Delays in Quantum and Financial Methods for Computing Costs and Damages

Construction industry

The construction industry is a major employer and contributor to global gross domestic product (GDP). It is estimated that, during 2022, the construction industry employed more than 160 million people worldwide and contributed more than US$12.5 trillion (approximately 13 per cent) of global GDP.^[2] This ranks construction as the second largest sector in the world after manufacturing, and the third largest employer behind agriculture and retail.

Unlike manufacturing, which is predominantly an automated process performed in a controlled environment (e.g., a factory production line), a construction project is generally a one-off endeavour. This could be a hospital, a highway, a system of mass transportation, or an oil and gas facility, among other things. A common thread linking these and most other construction projects is their bespoke nature.

The construction of these bespoke assets can be complex and often subject to delays, disruptions and changes, which can result in potentially significant consequences on time and cost.

Delays in construction

Construction projects require meticulous planning and resource allocation, and precise execution. These complex undertakings can only be achieved with a clear plan and a mutual understanding between the parties of their respective rights and obligations.

The parties’ time obligations will be set out in the construction contract, including, as a minimum, the commencement date and a time for completion (measured in days), from which a completion date can be derived, as well as a requirement to proceed regularly and diligently. There may additionally be sectional or milestone completion dates dealing with the completion of discrete work elements, which may or may not be directly linked to the overall completion of the project.

Provisions for extending time are included in all standard form contracts, as are parties’ relief clauses dealing with the effects of delay.

Delays in construction projects occur when project milestones or the completion of the project is extended beyond the originally planned and agreed dates. Without measures to mitigate the delay (such as acceleration), delays to construction activities that are on the critical path of the project will cause the extension of the project completion and are therefore regarded as critical delays. Critical delays that are not the fault of the contractor may give rise to contractors’ claims for extension of time and the recovery of the direct loss and expense incurred as a consequence of the delay (e.g., prolongation costs).

Not all delays are critical. Delay to activities that contain float (or slack) may take longer than originally planned but not affect the sequence of activities that are driving the overall completion of the project. To illustrate, a contractor is required to complete building A and building B by the completion date. Building A was planned to take 400 days and building B 450 days. A delay in the completion of building A of 30 days would not result in a delay to the overall project completion because the delay occurred in an activity that had a 50 days float.

A non-critical (or subcritical) delay will not entitle a contractor to an extension of time, but it does not inherently prevent a contractor from recovering any direct loss and expense that can be attributed to the non-critical delay suffered.

Standard form contracts contain mechanisms by which the time for completion can be extended. A key component of such mechanisms is the identification of risk events (i.e., the allocation between the parties for certain defined events). Standard form contracts also generally provide a notice regime, whereby a contractor is required to notify the employer of a risk event in accordance with the terms of the contract or risk time-barring its entitlement.

In a judgment at the Dubai International Financial Centre (DIFC),^[3] Panther Real Estate v. Modern Executive Systems Contracting LLC (MESC), the DIFC Court of Appeal held that the failure to provide a notice within the 28-day period stipulated under the contract was a condition precedent to the granting of an extension of time, the recovery of loss and expense, and protection from the levying of liquidated damages. At first instance, heard in the DIFC’s Technology and Construction Division, the court found the employer (Panther) was responsible for 306 of the 325 days of delay, and only 19 days could be attributed to the contractor. However, because of MESC’s failure to issue timely notice of the delay, its claim for an extension of time and loss and expense were dismissed, and a cap on liquidated damages was enforced.

In rare instances where the employer prevents the contractor from meeting its time obligations and no contractual mechanism for time extension exists, time is held ‘at large’. If time is at large, the contractor’s obligation is simply to complete the work within a reasonable time. The employer would then likely lose its ability to impose liquidated damages^[4] because, without a defined time for completion, it becomes impossible to set a date from which the employer could levy damages.

On the premise that construction contracts generally contain an extension of time mechanism, the contractual entitlements of the parties in the event of a critical delay turn on matters of causation and responsibility. For example, to claim time and money, the contractor needs to prove that the causative events that gave rise to critical delay on the project were the responsibility of the employer.

From a construction damages perspective, when considering the effect of critical delay, there are potentially four scenarios that will affect the claimants’ rights to recover its damages. In simple terms, these are:

• compensable delay: the contractor is entitled to an extension to the time for completion for some or all of the delay and the corresponding additional payment of the loss and expense suffered;
• non-compensable delay: the contractor is entitled to an extension to the time for completion for some or all of the delay, without any additional payment;
• culpable delay: the employer is entitled to levy liquidated damages against the contractor for some or all of the delay; and
• concurrent delay: the contractor will likely have an entitlement to time but the parties bear their own losses.

