THE COST OF DELAY AND DISRUPTION

Document Sample
THE COST OF DELAY AND DISRUPTION Powered By Docstoc
					CONTINUING PROFESSIONAL DEVELOPMENT




    MAXIMUM PERIOD 3 HOURS




THE COST OF DELAY AND DISRUPTION




             BY



       ROGER KNOWLES
THE COST OF DELAY AND DISRUPTION

ADDITIONAL COSTS RESULTING FROM DELAY

Financial Losses

Delays to construction projects will invariably involve the contractor in financial
losses unless these losses can be recovered from the employer. Whether they can be
recovered will depend upon what events gave rise to the delay and whether under the
terms of the contract the employer has taken the financial risk of them occurring. In
addition the contract may set out a procedure to be followed by the contractor relating
to claiming payment of the money involved. If the contractor ignores the procedure
the entitlement to payment may be adversely affected.


Events Giving Rise to Losses

In most standard forms of contract losses or costs resulting from delays to the
progress or completion of the works if caused by the employer his Architect, Engineer
or persons for whom he responsible will be recoverable by the contractor. Standard
forms of contract deal with this matter in different ways. The JCT 98 and 05 contracts
for example provide an all embracing entitlement which covers costs resulting from
impediments, prevention or default by the Employer, Architect, Quantity Surveyor or
any of the Employer’s Persons. By way of contrast the ICE 6th and 7th Editions
includes for the recovery by the contractor of costs resulting from delays caused by
the Employer and Engineer in several different clauses throughout the contract. For
example if the contractor incurs extra costs as a result of the Employer providing
possession of the site late then clause 42 provides for the recover of these costs.
Where the Engineer provides late information required by the contractor and as a
result the contractor incurs additional cost clause 6 allows the contractor to be
reimbursed those extra costs. The NEC has a different approach to the matter. All
delays and cost matters which under the terms of the contract are at the risk of the
employer are catered for in one clause and styled compensation events.

Variations/Change Orders

It is important from the employer’s point of view for the conditions of contract to
include a clause which permits the work described in the contract to be altered. In the
absence of a clause of this nature the employer would be unable to amend the design
during the construction of the works. This could prove difficult if variations to the
design became necessary due to changes in technology or legislation. Without a
variations clause the contractor could refuse to undertake them even if such a change
were essential. Alternatively the contractor could carry out the work on the basis that
it constituted a separate contract. All standard forms of contract therefore have a
variations clause. It is vital that the contract provides a definition of variation to
ensure that it is clear as to the extent to which the work may be altered. The JCT 98
and 05 contracts have a wide ranging variations clause which allows the Architect to
alter or modify not only the design of the works but also the hours of work and the
order in which the work is to be carried out. The ICE Design and Construct Form
deals with alterations to the Employer’s Requirement but there must be consultation
with the contractor’s representative before the amendments can be ordered.
Variations if issued at a late stage or involve significant extra work will inevitably
result in delay and additional cost being incurred. Standard forms of contract deal
with this problem in different ways. JCT 98 and 05 expressly provide for the
contractor to be reimbursed if a variation affects the progress of the works and as a
result the contractor incurs loss or expense. The I Chem. E Lump Sum and the NEC
contracts contain a procedure whereby the contractor is required to submit a quotation
in respect of each variation which will no doubt include delay costs.

Ground Conditions

Many contracts particularly where a substantial amount of work occurs below ground
will specifically deal with the risk of encountering difficult ground conditions. If the
contract is silent on the matter the contractor, who is in most cases contractually
obliged to undertake and complete the works, will bear the risk of any delay and extra
cost resulting from encountering bad ground conditions. The ICE 6th and 7th Editions
include the notorious clause 12 under which the contractor is entitled to recover any
additional cost which results from bad ground conditions. It is not an open ended
entitlement however as it only applies if the conditions encountered could not
reasonably have been foreseen by an experienced contractor. The NEC contract is
similar but from a contractor’s point of view more onerous. This contract allows the
contractor to claim more time and money only if at the date the contract came into
existence an experienced contractor would have considered that the ground conditions
ultimately encountered only had a small chance of occurring.

