Does time equal money?: Costs claims in construction projects

Prolongation and disruption costs: The fundamentals

Construction contracts typically specify a date by which the works must be completed, usually defined as the Time for Completion, as well as the circumstances which may attract an award of additional time to achieve completion and/or costs associated with any delay to the project.

Whilst prolongation costs and disruption costs are often discussed together, they are fundamentally different claims. A key difference between the two is that disruption claims do not have to be attached to a delay to the Time for Completion (though they often are), whereas prolongation claims are limited to time-related costs arising from delay events impacting the Time for Completion (i.e. delays to the critical path of the project).

It is important to distinguish disruption from delay as the two concepts are often conflated. Whilst it is possible for disruption to be caused by a delay to the Time for Completion (if it cannot be mitigated), Hudson’s Building and Engineering Construction Contracts clarifies that:

“Delay is usually used to mean a delay to the completion date, which presupposes that the activity which was delayed was on the critical path. Disruption to progress may or may not cause a delay to overall completion, depending on whether the activity delayed is on the critical path […] but will result in additional cost where labour or plant is under-utilised as a consequence of the event.”

Similarly, the Society of Construction Law Delay and Disruption Protocol, Second Edition defines disruption as ‘disturbance, hindrance or interruption to a Contractor’s normal working methods, resulting in lower productivity or efficiency’. Examples of disruption to works may include:

1. The employer is late in providing information meaning that work is carried out in a different order to the programme;
2. Stacking or crowding of trades which occurs when too many subcontractors are scheduled to work in a site area;
3. The contractor cannot access the site and as a result cannot progress works in the manner planned; or
4. Additional expenses and labour/equipment costs were incurred when works were rescheduled at the employer’s request.

In summary, disruption costs are additional costs incurred by a contractor as a result of not being able to work as efficiently as planned (Disruption Event), where the Disruption Event is not a contractor’s risk under the construction contract.

Prolongation costs are described by Keating on Construction Contracts as, “costs and losses incurred as a result of delays to the activity in question or the works as a whole which have led to critical delay to the contract completion date.” They are time-related expenses only, which have been incurred by the contractor and are linked to the extended Time for Completion.  Examples may include on-site facilities, site management costs, site accommodation, and additional costs associated with continuing to hold plant and equipment on site.

Does time equal money?:Proving cost claims

The importance of contractual notices

The first hurdle to a successful costs claim is often compliance with the contractual notice requirements. Whilst in some regions of the Gulf Corporation Council (GCC), failure to provide notice in compliance with the construction contract may not prove fatal to a claim, but it is best practice to ensure compliance with the construction contract notice requirements to avoid unnecessary risks and disputes.

The preferred standard form of construction contracts used in the Middle East region are the International Federation of Consulting Engineers (FIDIC) forms of contract. The FIDIC Red Book 1999 requires a claim for ‘any additional payment’ under the construction contract or otherwise in connection with it to be the subject of an initial notice of claim within 28 days of the relevant event (being the date the contractor became aware or should have become aware of the relevant event).

A fully detailed claim must then be submitted within 42 days, unless the engineer approves a longer period. Notice provisions are typically drafted to operate as a condition precedent to entitlement, meaning failure to comply could result in losing the right to bring the claim (though this is less likely in some regions of the GCC including in the Kingdom of Saudi Arabia or in the United Arab Emirates where neither DIFC nor ADGM law applies).

In Panther Real Estate v Modern Executive Systems Contracting LLC [2022] DIFC CA 016, the DIFC Court of Appeal decision noted that a failure to give the notice of the claim within the period required under the construction contract would have resulted in the contractor’s delay and cost claims being dismissed. Whether or not the jurisdiction will strictly enforce notice periods, it is both best practice and advantageous to manage risk and avoid potential disputes to comply with contractual notice requirements when submitting claims.

Disruption costs

Uncertainty and a global approach to costs are the enemy of a strong disruption claim. Instead, a contractor seeking to make a disruption claim should:

1. Identify the Disruption Event;
2. Provide evidence of the cause of the Disrupted Event;
3. Set out the entitlement for costs for the Disrupted Event under the construction contract (i.e. identifying that the Disruption Event is either a contractor’s risk event or a neutral event that permits the contractor to claim costs);
4. Demonstrate the analysis method setting out the impact of the Disruption Event on the progress of work; and
5. Evidence of the additional plant and equipment or manpower expended due to the Disrupted Event.

