Evaluating Contract Claims

JOHN MULLEN is a chartered quantity surveyor and civil engineering surveyor, with 40 years' experience in the construction and engineering industries. John was one of the founders of Driver Group PLC, creating many of its businesses, and has been its individual largest shareholder and UK and Middle East Managing Director. He has an international reputation as a quantum expert witness in litigation and arbitration around the world, on matters up to US$2.25 billion in dispute. R. PETER DAVISON was one of the founders of Driver Group PLC and is former head of its expert witness business, DIALES. Peter originally trained as a quantity surveyor and is a former Chartered Quantity Surveyor and Chartered Arbitrator, who established a reputation as an objective, experienced and reliable expert witness on quantum matters.

• Reviews xviiPreface xxiAcknowledgements xxvii1 Introduction 11.1 The Legal Basis 21.1.1 Forms of Contract 21.2 The Standard of Substantiation 41.2.1 SCL Delay and Disruption Protocol 51.2.2 Direct and Time Consequences 71.2.3 Duty to Mitigate 91.3 Risks 121.3.1 Design Risks 121.3.2 Design Review 141.3.3 Professional Indemnity Insurance 141.3.4 Risk Analysis and Management 141.3.5 Risk Registers 161.3.6 Risks and Records 171.3.7 Reimbursable Risks 201.3.8 Non-reimbursable Risks 211.4 Sources of Change 221.4.1 The Process of Analysis 221.4.2 Inadequate Pre-contract Design and Documentation 231.4.3 Design Development and Approval 261.4.4 Access or Possession 271.4.5 Early Taking over or Beneficial Use 281.4.6 Changes in Employer Requirements 281.4.7 Contract Documents 291.4.8 Unforeseeable Occurrences 301.4.9 Breach of Contract 311.5 Summary 322 Establishing the Base 332.1 Planned Change 342.1.1 Ordered Variations 362.1.1.1 Fair Rates and Prices 392.1.2 Changes in Quantities 412.1.2.1 Quantities and Conditions 432.1.3 Preferential Engineering 442.1.4 Value Engineering 452.1.5 Unconfirmed Instructions 462.2 Unplanned Change 472.3 Programmes and Method Statements 472.3.1 The Status of Programmes 472.3.2 Programmes and Resources 522.3.2.1 Method Statements 522.3.3 The SCL Delay and Disruption Protocol 542.3.4 A Partial Programme 552.3.5 Limitations on Liability 552.4 Summary 563 Effect of Change on Programmes of Work 573.1 Use of Programmes 583.1.1 Provisional Sums in Programmes 603.1.2 The Base Cost 633.2 Use of As-Built Programmes 643.2.1 Sources of Information for As-Built Programmes 653.2.2 Constant Resource/Continuous Working 663.2.3 Recording of Completion 673.3 Change Without Overall Prolongation 673.3.1 Who Owns the Float? 683.4 Prolongation of the Works 743.5 Analysis of Time and Delay 773.5.1 Introduction 773.5.2 Basic Requirements 823.5.3 Float and Acceleration 863.5.4 Concurrent Delays 883.5.5 ‘Dot on’ 983.5.6 Concurrency and the Contractor’s Financial Claims 1003.5.7 Delay Analysis Techniques 1033.5.7.1 Impacted as Planned 1043.5.7.2 Time Impact Analysis 1083.5.7.3 Collapsed As-Built Analysis 1113.5.7.4 As-Planned Versus As-Built Programmes 1133.5.7.5 Windows Analysis 1153.5.7.6 Software 1163.5.7.7 Building