Article 013 is an introduction to quantifying delay costs which introduces the primary heads of delay cost claim, claims made for delay costs under the contract and general damages at common law, the contractor’s duty to mitigate loss, and claims for loss due to critical delay and non-critical delay.
The following are the primary heads of delay cost claims:
Labour;
Preliminaries (site overheads/indirect job costs);
Subcontractors;
Off-site/head office overheads;
Loss of profit;
Increased costs of resources/inflation; and
Finance charges and interest.
This article examines labour costs.
Labour costs
A contractor’s labour resources will comprise both direct and indirect labour; direct labour generally categorised as a resource which carries out the ‘hands-on’ actual physical works on site and all other labour generally categorised as indirect labour, for example, supervisors, foremen, cleaners etc who do not undertake the ‘hands-on’ physical work itself. However, some contractors do vary slightly on his categorisation.
As a result of delay, a contractor will probably incur additional costs in relation to its labour (in addition to its other time related resources) due to, for example, one or more of the following:
working for extended periods;
working overtime and/or on multiple shifts;
increased pay to the labour resources;
loss of productivity;
non-productive overtime;
non-productive labour; and
demobilisation and remobilisation costs.
Whilst some of the above arise as a direct consequence of critical delay, this is not automatically the case; others may be a by-product of critical delay and related issues.
Working for extended periods, working overtime and/or on multiple shifts
If the contractor must work for extended periods of time due to employer delay, it will almost certainly incur additional costs and/or loss in doing so. To reduce the potential delay, the contractor may, either by employer instruction or of its own volition, work overtime and/or multiple shifts.
Depending on the terms of the contract and/or other legal remedies, the contractor may be entitled to some, or all, of the costs incurred.
The additional costs incurred could include a combination of delay costs, acceleration costs and possibly also disruption costs. It will therefore be necessary to separately identify the cause(s) and the different categories of costs incurred which is very rarely straight forward.
Labour costs at the best of times are difficult to monitor (and control) during the progress of the works, never mind during periods of delay, acceleration and/or disruption occurring at the same time.
Contractors often subcontract most, or all, of their work to subcontractors, and this results in:
The loss and/or expense incurred being the subcontractor’s; and
To recover the loss and/or expense due to any additional payments made to its subcontractor(s), the contractor will have to demonstrate that the payments made were reasonable and in compensation for the loss / additional cost incurred.
The subcontractor(s) will obviously have to prove its claim.
This sometimes puts the main contractor in the position of making payment to a subcontractor which itself may not be able to recover if the subcontractor’s claim is not sufficiently supported.
Increased pay
Delay may result in workers falling under a different trade labour agreement, resulting in pay increases. However, in William Sindall v North West Thames RHA,[1] the court considered that pay increases made under a bonus scheme created pursuant to the rules and decisions of the National Joint Council for the Building Industry were not recoverable under the contract. The court considered the bonus payments were not recoverable because the amount of bonus was not established under the Joint Council, and the contractor established the bonus scheme voluntarily.
However, the court held that, whilst the contract provided that the contractor was deemed to have based its tender on “rates or wages and other emoluments and expenses” paid pursuant to the rules and decisions of the Joint Council, these increases were recoverable if the rates were increased following a decision by the Joint Council.
In JC & Sons v Southwark London Borough Council,[2] the contractor claimed the cost of pay increases to self-employed workers engaged by the contractor to carry out the works. Clause 31A of the contract provided that the contractor could recover an increase in rates of pay which were payable by the contractor to, or in respect of, “workpeople” engaged upon, or in connection with, the works in accordance with the rules or decisions of the Joint Council. The contract defined “workpeople” as persons whose rates of wages and emoluments are governed by the rules or decisions or agreements of the Joint Council. The court did not consider that the contractor was entitled to recover the cost of the self-employed labourers, as self-employed workers were not “workpeople” and so did not come within those provisions. However, had the contractor made the self-employed workers subject to the clause 31A conditions, then the increases in payment would have been recoverable under that provision.
Of course, the outcome in cases like the above will turn on the wording of the contract. For example, if under the contract the contractor is entitled to all demonstrable reasonable costs, this being reasonable expenditure incurred, then this arguably would include pay increases and bonus schemes and the like.
Loss of productivity / disruption
Loss of productivity / disruption is examined in more detail in the articles that focus on disruption.
However, in summary, delay to the progress of the works leading to further impacts like piecemeal site access, out of sequence working, lead to reduced productivity with the secondary consequence of the execution of the works being further impacted by, for example, overcrowding of labour, stacking of trades, dilution of supervision due to fragmented work gangs, excessive overtime leading to fatigue, and poor morale which further reduces productivity leading to delay, or increased hours/resources to maintain program.
There will also be, as a result, disruption issues such as idling and stand-by time being incurred.
Non-productive overtime
Overtime working may be required to maintain program or to accelerate the progress of the works. Excessive overtime can lead to fatigue which in turn may reduce productive working.
When a contractor works overtime, suffers delay and/or loss of productivity, the contractor may change its labour mix from skilled to semi-skilled or vice versa when the progress of the work is accelerated. This may expand the labour hours without impacting actual cost, or, increase the actual cost without increasing the labour hours.
It will therefore be necessary to check in detail the labour mix used by the contractor, against that which would have been required had the progress of the works not been impacted. Any analysis must take this into account. A properly conducted measured mile, or similar type of analysis, must pick this up for the analysis to be reliable.
Contractors often calculate the ‘overall’ increase in labour costs due to the combined causes of lost productivity. However, the problem with this approach is that there may be little, if any, correlation between the contractor’s assessment and for the alleged impact(s). For the reasons given in article 002 on global claims, this approach should be avoided.
Non-productive labour
Non-productive labour such as cleaners, helpers, traffic managers, and the like, are generally time related. There will therefore be a direct correlation between the costs of these resources and critical delays.
Demobilisation / mobilisation
Additional demobilisation and mobilisation may occur, for example, where the delay to progress means that work is unable to proceed in area A on site in which case the labour and other resources will need to demobilise from area A to say area B. This would then be repeated when work area A becomes available again and the resources return. On big value projects and/or on large sites this could be very disruptive and costly.
Summary
This article has touched on how a contractor’s labour costs can be impacted as a direct and indirect consequence of critical delay. There are of course other ways in which labour costs/resources may be impacted and the accuracy of assessment of the contractor’s entitlement will often come down to the quality of administration and record keeping of the contractor.
NEXT ARTICLE
Article 014 examines preliminaries, often the most substantial part of a contractor’s delay cost claim.
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