Financial Reimbursement

Having established that the events which have lead to the delay represent an
employer’s risk and that as a result the contractor has suffered delay and incurred
additional cost, the question to be answered is the amount of money which under the
terms of the contract will become due to the contractor. Nothing is straight forward as
the standard forms of contract deal with the problem in different ways. Under ideal
circumstances the contract would provide a definition, free from ambiguity, as to the
contractor’s entitlement. The ICE 7th Edition is helpful in this respect in that the
contractor’s entitlement is specifically referred to as additional cost which is defined
as:
expenditure whether on or off the site including overhead, finance and other
charges (including loss of interest) properly locatable thereto but does not include
any allowance for profit

 The JCT 98 and05 contracts are less helpful as they merely refer to direct loss and/or
expense without providing a definition as to its meaning. One has to turn to an
established text book such as Keating on Building Contracts to provide assistance.
Briefly it states that direct loss and or expense means loss or expense which arises
naturally and in the ordinary course of things. This type of definition is vague and
leaves the gate open to many and varied disputes when it comes down to real live
situations. The NEC contract approaches the problem in a different manner. Where
delay and additional cost is or is likely to occur as a result of a compensation event
such as a delay caused by the employer, the Project Manager may require the
contractor to submit a quotation. This will include actual defined cost of the work
already done, together with a forecast of the defined cost of work yet to be done plus a
fee which includes profit. The definition of cost is provided in a detailed Schedule of
Cost Components included in the contract.


EVALUATING DISRUPTION

Problem Areas

One of the most difficult items to evaluate with any accuracy is disruption. The
problem is usually caused by a lack of accurate records.
With the spotlight on linking cause and effect claims for disruption will come under
greater scrutiny. It is unlikely that contractors and subcontractors will succeed where
their claims for disruption are bases simply upon the global overspend on labour for
the whole of the contract working period. More detail will have to be given which
isolates the cause of the disruption and evaluates the effect.
The courts have given some assistance in the manner in which disruption should be
evaluated.

Measured Mile
The most appropriate manner to establish disruption is to apply a technique known as
“The Measured Mile.” This system provides for the comparison of productivity
achieved on an unimpacted part of the contract with that achieved on the impacted
part. This method eliminates any argument concerning underestimating and inefficient
working. An example of the Measured Mile method can be seen by reference to the
decision in the case of Whittall Builders Company Ltd v Chester-Le-Street District
Council (1985) Difficulties were experienced by the employer in giving possession of
dwellings on a rehabilitation scheme. The court found that during the period when
these problems occurred the contractor was grossly hindered in the progress of the
work and as a result ordinary planning was rendered impossible. However a stage was
reached in November 1974 when dwellings were handed over in an orderly fashion
and no further disruption took place. The court had to decide upon the appropriate
method of evaluating disruption. Mr Recorder Percival QC in his judgement has this
to say:

“Several different approaches were presented and argued. Most of them are highly
complicated but there was one simple one – that was to compare the value to the
contractor of the work done per man in the period up to November 1974 with that
from November 1974 to the completion of the contract. The figures for this
comparison, agreed by the experts for both sides were £108 per man week while the
breaches continued £161 per man week after they ceased.”

Recorder Percival used this comparison in deciding that the disruption had the effect
of increasing the labour costs in the areas where disruption occurred by one third. He
then applied the one third value to all the labour cost expended during the period of
disruption to arrive at a total loss on labour. He considered this to be the most realistic
and accurate approach which he could have taken to arrive at a figure.

The Society of Construction Law Approach


The Society of Construction Law has produced a Delay and Disruption Protocol dated
2002 in which they express a view concerning the Measure Mile approach to the
evaluation of disruption. The Protocol explains the situation as follows:

The starting point for any disruption analysis is to understand what work was
carried out when it was carried out and what resources were used. For this reason
record keeping is just as important for disruption analysis as it is for delay analysis.
The most appropriate way to establish disruption is to apply a technique known as
the Measure Mile. This compares the productivity achieved on an un-impacted part
of the contract with that achieved on the impacted part. Such a comparison factors
out issues concerning unrealistic programmes and inefficient working. The
comparison can be made on the man hours expended or the units of work
performed. However care must be exercised to compare like with like. For example
it would not be correct to compare work carried out in the learning curve part of an
operation with work executed after that period.


