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Article 018: Delay Costs – Preliminaries – Applicable Period(s) for Cost Assessment (Cont’d)


My last article, article 017, provided a case law scenario based on Thiess Watkins White v Commonwealth of Australia[1] which examines the applicable period(s) during which delayed preliminaries costs should be assessed.


This article takes a deeper dive into what is/are the applicable period(s).  


Applicable Period(s) for Assessment of Delayed Preliminaries Costs

The primary issue in the Thiess Watkins White v Commonwealth of Australia scenario, examined in article 017, was in relation to where in the program the extra costs due to delayed preliminaries should be assessed. The Parties’, the Referee’s, and the court’s positions on this point were:


  1. In line with Thiess Watkins’ position, the Referee assessed the extra costs as if they had been incurred at the time of the relevant delay, not the period of overrun at the end of the project, and the court hearing the appeal agreed; and

  2. Commonwealth of Australia (“CoA”) argued that the extra costs only begin to bite when a contractor remains on site after the original date for practical completion as extended by reason of employer caused and neutral delays.


It was the Referee who was found by the court to be correct; that is, to assess the additional preliminaires costs due to delay as if they had been incurred at the time of the relevant delay, which is not the period of overrun. However, exactly when additional preliminaries costs are incurred because of delay is based on the facts of each particular case and, as the examples below illustrate, can vary from case to case. 

 

To help illustrate when delayed preliminaires costs should be assessed, and also when a contractor may ‘feel’ the additional preliminaires costs being incurred because of delay, this article will examine two types of project that have been simplified to help illustrate and understand these points, which in this article are referred to as:


  1. The ‘single activity / linear spend delayed project’; and

  2. The ‘multiple activity / non-linear spend delayed project’.

In relation to the ‘single-activity / linear spend delayed project’, four scenarios are provided in figure 1 below. For all four scenarios, assume a ‘linear’ spend in that the contractor has not reduced or increased its daily preliminaries resource levels, and there has been no cost escalation, from the commencement until completion of the project, meaning that its overall time-related costs per day is consistently the same for the entire duration of the project. Also, assume that no labour (direct or indirect), staff, plant and/or equipment was relocated to another project or stood down for any period of time for the duration of the project.


The final assumption is that the contractor would have completed the project as planned had there been no delay.


In relation to the ‘multiple-activity / non-linear spend delayed project’, none of these assumptions will apply.


Single Activity / Linear Spend Delayed Project


Figure 1 below provides four single-activity / linear spend project scenarios which are summarised as follows.  


  • Scenario 1 shows the project leading to practical completion which has not been impacted by delay. The single activity in this scenario is a critical path activity.

  • Scenario 2 shows a period of actual delay of one month during which the work stopped, which in turn caused the one-month ‘period of overrun’ / one-month delay to practical completion.

  • Scenario 3 shows six intermittent periods of delay which cumulatively total one month. The six delays intermittently delayed the critical path activity which in turn caused the one-month ‘period of overrun’ / one-month delay to practical completion.

  • Scenario 4 shows a period of slower working during which the contractor worked on average at about 50% efficiency over two months, which, in turn, caused the one-month ‘period of overrun’ / one-month delay to practical completion.


Figure 1 – Delay period(s) for assessment of delay costs

In relation to scenarios 2, 3 and 4 in figure 1 above, the contractor would obviously incur costs during the period(s) of actual delay, but the contractor may not suffer or ‘feel’ any additional costs due to the delay until the period of overrun. This is because, the costs incurred during the period(s) of actual delay, applying the assumptions for this scenario, would have been incurred by the contractor during that period even if there had been no delay.


Therefore, until the period of overrun at the end of the project, the contractor in scenarios 2, 3 and 4 would not have incurred any additional cost.


Where there is a ‘linear’ spend throughout the entire project in line with the assumptions made for the four scenarios in figure 1, and where there has been no disruption or any other impact to progress, the costs incurred by the contractor during the one-month ‘period(s) of actual impact’ and the ‘period of overrun’ should also be about the same.