We consider the basis of each scenario in more detail.

Excusable delay is a term that is often used to describe delays caused by employer risk events. In the context of this chapter, this essentially means an event or cause for which the contractor bears no blame, such as delay resulting from the deferment of site access, or extreme adverse weather. In both examples, if the excusable delay extends the completion date, the contractor will be entitled to an extension of time and relief from liquidated damages. However, if the contractor is to recover loss and expense, the matter giving rise to the delay will need to be a result of a compensable event. A compensable delay event is a delay that is the fault of the employer.

In consideration of the JCT (Joint Contracts Tribunal) form, the events that give rise to extensions of time are ‘relevant events’ and those that entitle the contractor to recover its loss and expenses and ‘relevant matters’.

Taking the two examples above in turn, the deferment of the giving of possession is both a relevant event and relevant matter^[5] and, as such, the contractor potentially would have entitlement to both time and cost (a compensable event).

Conversely, extreme adverse weather is a relevant event that would entitle the contractor to an extension of time, but not a relevant matter as it is not an event caused by an impediment, prevention or default by the employer. Consequently, the contractor would not be entitled to claim for its loss and expense (a non-compensable event).^[6]

A culpable critical delay occurs when the cause of the critical delay is a defined contractor risk event or the result of a breach by the contractor of any express or implied terms of the construction contract; for example, the contractor suffered from a shortage of labour and consequently took longer than planned to complete the construction work. The responsibility to procure the resources to perform the work rests with the contractor and, therefore, it is culpable for the delays experienced.

The principle of concurrent delay holds significant implications on construction projects and has been the subject of considerable debate by courts of jurisdictions around the world and by technical construction practitioners. In Adyard Abu Dhabi v. SD Marine Services, Mr Justice Hamblen said: ‘A useful working definition of concurrent delay in this context is “a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative potency” – see the article Concurrent Delay by John Marrin QC (2002) 18 Const LJ No. 6 436.’^[7] It is considered that true concurrency is rare. In simple terms, true concurrency refers to a scenario in which the contractor delays and the employer delays commence at the same time and have an equivalent delaying effect (i.e., both delays must affect the critical path).

The occurence of concurrent delay requires consideration of the contractual obligations of the parties, liability, allocation of risk and, crucially, how to determine the temporal and financial consequences of concurrent delay in the absence of express provisions in the construction contract.

In North Midland Building Ltd v. Cyden Homes Ltd,^[8] the Court of Appeal of England and Wales (EWCA) upheld a decision appealed from the Technology and Construction Court (TCC). In this case, the construction contract contained a clause that entitled the contractor to an extension of time for a relevant event (i.e., an employer risk event) save that ‘any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account’.^[9] On the facts, the contractor experienced several delays during the course of the project, some attributable to the employer and some by its own actions. The TCC and EWCA found that the contractor was not entitled to an extension to the time for completion because it was unable to demonstrate that ‘but for’ the employer delays, it would not have been delayed in any event.

EWCA held that the contract clearly allocated the risk of concurrent delay to the contractor and that, accordingly, the outcome was not ‘uncommercial or unreal’.^[10]

In the earlier case of Adyard,^[11] concerning the construction of two ships, EWCA upheld an earlier decision from the TCC but clarified the principles on concurrent delay. On the facts, the contractor suffered delay arising from employer-responsible events, its own actions and inclement weather. In response to the contractor’s claim for a full extension of time, the employer argued that the contractor could not be entitled to an extension of time for the delays caused by its own actions.

EWCA upheld that the employer is not entitled to recover liquidated damages if it prevented the completion of the work, regardless of whether the act of employer prevention occurred concurrently with contractor-caused events.

The topic of concurrent delay is the subject of considerable legal analysis by courts around the world, academics and technical construction practitioners. The two cases briefly summarised here cannot represent the full gamut of legal and technical matters to be considered. For the present purposes, concurrent delay may give rise to an extension of time but the losses are likely to lie where they fall.^[12] It is important to note, however, that this conclusion may vary under different contract terms.

Delay analysis

The investigation of project delay and establishment of extensions of time are the subject of delay analysis.