More Measured Mile

In the case of John Doyle Construction Ltd v Laing Management (Scotland) Ltd
(2004) the court was asked to express a view as to whether a measured mile approach
in principle is acceptable. Laing Management was the contractor in connection with a
new corporate headquarters for Scottish Widows in Edinburgh. A number of works
packages were contracted out to John Doyle and disputes arose as to the entitlement
under the package contract to Doyle’s financial entitlement. A part of the claim
related to disruption and the evaluation was produced by comparing labour
productivity actually achieved on site when work was largely free from disruption
with labour productivity achieved when work was disrupted. It was decided that this
method of evaluating a claim was not a total cost claim and therefore in principle was
acceptable

Total Cost Claims
Contractors with little in the way of records where they have incurred losses on labour
as result of action or inaction by the employer his Architect or Engineer often
approach the production of a claim by comparing the actual cost expended on labour
with the sum included in the tender. This method is likely to be unsuccessful as there
may be any number of reasons why the labour costs were greater than the allowances
in the tender. There may for example be errors in the tender, loss due to the risk
undertaken by the contractor for which no proper allowance was made in the tender,
inefficient working and correcting defective work. A more realistic approach although
not guaranteed to be anything other than broad brush is to take as a starting point the
total labour cost for the project. Deductions are then made for tender errors, unpriced
risk, inefficiency and defect rectification. The labour element of any variations and
changes and additional cost claims would also have to be taken into account. This
would leave a sum, once the tender allowance had been deducted, which at least
theoretically represented the cost of disruption. This type of claim has been
successfully pursued in the USA but there seems very little enthusiasm shown for it
among employers and their consultants in the UK. In the earlier mentioned case of
John Doyle Construction Ltd v Laing the court was asked to review a total cost claim.
It had been argued that if a total cost claim is pleaded and it can be shown that some
element of the cost has resulted from fault on the part of the contractor the claim in its
entirety will fail. There was sympathy express by the court as to this view but it was
felt that the whole matter should be treated with common sense. The decision of the
court was that if a total cost claim is to succeed the contractor must eliminate from the
claim all costs that are not the responsibility of the employer. He considered that total
cost claims are a risky business but nonetheless allowed proceedings to continue.



Calculation by Assessment

It may not be possible due to the nature of the disrupting matters and the complexity
of the project to employ the measured mile approach to evaluation. Therefore it may
be appropriate to attempt to isolate the additional hours of labour and plant which
results from the events giving rise to disruption. A schedule of matters which have
caused disruption should be prepared which sets out each disrupting event indicating
the additional labour and plant hours expended. Schedule JRK/DS/1 which is annexed
to this module can be used for the purpose.
Difficulties may be encountered in isolating the additional hours of labour and plant
which result from each and every disrupting matter. The courts however have
provided assistance in dealing with this problem. In the case of Chaplin v Hicks
(1911) it was held:

Where it is clear that there has been actual loss resulting from the breach of
contract which it is difficult to estimate in money, it is for the jury to do their best to
estimate, it is not necessary that there should be an absolute measure of damages in
each case.

The Canadian case of Wood v The Grand Valley Railway Co (1913) involved a
dispute where accurate ascertainment of damages was proving difficult and it was
held:

It is clearly impossible under the facts of that case to estimate with any thing
approaching to mathematical accuracy the damages sustained by the plaintiffs but
it seems to me to be clearly laid down there by the learned judges that such an
impossibility cannot relieve the wrongdoer of the necessity of paying damages for
his breach of contract and that on the other hand the tribunal to estimate them
whether jury or judge must under such circumstances do the best it can and its
conclusion will not be set aside even if the amount of the verdict is a matter of
guesswork.