Information Modelling 1183.5.7.8 Case Law 1203.5.7.9 Conclusions 1233.5.8 Assessment of Productivity 1253.5.8.1 Tender Productivity 1263.5.8.2 Achievable Productivity 1273.5.8.3 Actual Productivity After a Change 1273.5.9 Sources of Productivity Data 1283.5.9.1 The Fundamental Principles 1283.5.9.2 Relevant Quantities 1283.5.9.3 Equipment and Methods 1293.5.9.4 Sustainable Outputs 1303.5.9.5 Recalculation Using Efficiency Factors 1303.5.10 Effect on Contractor’s Plant and Equipment 1313.5.10.1 Working Plant and Equipment 1323.5.10.2 Site Facilities and Equipment 1333.5.11 Duty to Mitigate 1343.6 Summary 1354 Sources of Financial Information for Evaluation 1374.1 The Contract Provisions 1394.1.1 Cost 1394.1.2 Loss and Expense 1414.1.3 To Ascertain 1424.2 Tender Documents and Information 1454.2.1 Entire Agreements 1464.2.2 Misstatements and Misrepresentation 1474.2.3 Mistakes in Tenders 1484.2.4 The Conditions for, and Character of, the Works 1494.3 Tender Calculations and Assumptions 1494.4 Cost Records 1514.4.1 Identification of Invoices 1514.4.2 Discounts and Credit Notes 1524.4.3 Bulk Discounts 1534.4.4 Coding Systems 1544.4.5 Timing of Costs 1544.4.6 Cost Transfers and Accruals 1554.4.7 Final Accounts and Economic Duress 1564.5 Accounting Information 1584.5.1 Financial Accounts 1584.5.2 Management Accounts 1594.5.3 Exceptional Items 1614.6 External Information 1614.7 Summary 1625 Evaluation of the Direct Consequences of Change 1655.1 Unit Rates and Prices or Actual Costs? 1665.2 Unit Rates and Prices 1675.2.1 The FIDIC Forms of Contract 1725.2.2 Measurement of Work 1735.2.3 Design and Build/Schedule of Rates 1755.2.4 Status of Contract Rates and Prices 1765.2.5 Errors in Rates and Prices 1775.3 The Valuation ‘Fences’ 1845.3.1 The ‘Fences’ 1855.3.2 ‘Conditions’ and ‘Character’ 1855.3.2.1 Change in Conditions 1875.3.2.2 Change in Character 1885.3.3 New Rates 1895.3.4 Valuation of Variations in Quantity 1905.3.5 Effect of Variations on Other Work 1965.4 Inclusion of Preliminaries and General Items 1975.5 Percentage Adjustments 2005.5.1 Percentages in Variation Valuation 2005.5.2 Threshold Percentages 2015.5.2.1 Criteria for Judging Change in the Amount of Work 2025.5.2.2 Which Rates are to Be Amended? 2035.5.2.3 What Rules Apply? 2035.5.3 Percentages for Defective or Incomplete Work, etc. 2045.5.4 Percentage Caps on Adjustments 2055.6 Valuation Using Day work Provisions 2055.7 Use of Actual Costs 2105.7.1 The NEC Suite of Contracts – Introduction 2115.7.2 The NEC Suite of Contracts – Forecast or Actual Cost? 2135.7.3 The NEC Suite of Contracts – Defined Cost 2185.7.4 The NEC Suite of Contracts – Disallowed Cost 2215.7.5 The NEC Suite of Contracts –The Fee and Other Agreed Rates 2235.7.6 The NEC Suite of Contracts – Objectives 2245.8 Unit Costs 2255.8.1 Labour Costs 2295.8.1.1 Gang Rates 2295.8.1.2 Supervision 2305.8.2 Use of Norms in Evaluation 2315.8.3 Plant and Equipment Costs 2345.8.3.1 Plant and Equipment Cost Rates 2355.8.3.2 External Hire Charges 2405.8.4 Materials Costs 2415.8.5 Overheads and Profit 2435.9 Subcontractor and Supplier Costs 