A full consideration of the various methods of delay analysis is beyond the scope of this chapter. However, according to The Society of Construction Law’s ‘Delay and Disruption Protocol’ (the SCL Protocol), ‘there is no longer a preferred delay analysis methodology where that analysis is carried out time-distant from the delay event or its effect’. The Protocol summarises some of the more prominent approaches,^[13] which include the following:

The SCL Protocol recommends that applications for extensions of time should be made and dealt with as close in time as possible to the occurrence of delay events, and endorses using the time impact analysis method for contemporaneous delay analysis.^[14]

To give effect to this recommendation, the SCL Protocol identifies two methods of analysis that are used to determine the consequences of the delay prospectively (the impacted as-planned method and the time impact method). In this context, the term ‘prospectively’ refers to forecasting the effect of delays in the future. Under both the impacted as-planned method and the time impact method, delay events are modelled in the programme by inserting new activities for what is likely to occur in the future into a host programme and rerunning the programme. The result is a programme that reflects the forecast or estimated effect of the delay event.

However, when extensions of time are assessed after the occurrence of a delay event or its effects (i.e., time-distant from the delay event), the SCL Protocol advises that prospective methods of analysis, such as the time impact method, may no longer be appropriate.^[15] In the instance of an analysis time-distant from the event, the SCL Protocol endorses a retrospective method of analysis that starts with identifying the critical delay (the effect) and then establishes the cause of it.

The SCL Protocol identifies that four of the methods are used to determine the effects of the delay retrospectively (the time slice windows method, the as-planned versus as-built windows method, the retrospective longest path method, and the collapsed as-built method).

It is important to recognise that any form of delay analysis will benefit from a ‘common-sense’ test and to caution against following blindly the output of the many specialist suites of software available to perform any such analysis.

Non-critical delay

A non-critical delay does not affect the critical path of the project and, therefore, does not affect the overall time for completion. The consequences to a contractor of non-critical delay are primarily financial.

A contractor on a construction project is typically paid a fixed amount for a defined scope of work. This may take the form of a lump sum, or be on a remeasurement basis at agreed rates and prices as set out in a schedule of work or bills of quantities. Notwithstanding the particular form of procurement used, the amount paid to the contractor is generally measured by the volume or quantity of work performed, rather than payment being linked to the time taken to perform the work. Therefore, if a contractor takes longer than planned to perform a given scope of work (but without causing the overall time for completion to be extended), the contractor may suffer a loss. This is generally described in construction as a claim for disruption or loss of productivity.

In this context, loss of productivity (or disruption – the terms are often used interchangeably) therefore occurs when a contracting party performs an element of its work less efficiently because of an external factor. Expressed another way, the output from a fixed body of resources is reduced, increasing the cost per unit. This increased cost is typically the amount sought as compensation.

In its guidance note ‘Ascertaining loss and expense’, the Royal Institution of Chartered Surveyors provides the following explanation of disruption as a component of a claim for loss and expense:

Both disruption and prolongation are claims that can lead to loss and expense. The costs for disruption when tied to an employer/client event are generally related to loss of productivity and/or uneconomic working. This head of claim is different from prolongation costs . . . There may in fact be no delay at all, yet the contractor nevertheless incurs costs as a result of inefficient deployment of labour or plant (obviously not by his or her own volition).

If the contractor can show that the planned and actual use of labour and plant differed, and this difference can be tied to the said employer event, the contractor can recover the costs incurred by working at a different time or in a different sequence. For example, such an employer event would be late changes imposed to the construction programme by the employer.^[16]

For a claim for loss of productivity to potentially succeed, a contractor will need to demonstrate that it has been disrupted by matters for which the employer is responsible, and that a causal link exists between the disruptive events and the alleged costs incurred. The contractor may then consider matters of quantification. The preferred approach is the measured mile method, wherein the contractor compares the rate of productivity achieved on the project during an unaffected (or benchmark) period with the rate of productivity during a disrupted period.

Financial effect of delay

Delays on construction projects can have significant consequences financially beyond the extension of the project timeline. Several of the major financial consequences are considered in this chapter but this is not exhaustive.