Another Canadian case Penvidic Contracting Co Ltd v International Nickel Co of
Canada Ltd (1975) also provides some guidance on the manner in which disruption
should be evaluated where anything like an accurate evaluation is impossible. The
dispute arose out of a construction agreement to lay ballast and track for a railroad.
The owner was in breach in several respects of its obligation to facilitate the work.
The contractor who had agreed to do the work for an ascertained sum per ton of
ballast claimed by way of damages the difference between that sum and a larger sum
that he would have demanded had he foreseen the adverse conditions caused by the
owner’s breach of contract. There was evidence that the larger sum would have been a
reasonable estimate. At the hearing damages were awarded on the basis claimed but
on appeal to the Court of Appeal this portion of the award was disallowed. On further
appeal the Supreme Court of Canada held, restoring the trail judgement, that where
proof of the actual additional costs caused by the breach of contract was difficult to
properly calculate it was proper to award damages on the estimated basis used at the
trial. It was considered that the difficulties of accurate assessment cannot relieve the
wrongdoer of the duty of paying damages for breach of contract.

It can readily be seen from these cases that even though accurate records are not
available if the claim relates to what would amount to a breach of contract by the
other party them in many instances evaluation of the claimants entitlement may be the
subject of assessment. It is unlikely however that the amount awarded will be any
thing like as high as would be the case if accurate records had been kept.

Notices and Procedures

Standard forms of construction contract have not been drafted to make life easy for
contractors. Clauses under which the contractor is entitled to recover additional cost
as a result of delay and disruption inevitably require the contractor to produce
information in support of the entitlement. JCT 98 and 05 require the contractor to
submit a notice as soon as it becomes apparent that the progress of the works which
caused the loss has occurred. Further supporting information will have to be provided
to support the claim, if requested by the Architect or Quantity Surveyor. The ICE 6th
and 7th Editions are more onerous in that a notice must be sent within 28 days of the
event giving rise to the claim. There is a sensible requirement that the contractor must
maintain contemporary records which are necessary to support the claim. Before any
payment becomes due the contractor must send a first interim claim providing full and
detailed particulars of the amount claimed and the grounds on which the claim has
been made.
Contractors who fail to comply with these provisions may find that it has dire
financial consequences. The NEC 3rd Edition makes it clear that if the contractor fails
to notify the Project Manager of an event which he considers is a compensation event
within 8 weeks of becoming aware of it then he is not entitled to a change in the Price.
Whist JCT 98 and 05 are not so draconian in their wording; the courts in decisions
such as London Borough of Merton v Stanley Hugh Leach (1985) have made it plain
that a failure by the contractor to serve the appropriate notice will result in a loss of
financial rights. By contrast the ICE 6th and 7th Editions are quite mild. A failure on
the part of the contractor to comply with the requirement of the contract will only
result in loss of financial rights if as a result of the contractor’s non-compliance the
Engineer has been prevented from or substantially prejudiced by the failure to
investigate the claim.
Delay and disruption which results in the contractor incurring additional cost are
common place. The standard forms are designed to ensure that the contractor provides
notification early to enable the matter to be properly dealt with by the Architect or
Engineer whilst the matter is still fresh in the mind and records can be maintained.
The drafters of the forms and courts seem to take the view, not unreasonably, that if
the contractor is to claim more money he must comply with the requirements of the
contract or risk losing his rights. Many contractors unfortunately learn this lesson
when it is too late.
TEST QUESTIONS AND ANSWERS

TEST QUESTIONS


Question 1

Give two examples of the type of events which under many of the standard forms of
construction contract give rise to an entitlement for the contractor to claim the
recovery losses which result from delays?


Question 2

How does the NEC contract differ from most other standard forms of construction
contract in the manner in which it deals with claims for additional time and cost?


Question 3

How do the standard forms of contract in general use deal with the allocation of risk
relating to bad ground conditions?


Question 4

What is the measured mile method of evaluating disruption and give an example?


Question 5

What is a total cost claim and does it contain any flaws?


Question 6

What is evaluation of disruption by assessment and when can it be used?