2455.9.1 Subcontractors 2465.9.1.1 Nominated or Named Subcontractors 2465.9.1.2 Domestic Subcontractors 2495.9.2 Package Equipment Suppliers 2505.9.2.1 Example of Change Calculation for Package Equipment 2525.10 Valuation of Omissions 2535.11 Add and Omit Variations 2545.12 Quantum Meruit 2575.12.1 No Contract or Agreement as to Price 2585.12.2 Contract Only Says Reasonable Sum 2595.12.3 Work Outside of Contract 2595.12.4 Cardinal Change 2605.12.5 How to Calculate 2635.13 Valuation in Advance 2655.14 Requirements for Notices 2695.14.1 Notice in Relation to Unit Rates 2705.14.2 Notice in Relation to a Quotation or Proposal 2735.14.3 Notice as a Condition Precedent and Other Sanctions 2755.14.4 Further Considerations 2775.15 Summary 2786 Evaluation of the Time Consequences of Change 2796.1 Introduction 2796.1.1 Factual and Legal Background 2796.1.2 Financial Effects for the Employer 2826.1.3 Financial Effects for the Contractor 2836.1.4 The Causal Link 2856.1.5 The SCL Delay and Disruption Protocol 2876.1.6 Conclusions 2896.2 Prolongation 2896.2.1 What is to be Evaluated? 2896.2.2 The Relationship Between Extension of Time and Money Claims 2906.2.3 Time-Related Costs 2956.2.3.1 When Did the Delay Occur? 2956.2.4 What Costs Were Incurred in the Delay Period? 2976.2.5 Typical Heads of Prolongation Cost 2986.2.6 Typical Heads of Prolongation Cost – Staff 3006.2.7 Typical Heads of Prolongation Cost – Labour 3026.2.8 Typical Heads of Prolongation Cost – Temporary Buildings 3036.2.9 Typical Heads of Prolongation Cost – Temporary Services 3046.2.10 Typical Heads of Prolongation Cost – Temporary Works 3046.2.11 Typical Heads of Prolongation Cost – Plant and Equipment 3056.2.12 Example of Additional Activity Costs 3076.2.13 Relevance of Tendered Preliminaries and General Cost Rates 3106.2.14 Increases in Costs 3136.2.15 Off-Site Overheads and Profit 3156.3 Liquidated Rates for Delay Damages 3156.3.1 Challenges to the Rate of Delay Damages 3176.3.2 Delay Damages as a ‘Penalty’ 3206.3.3 Actual Damages for Delay 3236.3.4 The Date(s) from Which Delay Damages Run 3246.3.5 Procedure and Prerequisites 3246.4 Disruption 3256.4.1 Legal Basis of a Disruption Claim 3276.4.2 The Factual Basis of a Disruption Claim 3306.4.3 Evaluating the Costs of Disruption – Introduction 3326.4.4 Records of Time Lost 3346.4.5 The ‘Measured Mile’ 3386.4.5.1 Illustrative Example of an Earned Value Approach 3436.4.6 Comparing Tendered and Actual Outputs 3446.4.6.1 Tendered Allowances 3446.4.6.2 Actual Outputs 3466.4.6.3 Other Potential Distorting Factors 3476.4.6.4 Back-Checking the Results 3496.4.6.5 Conclusions on Costs Less Recovery Approaches 3516.4.7 Factors Affecting Productivity 3536.4.7.1 Excessive Overtime, etc. 3546.4.7.2 Weather Conditions 3566.4.7.3 Introduction of Additional Resources 3566.4.7.4 Lack of Management 3576.4.7.5 Changes in Ratio of Labour to Plant and Equipment Mix 3586.4.7.6 Condensing of Activities 3596.4.7.7 Resequencing Activities 3596.4.7.8 Breaks in Continuity 3606.4.7.9 Changes in Personnel 3606.4.7.10 Contractor Inefficiencies 3616.4.8 Cumulative Impact Claims 