Direct loss and expense

The quantification of a contractor’s loss and expense depends on the terms of the contract. However, it is generally understood that courts handle contractual claims based on the same principles as damages claims.^[17]

A contractor’s loss and expense, therefore, is usually an assessment of the direct expenditure incurred. This is true under JCT and International Federation of Consulting Engineers (FIDIC) standard forms, which respectively entitle contractors to recover ‘direct loss and/or expense’^[18] and ‘expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit’.^[19]

The Institution of Civil Engineers’ New Engineering Contract, however, requires delay-related claims to be assessed on the same basis as all compensation events. This means that the computation of the contractor’s loss will be assessed with reference to the rates and prices included within the contract instead of a determination of actual cost.

It is also not entirely uncommon to find bespoke forms of contract that provide a mechanism for deriving an average rate from the contractor’s preliminaries or that specify a pre-determined rate of liquidated damages.

What is recoverable?

Delay-related or prolongation costs are the financial side of a contractor’s extension of time claim.

These are the time-related costs that are incidental to the direct work and continue to accrue during the period of delay; for example, a project manager whose presence is required from the project’s commencement to its completion. In the event of a critical delay, regardless of fault, the project manager’s presence will need to be extended, resulting in additional costs for the contractor. The types of time-related costs that a contractor may incur include:

• staff;
• plant and equipment;
• power and utilities;
• insurance;
• bonds; and
• office rental and storage.

As outlined above, if the critical delay was caused by an employer-responsible event, the contractor may have an entitlement both to an extension of time and to its direct loss and expense. It is important to note, however, that although excusable delay may grant a contractor an extension of time, it may not automatically entitle the contractor to recover its prolongation costs, for example, if the delay was non-compensable or concurrent.

Although the specific provisions of the contract must be borne in mind, it is typical for prolongation costs to be based on the actual costs incurred by the contractor, as opposed to contract rates. The accepted approach is to compute an average daily cost (sometimes referred to as a ‘burn rate’), which is multiplied by a period of compensable critical delay.

Prolongation costs should be assessed at the time the additional cost was incurred. This would ordinarily be at the time of the critical delay and not at the end of the project. However, there are exceptions to this rule. For instance, bond and insurance costs in construction projects are often procured based on the intended duration of the project. As a result, calculating the contractor’s extended bond costs accurately would not involve calculating a ‘burn rate’ at the time of delay but rather using a rate derived from the bond renewal premium.

Careful consideration of the costs that were incurred because of the delay is necessary and so, costs that are one-off expenses, not time-related or would always have been incurred should be removed. These might include items of capital expenditure that are not related to the delay, mobilisation or demobilisation costs, and direct site labour and plant costs.

Depending on the project’s nature and the cause of critical delay, it might also be necessary to exclude task-specific costs. The recoverability of resources linked to discrete tasks hinges on establishing a causal connection between these resources and the critical path delay. For example, a critical project delay will not automatically extend the procurement timeline if the same goods and materials are being procured. However, critical path delays resulting from material selection changes will likely delay procurement and consequently extend the need for procurement resources.

Other heads of delay-related costs

In most instances, delay-related costs will be the most significant element of a claim for loss and expense. This chapter also considers some of the less commonly claimed financial consequences that might arise from a project delay.

Cost of material price increases

The responsibility for mitigating inflationary risks within lump sum contracts has traditionally rested with contractors. The backdrop, however, has transformed as a result of the confluence of global events stemming from the covid-19 pandemic, the continuing conflict in Ukraine, surging energy prices and the ever-present spectre of rising inflation.

These combined forces have sparked surges in construction costs and revealed vulnerabilities in intricate supply chains. Although the fervour of rising prices has subsided in recent months, there remains uncertainty and volatility within many markets.

In the context of new projects, contractors and employers may seek to share the risk through:

• price increase provisions;
• the pricing of potentially volatile inputs into the work as provisional sums;
• shifting towards reimbursable contracting arrangements. This is a trend that followed the global economic crisis in 2008; and
• negotiated finance to enable the early procurement and storage of specific materials.

However, these options may not be open to contractors and employers engaged in existing projects. As a consequence, price increase claims are becoming a prevalent theme within construction arbitration. An example, in the context of this chapter, is material price increases arising from delay and disruption. To illustrate, consider a situation in which a contractor is forced to pay a higher price for materials than it had planned because of an employer-caused delay in the approval of a particular material; that is to say, the employer delay prevented the contractor from procuring the materials when it had intended.

The way in which these claims are dealt with will depend on the specific provisions of the contract.

