daily rate. The contractor then multiplies the daily rate by the number of days of compensable delay. There are two flaws in this method. First, this calculation can only be made after project completion, as the total costs and duration cannot be known before this time. Second, this method utilises an average daily rate under the assumption that each day on the project can be priced the same. Preliminaries or overhead costs typically manifest a bell-shaped curve. Beginning at a modest amount following commencement of the project, with an exponential rise and a plateau at a high rate for a period, followed by an eventual gradual decrease as a project nears completion and handover. By dividing the total expenditure of preliminaries by each day spent on the project, the costs will either be over- or under-estimated depending on when the delay event occurred.

Below is a diagram to illustrate this concept:

Claims formulated by these methodologies are likely to be rejected by the principal and an adjudicator, as the contractor has failed to clearly demonstrate that the costs were incurred as a result of the delay. A more appropriate method is to first consider the direct impact of the delay, such as stand down or relocation costs for labour or subcontractors. Once the direct costs have been captured, consider whether additional running costs have been incurred. A practical approach to calculating additional running costs is to first ascertain the average actual time-related costs during the delay periods. This can be achieved by utilising the following techniques:

1. identify and review running costs by a detailed analysis of account records, costs reports, project costs ledger, payroll, invoices etc.;
2. link the indirect time-related costs to the delay;
3. demonstrate that the costs being claimed were unavoidable.

The average daily rate during the period of delay can then be multiplied by the number of days of overrun and added to the direct costs to calculate the total cost of the delay.

Contemporaneous records

The nub of any successful delay claim is being able to establish with contemporaneous project evidence the following:

1. The event: the event to be identified as a fact, e.g. late supply of information to the contractor by an authority.
2. Liability: determined by interpretation of the contract.
3. Effect: the change to the planned progress of the works as a result of the event.
4. Compensation: the actual costs incurred as a result of the effect of the event.
5. Causation: the causal connection between the event, effect and compensation.

The records you rely upon should ideally be included as attachments to the delay claim submitted to the principal. The importance of reliable as-built documentation and detailed contemporaneous record-keeping cannot be overstated. When it comes to delay disputes, the quality of your records can make or break your case.

Conclusion

This two-part series has outlined the pre-emptive measures contractors can take to ensure success of EOT and delay cost claims, whether that be leveraging a commercial settlement or satisfying an adjudicator as to your entitlement. Each construction contract is unique and should be assessed on a case-by-case basis.

All too often we see contractors take a ‘cross that bridge when we come to it’ approach, submitting EOT and delay claims at the end of the project or after the contract completion date. By this stage, the contractor has significantly limited their prospects of successfully defending a claim for liquidated damages and recovering their delay costs.

Contractors must have set processes for each project to ensure they comply with their contractual requirements. Contractors should maintain an updated construction program, keep detailed contemporaneous records, and communicate those records to the principal as soon as possible. Ticking these boxes will go a long way to securing your entitlement to relief for delay should there be a dispute.

*As a disclaimer, this content does not constitute legal advice and should not be relied upon as such. Appropriate legal advice should be obtained in actual situations. Feel free to contact me at [email protected] should you require any assistance in resolving a legal dispute.