When evaluating disruption claims, the employer should take care to ensure the claimed disruption costs do not overlap with any other costs claimed under the construction contract (i.e. prolongation costs in the event of a delay to the critical path), which may result in double counting. Additionally, the employer should check to ensure there were no concurrent delay events that were with the contractor’s risk during the relevant period.

Prolongation costs

When claiming prolongation costs, the contractor must demonstrate that it actually incurred the costs solely due to the delay to the critical path. Although prolongation costs are often viewed as the financial side of an extension of Time for Completion claim (otherwise referred to as a delay claim), there is no automatic entitlement to costs even if a right to an extension of Time for Completion is established.

The contractor has the burden of proof to demonstrate its claim for prolongation. It must show that:

1. The costs have been incurred;
2. The costs were incurred as a result of the delay to the critical path; and
3. Such costs are recoverable under the terms of the construction contract. 

Once it is established that compensation for prolongation is due under the construction contract, the evaluation of the sum will be made by reference to the period where the effect of the delay event took place as opposed to the period of the extension to the Time for Completion. Contractors should, therefore, seek to claim for the actual costs incurred during the period when the delay event occurred, rather than the period of project overrun at the end.  

The Society of Construction Law Delay and Disruption Protocol, Second Edition states that “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”.

Methodologies for calculating disruption

Society of Construction Law Delay and Disruption Protocol, Second Edition sets out a range of disruption analysis methodologies that can broadly be divided into productivity-based and cost-based. Two of the most widely used productivity-based methods are the measured mile analysis and the earned value analysis.

A measured mile analysis looks at productivity levels for an activity or period where there was no disruption. The measured mile is then compared with the actual productivity levels when the Disruption Event occurred so that the impact of the disruption can be quantified. If the contractor has failed to maintain good quality contemporaneous records such as site records, site photos and evidence of the costs to perform the works during the reduced productivity period, establishing a baseline of productivity will be difficult. The importance of good quality contemporaneous records was highlighted by the English courts in Van Oord UK Ltd v Allseas UK Ltd [2015] EWHC 3074 (TCC) as such records are critical when ‘trying to work out what was happening on site at any given time, and what the relevant individuals thought were the important events on site during the works” which helps to paint a picture of the impact of the disruption.

An earned value analysis is a comparison between the planned performance and the actual performance over a specific period. This analysis is typically expressed as expected revenue to be generated per labour hour expended compared with the actual revenue generated by actual labour expended.

Three top tips to minimise disputes over costs claims

1. Consistently maintain detailed project records: As claims can be brought long into the project’s lifespan, whether a disruption or prolongation claim is successful will likely turn on the documents. To avoid costly disputes over whether a claim has been sufficiently made out, it is crucial that detailed records of a project’s progress are maintained. Clear records will help support claims and avoid uncertainty and argument. Records include timesheets, emails/letters, minutes of meetings, allocation sheets, site photos with date stamps and progress reports.
2. Keep an up-to-date baseline programme: A programme of works acts as a road map of how the works will be carried out over the span of the project. Updating the programme when required will make it easier to keep track of progress and review the impact of cost claims and delay claims on the project.
3. Understand and comply with relevant notice provisions in the construction contract: As mentioned above, close attention should be paid to whether notices need to be provided to the employer for events impacting the time it takes to the complete the works and/or the cost of the project. Although often viewed as burdensome, such a requirement acts to mitigate risk and make sure that all parties are aware of potential issues as soon as reasonably practicable as well as preventing the contractor from inadvertently losing rights (particularly in jurisdictions where notice periods are strictly enforced).

Summary

Claims for prolongation and disruption are often discussed as if they are interchangeable, but as demonstrated above, they have significantly different applications. Given this, it is crucial that parties understand what needs to be demonstrated to make out each of these claims. Key steps all parties can take to reduce risk and uncertainty around cost claims is to keep good contemporaneous records throughout the life of the project and understand the provisions of the construction contract to ensure that events impacting the progress of works can be analysed accurately.

Look out for our next article in this series which will consider managing defect claims in construction projects.