In scenarios 2, 3 and 4, unless the contractor increased or reduced resources during the period(s) of actual impact and/or during the ‘period of overrun’, the contractor would only ‘feel’ the additional costs being incurred during the period of overrun. This was Commonwealth of Australia’s point in Thiess Watkins. However, where the contractor’s spend is more in line with the typical ‘S’ curve where, for example, higher preliminaries costs and/or losses are incurred by the contractor during the middle stages of the project than at the beginning or end of the project, the contractor may then ‘feel’ the additional costs being incurred before the period of overrun.


The question “when are additional costs and/or loss incurred due to delay?” is crucial to answer in order to properly determine not only how much the contractor is entitled to, but also to establish when the contractor’s entitlement to payment to delay costs accrues. For example, damages and loss/expense entitlement is normally based on actual reasonable ‘costs/loss incurred’. If the contractor has suffered delay due to the impacts during the ‘period(s) of actual impact’ as illustrated in figure 1 above, and makes its claim for additional costs due to that delay before the commencement of the ‘period of overrun’, has the contractor actually incurred any additional costs and/or loss at the time of making the claim? Arguably, although delay to progress has occurred and the delay analysis will show the period of likely delay to completion, the additional costs due to that delay may not yet have been incurred (in relation to the single activity / linear spend delayed project scenarios).


Whether or not the contractor suffers additional cost and/or loss may, however, also turn on how the contractor is paid for work completed. The contractual arrangements between the respective parties may mean that the contractor, for example, has to pay its suppliers for the preliminaries items on site on a monthly basis, including during the period(s) of delay, but does not receive payment from the employer for those items being on site during the period of delay because less, or even no, physical work has been completed for which payment that month can be claimed; the contractor would therefore suffer a reduced or even negative cash-flow in relation to those items soon after, or even during, the period(s) of actual delay depending on how long the delay occurs. Although the contractor may not have incurred additional costs due to delay at this point, the contractor may have suffered a loss.


It should be noted that, it would be very rare that all project resources will start and finish at the same time at the commencement and the end of the project.


This article will now examine the ‘multiple activity / non-linear spend delayed project’ which more closely resembles most projects.


Multiple Activity / Non-Linear Spend Delayed Project


Unlike the single activity / linear spend delayed project scenarios, there will be different and additional considerations when assessing delay costs on a project where the various preliminaries resources are on site for different periods during the project.


It is important to emphasise that it is generally incorrect for a contractor to submit delay cost claims on the basis that the additional preliminaires costs due to compensable critical delay, where various resources are on site for differing periods and durations of time, are those incurred during the period of overrun; that is, after the original contract/project completion date up to the extended (or actual) completion date. The following examples illustrate how delayed preliminaries costs may be incorrect using this assumption.


The example in figure 2 also illustrates why taking an average of the daily running costs incurred during the period of actual delay may also be insufficiently precise, but the example in figures 3 to 6 shows how taking an average of the daily running costs for delayed resources incurred by reference to the period of actual delay (periods D1 and D2) would be sufficiently precise and probably the most appropriate approach to be taken to assess the additional costs for extended preliminaries in that scenario.


The scenario in figure 2 has been kept simple for illustarative purposes. In practice, the exercise is much more complex and extensive where the project duration as detailed in figure 3 is much longer than three to four months and where there are hundreds, or even thousands, of activities and preliminaries items to assess. Where the project duration is much greater than three to four months scenario, for example 12 to 18 months or longer in duration, it may be a better option to assess the additional costs for the extended preliminaires by reference to the period of delay as illustrated in figures 3 to 6 below.


The scenario in figure 2 below illustrates where neither the costs incurred during the period of actual delay or the period of overrun correctly captures the costs of the delayed preliminaries.


Figure 2 – Resource-by-Resource Assessment

In figure 2 above, five resources have been used in the example. There are two bars per resource, the top bar shows how long the resource would have been on site had there been no delay, and the bottom bar shows the duration the resource was on site because of the delay (Assume the delay is a compensable delay for this scenario).


A brief explanation for each of the five resources now follows:

  • Project manager:

    • Had there been no delay, the project manager would have been on site for three months;

    • Because of the one-month delay, the project manager was on site for four months;

    • The costs incurred by the contractor for the project manager during the ‘period of actual delay’ were the same as what the contractor would have incurred during this period had there been no delay; and

    • The contractor incurred the additional project manager’s costs during month four when it would not have incurred those costs had there been no delay.