Question 7

Is there legal support for the argument that in the absence of a proper written notice
the contractor will lose entitlements to additional cost which results from delays
which under the terms of the contract are at the risk of the employer?
MODEL ANSWERS


Question 1

Examples of events which under many standard forms of construction contract give
rise to additional costs which results from delays:

   1. Late issue of information by the Engineer or Architect to the contractor

   2. Late possession of the site by the Employer.


Question 2

Under most standard forms of construction contract provision is made for the granting
of extension of time for completion of the works and the payment of additional cost
which results from the delays in separate clauses in the contract.
The NEC contract deals with these matters in a different manner. Entitlements for
extensions of time and payment of additional cost are included in a single clause.
They are all referred to as compensation events and in respect of all of the events to
which the clause refers there is an entitlement to both an extension of time and the
payment of additional costs.


Question 3

With regard to the risk of delays and additional cost which may result from the
contractor encountering difficult ground conditions the ideal exists if the contract
makes it clear who carries the risk. If the contract is silent but places an obligation
upon the contractor to carry out and complete the works then all the risk for delays
and additional cost which results from encountering bad ground conditions will lie
with the contractor. Some contracts are prescriptive as to how the risk of bad ground
is to be dealt with. There may be a sharing of risk as in the case of the ICE 6th and 7th
Editions. Clause 12 in these conditions provides for the contractor to be granted more
time and additional cost where ground conditions are encountered which could not
reasonably have been foreseen by an experienced contractor.

Question 4

 The measured mile is a method of evaluating disruption. It is a system whereby a
comparison is made between productivity achieved on an unimpacted part of the
contract with that achieved on an impacted part. In the case of Whittall Builders
Company Ltd v Chester Le Street District Council (1985) difficulties were
encountered by the employer in granting possession of the site which resulted in the
contractor’s work being disrupted. The evaluation of the disruption was calculated by
comparing the output per man week achieved when work was disrupted with that
achieved when there was no disruption which produced a net additional labour cost.
The court approved this method of calculation.
Question 5

The total cost claim is often used by contractors who have failed to retain good
accurate site records. Losses incurred as a result of actions or inactions on the part of
the Architect or Engineer are under this method calculated by comparing the actual
cost expended upon labour with the sum included in the tender. This method is flawed
as it ignores any additional costs which may have been incurred as a result of errors in
the tender, loss due to the risks undertaken by the contractor for which no proper
allowance has been made in the tender, inefficient working and correcting defects. A
more realistic approach which is little more than broad brush is to take as a starting
point the total cost of labour for the project. Deductions are then made for tender
errors, unpriced risk items, inefficiency and defect rectification. The labour element of
any variations to the works and additional cost claims would also have to be taken
into account. This would leave a sum, once tender allowances had been deducted
which at least theoretically represented the cost of disruption.

Question 6

It may not be possible to adopt the measured mile approach to the evaluation of
disruption due to the nature of the work which contains little by way of repetition. It
may however be appropriate to attempt to isolate the additional hours of labour and
plant which results from the events giving rise to disruption. A schedule of events
which have caused disruption should be prepared which sets out each disrupting event
indicating the additional labour and plant hours expended. Difficulties may be
encountered in isolating the additional hours expended which result from each and
every event. It was held in the case of Chaplin v Hicks (1913) that in the case of a
breach of contract action it may be appropriate to estimate the damages to be
awarded. In Wood v The Grand Valley Railway Co (1913) it was held appropriate for
the tribunal to do the best it can in assessing damages for breach of contract. Whilst
both of these cases dealt with actions for breach of contract it is likely that the same
approach would be expected of an arbitrator with regard to a claim for additional cost
relating to a construction contract.

Question 7

Most construction contracts in which there is provision for the payment to the
contractor of additional sums of money in the event of delays will usually require the
contractor to submit a written notice to the Engineer or Architect. A question which is
often asked is would the contractor lose financial entitlements in the event of a failure
to serve the appropriate notice. Some of the contracts for example the NEC 3rd Edition
makes it clear in the wording that if the contractor fails to serve on the Project
Manager a written notice within 8 weeks of becoming aware of an event he considers
is a compensation event then he is not entitled to a change in the Price for the works.
The case of London Borough of Merton v Stanley Hugh Leach (1985) makes it clear
that under a JCT contract that a failure on the part of the contractor to serve a proper
notice relating to a claim for additional cost resulting from delay will result in a loss
of rights to recover additional cost.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:27
posted:3/6/2012
language:
pages:12