Loss and/or expense
Loss and/or expense
180 Must the architect or quantity surveyor consider further loss and/or expense information provided by the contractor after the quantity surveyor has prepared the final account?
Architects frequently moan about contractors who submit claims for loss and/or expense at the last minute. There can be nothing more last minute than after the contractor has submitted all the documents required under the contract, the quantity surveyor has prepared the finally adjusted contract sum, commonly known as the ‘final account’, and the architect has given it to the contractor. If all the other criteria have been satisfied, there is nothing to prevent the architect issuing the final certificate almost immediately. Sometimes, a contractor will submit a loss and/or expense submission just before the architect issues the final certificate. Under SBC, the architect has just two months to issue the final certificate after submission of the final account to the contractor if the certificate of making good has already been issued. Is the architect justified in simply rejecting the late submission and issuing the final certificate, or must the submission be considered even if it takes longer than two months?
In a case dealing with an earlier JCT contract on similar terms, the court said:
I cannot accept that the contract terms, properly construed, prohibit the provision and receipt of further information, documentation, or details about direct loss and expense after the six-month period following practical completion. Such a stringent time-bar would in my view require to be expressed in clear and unambiguous language, which I have been unable to find in the contract terms. On the contrary, the wording of [the clause in question] suggests that [the sub-contractor] are correct in their contention that the statutory [sic – the learned judge clearly meant contractual] provisions simply provide a time table to which the parties are expected to adhere.1
This appears to suggest that the architect should consider late submissions regarding loss and/or expense. Another court has suggested that the relaxation of the contractual timetable must be undertaken reasonably by the certifier and is subject to any express or implied terms agreed by the parties.2 In practice that does not get the architect very far, because only a court will be able to definitively say what is reasonable in any particular circumstances.
The provision of documents necessary for the adjustment of the contract sum is one of the three criteria which must be satisfied before the two-month period, in which the architect must issue the final certificate, starts to run. Therefore, it is arguable that the submission of further information about direct loss and/or expense has the potential to re-start the two-month period running again. If the architect rejects the information out of hand and issues the final certificate, the contractor may consider that there is a dispute and refer it to adjudication immediately. That may be the best outcome; otherwise the contractor can continue submitting information at intervals for months. Alternatively, the architect may take a short period to consider whether the information appears to add anything to what was previously submitted. If no, the final certificate should be issued. If yes, the architect should consider the information and, if appropriate, ascertain, or instruct the quantity surveyor to ascertain, the loss and/or expense. That will also necessitate a revised final account from the quantity surveyor.
181 What exactly is a global claim?
A typical global claim is where a contractor puts in a claim for loss and/or expense along the following lines: ‘The architect has issued 125 architect’s instructions requiring variations and all those instructions resulted in a delay to the completion date of 35 days. The cost of the overrun is £XXX.’ The difficulty facing the contractor is that there is no mechanism for working out how much of the total amount the contractor allowed for each instruction, so if it can be shown that some of the architect’s instructions had no effect on the completion date, the claim falls to the ground.
When making a claim either at common law for damages or under a standard form contract for loss and/or expense, it is usually necessary for the contractor to prove each part of the claim by relevant evidence. Therefore, in the example noted above, the contractor should separate each architect’s instruction and provide evidence of the effect of each separate instruction on the completion date. Sometimes a contractor will lump the entire claim together, including both prolongation and disruption, compounding the problem.
However, there are some circumstances in which a ‘global’ claim may be admissible. This principle also applies to extensions of time. The case which is usually cited in support of the global approach is J Crosby & Sons Ltd v Portland UDC.3 This case, decided under the ICE Conditions of Contract (4th Edition), established the criteria for a valid global claim.
The court held that a global approach can be justified only in those circumstances where a claim depends ‘on an extremely complex interaction in the consequences of various denials, suspensions and variations’ and where ‘it may well be difficult or even impossible to make an accurate apportionment of the total extra cost between the several causative events’. In those limited circumstances, the court said, there is no reason why an architect, engineer or arbitrator
should not recognise the realities of the situation and make individual awards in respect of those parts of individual items of the claim which can be dealt with in isolation and a supplementary award in respect of the remainder of those claims as a composite whole.
This does not, of course, relieve the contractor of producing substantiating evidence and proving each head of claim. What it does is enable the architect or quantity surveyor to adopt a commonsense method of ascertaining certain complex claims where it is impossible or totally impracticable to prove the cost resulting from each individual item. The court went on to say:
The events which are the subject of the claim must be complex and interact so that it is difficult if not impossible to make an accurate apportionment. It is very tempting to take the easy course and to lump all the delaying events together in order to justify the total overrun or total financial shortfall. That argument is justifiable only if the alternative course is shown to be impracticable.
It is doubtful that the Crosby decision can be relied upon in most cases. Contractors are faced with real difficulties if the facts are actually interconnected in such a complex way that it is not possible to separate them into different heads of claim. It is inequitable if an employer responsible for just one occurrence resulting in a claim, and for which a clear cause and effect can be demonstrated, is more likely to be made to suffer the consequences than an employer who has been the cause of many events, all of which are inextricably bound together. Perhaps because of this, the courts have continued to allow claims to be made on a global basis.4
It may be sufficient if the contractor sets out the claim in enough detail so that the employer knows what is being claimed, and in many cases it may be that the employer can quite readily calculate the amount the contractor should be paid without the necessity of the contractor having to jump through hoops in order to separate the claim into its various parts for the purpose of allocating a value to each part.
The basic position is that the contractor is entitled to put its claim in any rational way, but there may be difficulties in providing the necessary evidence if the claim is presented on a global basis. The need for a rational presentation has been re-stated in an Australian case.5 It held that where the connection between cause and loss is not otherwise apparent, each aspect of the connection must be set out, unless the probable existence of such a connection can be shown by evidence or by argument, or unless it can be shown that it is impossible or impracticable for the connections to be itemised further.
