Overheads and Profit Loss

David Daly discusses how to improve your chances of recovering head office overheads and loss of profit in delay claims

Examining this topic in full is beyond the limitations of this article. Here we concentrate on highlighting the oftenoverlooked topic of how to prove a loss of contribution to head office overheads (“HOOH”) and profit.

Introduction

HOOH are the administrative and management costs incurred by contractors in the running of its business. If a contractor is delayed on a project, the argument is that but for this delay, the contractor’s workforce would have been deployed on other projects generating a contribution toward its HOOH and profit.

Whilst contractors are usually familiar with claiming site overheads (prolongation costs) in delay claims, less awareness exists around a loss of contribution to HOOH and profit. This can amount to a large proportion of a contractor’s loss and expense claim and commonly fails due to a lack of appropriate evidence.

Although in theory a loss of contribution to HOOH and profit can be proven through accurate record keeping, in practice, maintaining sufficiently detailed records is often impractical. The courts have therefore taken a pragmatic approach and approved the use of formulae to ascertain these losses. The commonly used formulae to do so are Hudson, Emden and Eichleay.

The law

In the infamous case of Walter Lilly v McKay [2012] EWHC 1773 (TCC), the judge set out relevant guidance in paragraphs 540 to 554 when approving the use of the Emden formula. In paragraph 543, the judge summed up the relevant principles to consider in claims of this nature: “543. Considering these various authorities, the following conclusions can be drawn:

(a) A contractor can recover head office overheads and profit lost as a result of delay on a construction project caused by factors which entitle it to loss and expense.

(b) It is necessary for the contractor to prove on a balance of probabilities that if the delay had not occurred it would have secured work or projects which would have produced a return (over and above costs) representing a profit and/or a contribution to head office overheads.

(c) The use of a formula, such as Emden or Hudson, is a legitimate and indeed helpful way of ascertaining, on a balance of probabilities, what that return can be calculated to be.

(d) The “ascertainment” process under

Clause 26 does not mean that the Architect/Quantity Surveyor or indeed the ultimate dispute resolution tribunal must be certain (that is sure beyond reasonable doubt) that the overheads and profit have been lost.

HHJ Lloyd QC was not saying that assessment could not be part of the ascertainment process. What one has to do is to be able to be confident that the loss or expense being allowed had actually been incurred as a result of the Clause 26 delay or disruption causing factors.” Thus, steps (b) and (c) are entirely separate. Under step (b), it is necessary for the contractor to first show that if the delay had not occurred it would have secured work on projects which would have produced a return. Proving this is where contractors usually run into difficulty.

In Walter Lilly, the contractor provided evidence on that point as set out at paragraph 544 of the judgment, in particular the last sentence, which stated:

“During that period WLC had to and did decline a number of tendering opportunities: that was not said vaguely, or in a vacuum of support: the opportunities received and declined were precisely detailed on a comprehensive schedule attached to Mr Corless’ statement.”

Practical tips

The first step to succeeding in a claim for lost contribution to HOOH and profit is to prove an entitlement to an extension of time and compensation. Once this entitlement has been established, a prerequisite to the use of the any formulae is proof that some profitable contracting opportunities have been lost. Contractors should therefore implement some of the following project control measures within its business to assist:

• Maintain accurate, contemporaneous records of incoming inquiries and tenders issued;

• Record declined inquiries, withdrawn tenders or declined contract offers;

• Record this by issuing internal memos, letters and appropriate emails; and

• Do all of the above on a monthly basis at least (we recommend bimonthly or weekly if possible).

Disclaimer: this content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by HD Construction Solutions Ltd.