  • Project engineer:

    • Had there been no delay, the project engineer would have been on site for two months and a few days;

    • Because of the one-month delay, the project engineer was on site for two months and three weeks;

    • As a result of the one-month delay, the project engineer was on site for just less than an additional three weeks;

    • The costs incurred by the contractor for the project engineer during the ‘period of actual delay’ were the same as what the contractor would have incurred had there been no delay; and

    • The contractor incurred the additional project engineer’s costs during month three (not the period of actual delay or project overrun) when it would not have incurred those costs had there been no delay.

  • Project supervisor;

    • Had there been no delay, the project supervisor would have been on site for approximately two-and-a-half months;

    • Because of the one-month delay, the project supervisor was on site for about two months and three weeks;

    • As a result of the one-month delay, the project supervisor was on site for about an additional week;

    • The costs incurred by the contractor for the project supervisor during the ‘period of actual delay’ was less than what the contractor would have incurred had there been no delay because the project supervisor was relocated to another project to mitigate costs;

    • The contractor incurred the additional project supervisor’s costs during month four when it would not have incurred those costs had there been no delay; however

    • About three weeks of the project supervisor’s costs that were incurred in month four because of the delay, would have been incurred in month two had there been no delay.

  • M&E engineer:

    • Had there been no delay, the M&E engineer would have been on site for just less than two months during months two and three;

    • Notwithstanding the one-month delay, the M&E engineer was still on site for just less than two months, but arrived on site during month three, one month later than would have been the case had there been no delay; and

    • The contractor did not incur additional costs, it incurred the same costs as planned but one month later than they would have been incurred had there been no delay.

  • Finishing supervisor:

    • Had there been no delay, the finishing supervisor would have been on site for just less than one month during month three;

    • Because of the one-month delay, the finishing supervisor was on site for just over one month from the end of month three;

    • None of the additional costs incurred by the contractor for the finishing supervisor were incurred during the ‘period of actual delay’; and

    • The contractor incurred the additional finishing supervisor’s costs during month four when it would not have incurred those costs had there been no delay.

This would mean that an average daily rate for the delayed preliminaries ascertained from the contractor’s running costs during the period of actual delay would not be the correct approach to quantify delay costs if the above scenario in figure 2, or similar, applies.


However, where the duration of the project is longer, say for several years, then it may be the case that most of the time-related preliminaries resources are on site during the period of actual delay and have also been delayed for the same period as the period of actual delay (see periods D1 and D2 in figures 4, 5 and 6). In these circumstances, a daily delay rate ascertained from the time-related resource costs incurred by reference to the period of actual delay would probably be the most appropriate approach to quantify delay cost entitlement.   


The following explanation, by reference to figures 3 to 6 below, illustrates why it is important to isolate the delay event at the time it occurs and not during the period of overrun.


Also, to illustrate why quantifying and claiming the contractor’s time-related costs incurred during the period of overrun may result in an under recovery (unless the delay occurs during the period of overrun), the example in figures 3 to 6 helps to illustrate that not only could the overall time-related costs during the period of overrun be less than during the period of actual delay, but they may also be costs in relation to activities / resources that bear partly or substantially (depending on the project) no relation to the activities / resources that were actually impacted by the delay.


Figure 3 below is the baseline program for the construction of a building (substantially simplified for illustrative purposes).


Figure 3: Preliminaries: Period of Delay for Cost Assessment: Baseline Program


Suppose an employer caused delay occurs when the substructure works are progressing, and that activity is on the critical path. The substructure delay (D1 in figure 4 below) delays the project by three weeks. Other than causing all work to be delayed for three weeks, there are no other delays occurring until D2, the contractor’s cost profile therefore being the same as planned, but moved back by three weeks.


By reference to figure 4 below, it can be seen that if the contractor’s time-related costs for D1 were assessed using a rate derived by reference to the period of overrun, the rate would be in relation to resources that mostly bear no relation to resources actually delayed/extended because of D1.