The subject of global claims was examined again from basic principles by the Scottish courts in John Doyle Construction Ltd v Laing Management (Scotland) Ltd.6 This judgment re-emphasises the point that for a global claim to succeed, the employer must be responsible for all the major causative factors. That is a point often overlooked when such claims are made.
There is nothing in the SBC, IC or ICD forms of contract requiring the architect to give the contractor the benefit of any doubt where claims are concerned. It is rather the contractor’s task to prove, on the balance of probabilities, that what it asserts is correct. It is tempting for a contractor who is faced with substantial delays to try and secure at least some additional payment by making a very broad-based global claim, but unless the architect and quantity surveyor are both half asleep, the chances of such a claim succeeding are very slim.
182 How can a contractor claim for disruption?
Disruption has always been very difficult to establish with any precision and even more difficult to ascertain in monetary terms, which is why the great majority of contractor’s claims are based on prolongation of the contract period. Prolongation is easier to understand and an easier claim to make and to deal with, although not if all parties are acting strictly in accordance with the terms of the particular standard form contract. Commonly, a contractor’s claim for disruption relies on comparing anticipated with actual labour costs. This approach is lacking in any kind of merit and it has been very seriously criticised in the courts.7 The inescapable fact is that there may be many reasons for the costs of labour being greater than the contractor anticipated at tender stage, other than reasons for which the employer or the architect can be held accountable.
An acceptable method of evaluating disruption is to compare the value to the contractor of the work done per man during a period of no disruption with the value per man during the disrupted period and then to apply the ratio obtained to the total cost of labour affected.8 It is obvious that if this method is to work, it must be possible to isolate a period free from disruption. The comparison must relate to similar work.
Disruption often affects non-critical parts of a project, but not to the extent that those parts become critical in programming terms. That is why it is difficult to formulate a convincing claim. It is usually necessary to deal with each instance separately. The laying of specialist flooring in certain parts of a building may not be critical, and there may be so much float that architect-induced delays do not cause the activities to become critical. Nevertheless, there may be serious costs involved as a result of the delay. In such instances, the contractor should provide its claim for each instance as a separate item, comparing the time it should have taken to do the work with the time actually taken.
183 Why are overheads and profit difficult to claim?
If a contractor was kept on site for longer than the contract period, it used to be accepted that the contractor would be able to recover overhead costs and loss of profit for the whole of the period of delay, provided that the delay was not due to its own fault, of course. That view is no longer correct, and the recovery of head office overheads is now quite difficult. The usual basis of claim for recovery of head office overheads is not that the contractor has actually lost the overhead sum, but that it has lost the opportunity to recover its overheads in the price of another contract by being kept on the site after the overheads allocated to that particular contract have been exhausted. The basis of the claim is that the contractor allocates a percentage of head office overheads to each project. For example, if head office overheads are £18,000 per annum and the contractor has three projects of the same contract price each lasting 12 months, it will want to recover £6,000 overheads from each project and it will add that amount to each price. If one of the contracts lasts 14 months instead of 12 months, the contractor will be looking to recover overheads for the extra two months (i.e. £1,000), which it could have earned if it had another project of the same size immediately following the first.
It follows logically that the contractor must be able to show that it had other work which it could have done during the delay period. Otherwise, in the absence of any delay, there would have been no chance of contribution from another contract during the period and therefore no loss.9 There are two kinds of overhead costs. Head office overheads include not only costs of staff engaged upon individual contracts, but also such general items as rent, rates, light, heating, cleaning; personnel costs for clerical staff and telephonists; and general costs such as stationery and office equipment. It is important to distinguish between these two elements of overhead costs, however calculated. One set of overhead costs are costs which are expended in any event – rates, electricity and the like. The other is managerial time which is directly allocable to the project and to no other.
On every contract, delay or disruption may lead to some increase in direct head office administrative costs relating not only to any period of delay but also to the involvement of staff engaged in dealing with the problems caused by disruption. For example, contract managers may have to spend more time in organising additional labour, revising construction programmes, securing staff, ordering additional materials, arranging plant hire and so on. If, however, they would not have been fully employed but for the delay, the contractor may face difficulties in recovering such costs, since it will be argued that it would have incurred these costs as part of its head office expenditure in any event. The courts have held:
it is for [the contractor] to demonstrate that he has suffered the loss which he is seeking to recover . . . it is for [the contractor] to demonstrate, in respect of the individuals whose time is claimed, that they spent extra time allocated to a particular contract. This proof must include the keeping of some form of record that the time was excessive, and that their attention was diverted in such a way that loss was incurred. It is important, in my view, that [the contractor] places some evidence before the court that there was other work available which, but for the delay, he would have secured, but which, in fact, he did not secure because of the delay; thus he is able to demonstrate that he would have recouped his overheads from those other contracts and, thus, is entitled to an extra payment in respect of any delay period awarded in the instant contract.10
The problem was that the delay was not sufficient to stop a building contractor of the size and standing of the one involved in that particular case from tendering for other work. The recovery of head office overheads as part of prolongation costs is likely to be difficult in future where large contractors are concerned. Indeed, it is always difficult for any contractor to show that it has been prevented from using its workforce on another project because the current project is delayed. In modern construction practice, much if not all of the workforce will be sub-contracted, and the types of operatives engaged during a period of delay at the end of a contract are likely to work in the finishing trades and not the early trades needed for a new project. The supervisors will often be finishing foremen.
The use of formulae for calculating head office overheads and profit was not approved by the High Court in Tate & Lyle Food and Distribution Co Ltd v Greater London Council11