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Head office overheads

Delay claims include different types or ‘heads’ of loss. One of the most common is a claim for head office overheads, that is the general costs of running the contractor’s business as distinct from site overheads. 

But when can you make such a claim and what do you have to do to succeed?

Strictly speaking, this head of claim is a claim for loss of opportunity to recover from a job a contribution to head office overheads, because of contract overrun. The contractor’s argument will typically be that because of delay on the job in question, he has not been able to bid for and win other work which would have earned him a contribution to his overheads.

This type of claim is considered to be a ‘direct loss’. This is very important as very often indirect as opposed to direct losses are not recoverable by the contractor. This means that loss of contribution to head office overheads is generally recoverable as a direct loss either under the contract, or if the contract claims clause is silent on this, at common law. It is however vital to check the terms of your contract as it may, although unlikely, preclude such a head of claim. 

Assuming that your contract allows recovery of head office overheads, what must you prove to succeed?

  • Establish the average head office overheads as a percentage of turnover in your company, for example, with reference to a few years’ recent accounts. There may be an issue if the overhead contribution from the job in delay was well below that, but the contractor should not have to bear such lesser percentages in any period of delay unless the contract provides otherwise, and it can be shown this was not the case with other jobs being won.
  • Strictly speaking you should also have to provide some level of evidence that you have in fact suffered a loss. This might for example be done by showing that you had to turn away other work, or at the very least that there was other work available, or by showing a reduction in turnover.   

Since it can be very hard to prove the extent of your loss, the court may allow you to calculate this by reference to a formula - the most common are Hudson and Emden - which uses the established percentage. The Hudson formula, for example, applies the percentage contribution to the contract value and period of delay, divided by the original contract period. 

So even where you perceive you may have difficulty in definitively establishing your loss, it is still a head of claim worth pursuing. If you don’t ask; you don’t get.

Fiona Rossetter is a senior associate Dundas & Wilson CS LLP

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