HOW TO QUANTIFY PROLONGATION COSTS – A NON GLOBAL APPROACH

By Paul McArd MAIQS, CQS

More often than not, claimants derive prolongation costs by determining an average daily rate taken from the preliminaries and/or indirect costs listed in the contract and multiplying that rate by the number of days of delay.

A claimant must first identify the actual days of delay a respondent is culpable. The appropriate method to identify actual days of delay is to complete a cause-andeffect delay analysis. Next, the claimant's actual days of delay need to be identified to quantify the costs incurred on those days. Finally, the claimant should then analyse its cost records relating to the periods of delay, which are the respondent's responsibility.

Prolongation costs must reflect the actual losses incurred by a claimant unless otherwise stated in the contract.

To demonstrate a causal link and substantiate the cost claimed, the claimant should reconcile records of the indirect and direct costs such as daily reports and/or timesheets to the days claimed. In addition, the claimant can put forward other records such as invoices, if they can be proven that they are recoverable.

Assuming actual days of delay have been identified and the actual costs have been quantified and separated into indirect and direct costs; the claimant is also required to evidence that the costs claimed were on the project. Substantiation in the form of (but not limited to) daily progress reports, daily diaries and sign-in/out registers is required. Without this type of

contemporaneous evidence, it would be difficult for a claimant to prove the costs they are claiming were related to the delay event(s).

Generally, the claimant can claim only time-related indirect costs incurred during the period(s) of delay identified and costs can only be claimed for the days that are not the claimant's culpability. These costs typically include staff salaries, insurance costs, bank guarantees and reoccurring site running costs. The claimant cannot include purchase costs or capital costs such as vehicles, plant and office equipment.

Direct costs that the claimant can claim are those direct costs that naturally flow from the identified delay events. It is reasonably straightforward to work out the direct cost by reviewing an as-built program that demonstrates what direct costs were on the critical path at the time of the delay. Records such as timesheets, sign-in sheets and payroll data will provide evidence the direct costs were incurred during the delay period.

A general example of a claim for direct costs is when a three-day respondent delay event occurs and therefore delays the critical electrical commissioning team on a power station. The commissioning personnel and associated plant and equipment could not carry out any work on the project and the costs could not be mitigated by demobilisation and remobilisation. This means the cost for the personnel, plant and equipment would be increased by a further three days as there would be an additional three days spent on the project to complete the electrical commissioning works. The claimant would be able to demonstrate that the electrical commissioning work is on the critical path by way of a CPM programme and would need to prove by way of daily reports, daily timesheets and sign-in/

out registers that the personnel and equipment were on site when the delay occurred.

Generally, unless stated otherwise in the contract, profit cannot be claimed as part of a prolongation claim as it is not a ‘cost’. Profit would need to be claimed separately as a loss of profit claim (depending on the jurisdiction).

The key points to remember when quantifying prolongation costs are as follows:

1. Identify the actual days of nonculpable delays

2. Only quantify reoccurring indirect actual costs incurred (unless the contract allows for pre-agreed rates to be used)

3. When claiming direct costs, demonstrate these costs are on the critical path and only claim the actual costs incurred (unless the contract allows pre-agreed rates to be used)

4. Maintain records of the actual personnel, labour, plant and equipment affected by the delay event

5. Do not determine prolongation costs by using an average daily rate determined by the preliminaries contained within the contract (unless expressly allowed under the contract)

6. Do not divide the total loss incurred by the number of days of delay as this is at best a total loss or global claim approach.

This article was written by Paul McArd MAIQS, CQS and first published via Accura Consulting LinkedIn (linkedin.com/pulse/how-quantifyprolongation-costs-non-globalapproach-/).