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How to recover your losses

In pursuing claims the contractor’s aim must be to maximise recovery. By Fiona Rossetter

This involves identifying all types of recoverable losses - here are the most commonly pursued and how to succeed.

Prolongation

Typically a claim for increased preliminaries over the delayed period – this is often the easiest loss to establish. The recoverable costs are those incurred during the actual period of delay rather than the period of overrun.

Increased site staff/overheads claimed during the original contract period, not just the prolonged period – known as thickening of preliminaries – are not as easy to prove because of the difficulty in establishing cause and effect.

Disruption

This is essentially unproductive labour costs including those of any subcontractors arising from employer related events. It is notoriously difficult to prove but general principles are:

  • Some form of proof is necessary; simply adding a percentage to tendered labour costs is not acceptable. 
  • The accepted method is to analyse actual labour costs for the disrupted period against the anticipated costs, extracted from the original contract price. This can be complicated by building in the effect of changes.
  • Note however cost minus recovery is unlikely to succeed as a method of calculation without some very strong back up evidence. 

Head office overheads and loss of profit

There are a number of formulae used to calculate these. The Emden formula (which takes its name from the legal textbook it is published in) is preferred over Hudson. It has been approved by the courts (Norwest Holst versus CSW, for example) but must be accompanied by some evidence to back up the loss claimed, such as evidence that there was other work on offer. 

Only a percentage of the formula may be allowed – for example in the Norwest Holst case, 20 per cent of the formula was allowed. For loss of profit due to reduced turnover, a contractor must show that he could have used the lost turnover profitably. In periods of recession, where a contractor’s workload may be slim, such claims will be even harder to establish.  

Financing charges

This covers the cost to the contractor of having to fund the claims himself. General principles are:

  • It is categorised as “loss and expense” or it is calculated on a compounded basis.
  • The recoverable rate varies. If the contractor is in overdraft, then the rate should be easily ascertainable. If however he is in credit, then the contractor will have to evidence his typical rate of return. 
  • The underlying claim must still arise from an event for which the employer is responsible and ought previously to have certified payment. 

So while identifying and evidencing all types of recoverable losses can be time-consuming, at the end of the day it may pay do to so.

Fiona Rossetter is an associate in the construction practice at UK law firm Dundas & Wilson.

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