3626.4.9 Top Down or Bottom Up? 3656.4.9.1 The ‘Top Down’ Approach 3656.4.9.2 The ‘Bottom Up’ Approach 3676.4.10 The ‘Rump’ of the Contractor’s Losses 3676.4.11 Hypothetical Illustrative Disruption Calculation 3696.4.12 Preliminaries Thickening Claims 3736.4.13 Consequential Further Delay Events 3766.4.14 Summary of Disruption 3796.5 Acceleration 3806.5.1 Acceleration Under the Contract 3826.5.2 Acceleration by Extra-Contractual Agreement 3866.5.3 Acceleration as a Component of Delay and/or Disruption Costs 3906.5.4 Induced or Constructive Acceleration 3916.5.5 The Canadian Cases 3946.5.6 Acceleration to Reduce the Contractor’s Culpability 4006.5.7 Financial Quantification of Acceleration 4016.5.8 Sample Acceleration Costing 4046.6 Global Claims and Similar Terms 4066.6.1 Potential Definitions 4066.6.1.1 ‘Global Claim’ 4066.6.1.2 ‘Total Costs Claim’ 4096.6.1.3 ‘Total Loss Claim’ 4116.6.1.4 ‘Composite Claim’ and ‘Rolled-Up Claim’ 4126.6.2 Global Claims 4146.6.2.1 Introduction 4146.6.2.2 A Historical Perspective 4166.6.2.3 The Current Position 4326.6.2.4 Lilly and Mackay 4386.6.2.5 The Need for a Global Approach 4406.6.3 Conclusions 4436.7 Subcontractor Costs 4446.7.1 Third Party Settlements 4446.7.2 Unsettled Third Party Claims 4536.8 Off-Site Overheads and Profit 4546.8.1 Off-Site Overheads 4556.8.1.1 Off-Site Overheads on an Expenditure Basis 4566.8.1.2 The Time and Cost of Absorbed Overheads 4616.8.1.3 Lost Contribution to Unabsorbed Overhead 4616.8.1.4 Management Charges 4626.8.2 Profit 4636.8.3 Formula Approaches 4666.8.3.1 The Hudson Formula 4676.8.3.2 The Emden Formula 4686.8.3.3 The Eichleay Formula 4696.8.3.4 The Adoption of Formulae 4706.8.3.5 When to Use a Formula 4796.8.3.6 Example of a Formula Claim 4816.8.3.7 Concluding Comments on Formulae 4826.9 Interest and Finance Charges 4846.9.1 Finance and Interest Under Contract Provisions 4856.9.2 Finance and Interest as a Head of Claim 4896.9.3 Damages for Breach 4936.9.4 The Rate and Compounding of Interest 4956.9.5 Adjustments to the Calculation 4996.9.6 Statutory Interest 4996.10 Duplication of Recoveries 5016.10.1 Overlaps Between Prolongation and Disruption Claims 5026.10.2 Overlaps Between Additional Work and Prolongation 5046.10.3 Overlaps Between Overheads and Profit and Variations 5076.10.4 Overlaps Between Additional Work and Disruption 5086.11 Summary 5097 Termination Claims 5137.1 Introduction 5137.2 Termination Under Standard Forms 5187.2.1 Termination for Default by the Contractor 5187.2.2 Termination for Default by the Employer 5227.2.3 Termination for a Party’s Convenience 5247.2.4 Termination for Major Events in Neither Party’s Control 5267.2.5 Competing Claims for Termination 5277.3 Claims for the Contractor’s Lawful Termination 5277.3.1 ‘Amounts Payable for any Work Carried Out’ 5277.3.2 ‘The Cost of Plant and Materials Ordered for the Work’ 5327.3.3 ‘Any Other Cost or Liability Which in the Circumstances was Reasonably Incurred…in the Expectation of Completing the Works’ 5347.3.4 ‘The Cost of Removal of Temporary Works and Contractor’s Equipment’ 5377.3.5 ‘The Cost of