Articles

29 February 2024

When projects get delayed, costs pile up quickly for all parties involved. But determining who bears responsibility for extra expenses incurred can be a complex matter involving prolonged negotiations and legal claims.

While there's always going to be delays in construction, who is responsible for the costs incurred? And how can they be reimbursed?

The risky nature of construction

Construction is inherently a risky business, and when delays arise on a project, the timeline and costs can increase substantially if not adequately mitigated. Determining accountability for these costs involves comprehensive legal and technical review.

Many standard industry contracts contain stipulations assigning liability for specific delay events or cost impacts to the responsible party. However, a solid claim requires careful reconstruction of the sequence of events from project records to identify initial triggers.

When the fault lies with the other party

Contractors can submit claims for additional time and cost as a consequence of delay, however, the right to recovery will depend on whether the delay is compensable or not.

Construction contracts typically contain clauses that outline when contractors have the right to make claims for additional time and costs related to project delays.

Clearly distinguishing between the different types of delays is important when establishing the validity to claim these costs.

Excusable and compensable delays – delays that would entitle the contractor to claim additional time and attached costs. These delays are often caused by events which are the fault of the other contracting party such as the owner or developer.

Excusable and non-compensable delays – delays which limit the contractor to claim only the additional time. These delays are usually related to uncontrollable or neutral risk events such as adverse weather disruptions, civil commotion, and force majeure.

Inexcusable delays – delays stemming from the contractor’s fault. These delays would not provide entitlement to recover time and associated costs. 

Concurrent delays –delays made up of complex circumstances with multiple overlapping issues/parties involved, which often hamper clear event linkage to cost implications and recovery.

Prolongation claims and challenges in quantifying costs.

When clients fail to fulfil design obligations, make decisions to introduce changes, or approve work scopes on schedule, the contractor may be reimbursed for prolonged costs under standard contract terms.

This type of claim is used by contractors to recover costs under the contract for events which the owner or developer are responsible for, such as delayed access to the site, late provision of design information, instructed changes and variations.

Dependent on the requirements of the contract, these claims for compensation attached to additional time, need to follow legal principles, and focus on actual costs that have been sustained. The contractor or subcontractor must demonstrate a direct link between the delay impacts and the claimed costs. 

When submitting claims for prolongation, contractors and subcontractors should be aware of potential errors such as inadequate notice provision, poor record-keeping, speculative or unsupported cost submissions, failure to link costs to the delay, all of which can result in the claim being undermined or unsuccessful.

Criteria for claiming costs 

As a rule, for a cost to be recoverable in a prolongation claim it should be impacted by the project delay and therefore considered as time related. Some examples of these time related costs are as follows:

• Staff responsible for the management and supervision of the works.
• The site offices, accommodation, and welfare facilities.
• Lighting, water and power supplies.
• Attendant site resources and labour, such as cleaning staff, welfare, and general labour.
• Performance bonds and insurances.
• Plant and equipment which is site wide and not directly related to a specific task or work activity.

A party seeking to recover prolongation costs must consider the type of costs which are not eligible. Generally, resources which are used to carry out specific tasks for activities which are not on the critical path, would not necessarily be included in a prolongation cost claim. Instead, recovery for costs of this nature could be considered as part of a disruption claim.  

A party must also understand that one-off costs cannot be recovered, on the basis these are not related to time. Examples would include the mobilisation of plant, repatriation flights for staff, set up costs for site offices and accommodation.

Why a little documentation goes a long way. 

A major challenge contractors face when valuing a claim is providing adequate supporting records to demonstrate prolonged costs.

Accurate record-keeping is far more important than many people realise, and contemporary records should be double checked regularly to ensure they only reflect actual prolonged costs and causal impacts from compensable delays.

Timesheets, supervisor logs, ledgers etc. can all provide the verification, accuracy and transparency needed to support the claim – however care should be taken to quantify the claims in accordance with accepted principles, this means no provisional allowances, broad calculations or estimated amounts. 

A good cost accounting system can help segregate prolongation expenses for clear reporting, from prohibited cost types that are excluded from prolongation claims to avoid potential disputes, and an impartial audit can help strengthen the credibility of a claim.  

By ensuring only allowable expenses and supplementary costs that strictly adhere to legal and contractual provisions are claimed for. If in doubt, secure expert guidance to ensure compliance.

Staying on top of the following records is especially critical for contractors and subcontractors to justify cost claims:

• Ledger and accounting data
• Timesheets
• Plant allocation sheets
• Salary and employee cost records
• Subcontract agreements
• Supplier agreements
• Cost statements
• Purchase orders
• Invoices
• Payment records to suppliers and subcontractors

Contractual distinctions

It is common for most construction contracts to include provisions that govern prolongation claims, such as acceptable delay causes, proof formats, deemed cost quantification methodologies, and the process for submitting the claim.

However, a number of significant prolongation cost recoveries have been prevented due to contractors ignoring or failure to acknowledge their duties in regard to notification clauses.

It is also important to clearly identify which events qualify for an extension of time and which allow the compensation to be claimed for the additional time as defined by the governing contract and relevant clauses. 

While time extensions might be warranted, remember the contractor will not automatically have entitlement to compensation unless it is specified explicitly in the contract.

Best practices for contractors

Recovering costs caused by compensable events largely depends on the accuracy and consistency of records and calculations.

For that reason, following contractor best practices throughout a project will greatly improve a contractor's chances of being reimbursed for any prolongation costs incurred.

As early as the bidding stage, proactively planning for contingencies in terms of risk and costs is wise.

Once engaged on the job, it is just as important to establish stringent procedures for defining schedules, issuing change orders, documenting on-site events, tracking costs by work package, and maintaining project controls.

As the project progresses, validation checks conducted regularly can ensure that delays, change impacts, direct expenditures, and broader measures of productivity are recorded. 

Even though keeping detailed documentation during a project’s timeline can seem excessive at times, meticulous record-keeping of documents can hugely strengthen a claim down the road- while extra steps like undertaking third-party audits and assessments can also identify documentation gaps early.

Lastly, continually alerting clients to any associated prolongation costs so that they too are kept in the loop in the event of delays and extended timelines is considered good business practice and can safeguard client relationships in the future.   

By following these best practices, contractors and subcontractors will be in a better position to compile solid prolongation claims, while maintaining positive client relationships.

Contributed by:

Craig Sandison - Associate Director, TBH (Dubai)