Escalation clauses, which entitle contractors to price adjustments, reduce the burden of having to prove the loss suffered from increased prices, which can be contentious. These may not fully compensate the contractor, however, because:

• the provisions are there to measure ‘rises and falls in the cost’,^[20] which may not always be to the contractor’s benefit;
• the mechanism may have thresholds that limit the price adjustment that can be claimed; for example, adjustment may apply only when there has been a significant increase in the rates and prices (often more than 10 per cent);
• the provisions may be limited to certain specific inputs into the work, costs or commodities and may not provide blanket protection;
• an unavailability of appropriate indices can hinder the operability of the mechanism and limit the recovery; for example, commodity pricing may not account for increases in labour or manufacturing costs. The cost of turning raw material into, say, timber products or bricks is energy intensive and will be affected by rising fuel and labour costs; and
• contractors may have to share the burden with the employer.

An alternative approach, particularly when dealing with price increases that have occurred because of project delays, is to assess the direct cost impact. Contractors may therefore claim the incremental increase in cost (i.e., the difference between the estimated cost and the actual cost incurred).

In contrast to prolongation claims, contractors may be able to recover their costs even where no entitlement to an extension of time exists, so long as it can demonstrate that the event that delayed its planned procurement timeline was the employer’s responsibility. As with other loss and expense claims, the contractors’ recovery will be subject to it showing a causal link between the event and the costs claimed. Additionally, contractors may be required to demonstrate efforts to mitigate the loss, including early procurement and storage of materials. This effort in itself may give rise to additional costs for specialist materials and have potential consequences for the commencement of warranties and guarantees.

The computation of the contractors’ loss would most appropriately be assessed by deducting the expected cost from the actual cost incurred. Quantifying the actual cost should be straightforward, with the direct expenditure substantiated by orders, invoices and relevant proofs of cost.

Difficulty in the quantification may arise when computing the cost referable to the original plan. Insofar as it is possible, contractors should rely on third-party tender quotations and buildups; however, in the absence of available contemporaneous records, contractors may revert to analogous rates and prices or indices used to discount current prices. Reliance on secondary records and published indices may open the contractor up to questions regarding the reliability of its tender. Contractors would be best placed, therefore, to ensure detailed records and third-party quotations are maintained.

The above-mentioned market forces may also give rise to claims for increased transport costs and other related claims.

Acceleration costs

In addition to the direct cost of delay, contractors may also incur additional costs in mitigating delays. Delay mitigation,^[21] and, more specifically, acceleration, has been said to have no technical meaning^[22] but is often practically considered to mean the speeding up of performance. Acceleration is defined in the SCL Protocol as:

The application of additional resources or alternative construction sequences or methodologies seeking to achieve the planned scope of work in a shorter time than planned or execution of additional scope of work within the original planned duration.

Acceleration efforts to recover delays and to meet the time for completion is usually instructed; however, contractors may seek damages for constructively accelerating because of an employer’s refusal to grant an extension of time.^[23] Contractors may attempt to accelerate performance by:

• increasing the resources deployed; this may include additional labour crews and plant and equipment;
• adding shifts or increasing working hours;
• reprogramming work so that sequentially planned activities are performed at the same time;
• thickening (i.e., increasing) the supervision resources; or
• expediting procurement and (or) delivery of materials.

If acceleration is instructed, the contractor should take proactive steps to reach an agreement on the acceleration plan, the necessary record-keeping obligations and the payment terms^[24] ahead of time; however, this practice is seldom followed. In the absence of pre-agreed measures, the onus falls on the contractor to keep detailed records, both to demonstrate the effort taken to expedite performance and to substantiate the additional cost incurred in implementing the acceleration measures.

This may sound simple, but the difficulty of distinguishing between the cost of accelerating and the cost of regular performance can be a complicated endeavour; for example, with increased resources inevitably come increased congestion, diluted supervision, loss of learning, overtime fatigue, among other things, all of which are factors likely to affect productivity. These effects frequently give rise to additional claims from the contractor and ever more intertwined cost-based issues.

Conclusion

Delays and their associated financial consequences continue to be a feature of construction projects globally. The guidance provided in this chapter to the identification of delay and assessment of potential associated costs is borne from the collected experience of the authors with construction disputes assessed at project level through to arbitration. Although the spectre of global events continues to affect construction projects, many of the typical heads of claim seen in construction disputes and considered in this chapter are not novel. Quantifying delay and the financial consequences of delay requires rigorous commitment to record-keeping and the diligent adherence to the basic principles summarised in this chapter.

Footnotes