Also, by reference to figure 6 below, it can be seen that if the contractor’s time-related costs for D1 were assessed by reference to the period of overrun, together with assessing the costs of resources that may have nothing to do with D1, the assessment would be less than the time-related costs incurred during the period of actual delay during period D1.


Figure 4: Preliminaries: Period of Delay for Cost Assessment: D1


Another principal caused delay occurs during the superstructure work which causes a further four-week delay to the completion of the works (D2 in figure 5 below). By reference to figure 6 below, it can be seen that project spend in relation to time-related resources during the D2 delay is a its highest. Again, if the contractor’s time-related costs for D2 were assessed by reference to the period of overrun, the recovery would be less than during the period in which the delay actually occurred during period D2, and again in relation to many resources that may bear no relation to the resources actually impacted due to D2.


Figure 5: Preliminaries: Period of Delay for Cost Assessment: D1 & D2


Figure 6 below is the project spend for the contractor’s time-related preliminaires items during the project. Figure 6 illustrates that project spend for the time-related preliminaries is higher during D1 and D2 than during the period of overrun, plus, the costs during the period of overrun are in relation to some, or many, items of preliminaries that bear no relation to the time-related items that were on site longer during periods D1 and/or D2.


It should be noted, however, that it does not automatically follow that all the time-related preliminaires costs incurred during D1 and/or D2 are claimable as costs incurred due to the compensable cause of delay causing the D1 and D2 delays. A secondary investigation and analysis are required, for example, to:


  • Ensure that the costs claimed are in fact time-related and are attributable to compensable critical delays;

  • Ensure that the costs claimed are reasonable;

  • Depending on the wording of the applicable contract, establish that the costs have been incurred, or a liability for the cost has arisen;

  • Ensure that the costs claimed have arisen in relation to time-related resources on the project at the time of the actual delay as the dates the contractor may book the costs to the project may not be the dates the resources were on the project, for example, costs for work carried out in June, may get booked to August which is when payment for the work carried out in June was made.


Figure 6: Preliminaries: Period of Delay for Cost Assessment: Spend Profile


Approaches to Assessing Delay Costs


The approach I refer to as the ‘resource-by-resource ‘but-for’’ approach can be used to qualtify the delay costs where delay to the project resources occur in line with that detailed in figure 2.


The approach I refer to as the ‘delay-rate per-day’ approach can be used to quantify delay costs where delay to the project resources occur in line with figures 4 and 5.


These approaches, and others, are detailed in chapter 5 of my book[2], and are examined in later articles.


SCL Protocol


The SCL Protocol states:


“22. Period for evaluation of compensation.


Once it is established that compensation for prolongation is due, the evaluation of the sum due is made by reference to the period when the effect of the Employer Risk Event was felt, not by reference to the extended period at the end of the Contract.”


However, the period, or periods, during which “the effect of the Employer Risk Evant was felt” may differ from project to project, but some broad conclusions can be drawn as follows:


  • There is no one general rule to establish when the additional tme-related costs are felt, the scenarios above illustrate this;

  • It depends on the project and how the project was impacted by delay;

  • For longer duration projects, e.g. as illustrated in figures 3, 4 and 5 above, the most appropriate approach would most probably be to assess the impacted time-related resource costs by reference to the period of delay on site, in figure 5 this would be by reference to periods D1 and D2, and not by reference to the period of overrun; however

  • For shorter duration projects, with fewer resources in line with figure 2 above, then it would be more appropriate to consider each delayed resource separately maybe even on a resource-by-resource basis.


In the author’s experience, on most but the smallest projects, the scenario set out in figures 3, 4 and 5 generally applies and the approach to assessing delay costs in such a scenario is an approach the author refers to as the ‘delay-rate per-day’ approach[3].


NEXT ARTICLE

My next article will examine the various approaches that can be used to assess delay costs.




_________


[1] Thiess Watkins White Construction Ltd v Commonwealth of Australia (1998) 14 BCL 61

[2] Quantification of Delay and Disruption in Construction and Engineering Projects, Thomson Reuters, 2021, Second Edition.

[3] Quantiifcation of Delay and Disruption in Construction and Engineering Projects, Thomosn Reuters, 2021, Second Edition, section [5.630], page 595.


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