Repatriation of the Contractor’s Staff and Labour’ 5377.3.6 ‘A Loss of Profit or Other Loss or Damage Sustained by the Contractor’ 5397.3.7 Demobilisation 5427.3.8 Subcontractor and Supplier Claims 5437.3.9 Other Heads of Contractor Losses or Costs 5447.4 Claims for the Employer’s Lawful Termination 5447.4.1 ‘The Value of the Works, Goods and Contractor’s Documents’ 5447.4.2 ‘Any Losses and Damages Incurred by the Employer’ 5467.4.2.1 ‘Any Extra Costs of Completing the Works’ 5467.4.3 Bonds 5507.5 Claims for the Employer’s Unlawful Termination 5517.5.1 Repudiation 5537.6 Claims for the Contractor’s Unlawful Termination 5547.7 Summary 5548 Other Sources of Claims 5578.1 Letters of Intent 5578.1.1 Instructions to Proceed 5628.2 Bonds 5638.2.1 Types of Bond 5648.2.1.1 Bid Bonds 5658.2.1.2 Advance Payment Bonds 5658.2.1.3 Retention Bonds 5678.2.1.4 Parent Company Guarantees 5678.2.1.5 Performance Bonds 5688.2.1.6 Payment Bonds 5698.2.1.7 Materials Off-Site Bonds 5708.2.2 Claims in Relation to Bonds 5718.2.3 Costs Incurred When Bonds are Called 5718.2.3.1 Example of a Hypothetical Currency Swap 5738.2.4 Costs Incurred When Bonds are Extended 5748.3 Fluctuations in Costs 5768.3.1 Taxes, Levies and Statutory Contributions 5778.3.2 Labour, Materials and Tax Fluctuations 5808.3.3 Price Adjustment Formula 5818.3.4 Application to Other Claims 5838.3.5 Effects of Delays 5848.4 Suspension of Work 5858.4.1 The Right to Suspend 5858.4.2 Typical Financial Heads of Suspension Claims 5878.4.2.1 Prolongation Costs 5878.4.2.2 Security, Storage and Protection 5888.4.2.3 Deterioration and Defects 5898.4.2.4 Payment for Items Not Yet on Site 5908.4.2.5 Resumption Costs 5908.4.2.6 Reducing the Rate of Work Progress 5918.4.2.7 Profit on the Contractor’s Costs 5928.5 Incomplete and/or Defective Work 5938.5.1 The Requirement to Complete and a Defects Liability Period 5938.5.2 Potential Methods and Problems of Quantification 5958.5.3 The Employer Choses to Instruct a Covering Variation 5978.5.4 The Employer Requires the Contractor to Complete or Remedy the Work 5998.6 Omitted Work 6058.6.1 The Power to Omit Work 6058.6.2 How to Value Omissions 6068.6.3 Giving Omitted Work to Others 6098.7 Post-Handover Costs 6118.8 The Costs of Preparing a Claim 6148.8.1 A Claim Under the Contract 6158.8.2 Breach of Contract 6168.8.3 Costs Incurred in the Contemplation of Legal Proceedings 6228.8.4 In-House Management Time 6238.9 Errors, Omissions and Contradictions 6278.10 Summary 6319 Minimising the Consequences of Change 6339.1 Introduction 6339.1.1 Constructing the Team 6359.1.2 Rethinking Construction 6369.2 Contract Preparation 6379.3 Alliance, Partnering and Framework Contracts 6399.3.1 Partnering 6399.3.2 Alliance Contracts 6419.3.3 Framework Agreements 6429.4 Early Warning Systems 6439.4.1 Trend Analysis 6479.5 The Claims Industry 6489.5.1 The Numbers Game 6489.5.2 The First Number 6499.5.3 The Claims Industry and Experts 6499.5.4 Resolving Disputed Claims 6519.6 Summary 652Appendix A Example of Financial Accounts 655Appendix B Example of Management Accounts 657Table of Cases 659Index 667