Services » Construction Claims » Delay and Disruption
In most construction contracts the contractor is working to a programme for the works, an agreed contract sum and/or an associated set of contract rates, and a set of tender documents upon which these are based. This paper anlayses the financial effect of delay and disruption to these fundamental elements of the standard building contract.
In order to prepare or defend a claim it is necessary to understand how these two main elements of the contract are compiled by the contractor; a contractor typically receives a set of tender documents and carries out the following steps in arriving at his price:
- Split the documents into a selection of work packages.
- Obtain net prices for the work packages from sub contractors.
- Prepare a programme for the works based upon the above packages, as part of this extracting a critical path to give the overall project duration.
- Compile a list of preliminaries required to complete the project within the prepared programme period.
- Collate all of the above into a net tender price.
- Calculate the head office overheads; either on a historical basis or on a forward looking basis. Attribute head office overhead costs to the tender, either on a percentage addition based on the value of the project, or on a monthly rate based on the programme.
At this point contractors will generally sit down and assess the risk rating for the project (state employer, reputedly difficult client, long term client, new client, competence of design team, form of contract, etc…).
On the basis of the above the contractor will add a percentage to the project for profit.
It is not uncommon for a contractor to enter a negative profit figure for a mixture of the following reasons:
- Anticipation that packages will be purchased at a lesser price due to it being a real project as opposed to a potential project;
- Anticipation that package prices will be lesser due market conditions.
- Anticipation that, generally due to the poor tender documentation, claims will be successfully submitted for variations, delay and/or disruption.
If one looks at the last possibility, an experienced contractor will be able to adjust his rates upwards in the items he expects to increase and discount his rates for items which are unlikely to change or likely to reduce. In taking such an approach a contractor will look in particular at the preliminaries and overheads; if the anticipation is that the project will be delayed but not changed in terms of scope it will be wise to increase these provision so as to provide a basis for subsequent claims; likewise, if the project absolutely has to be open within a given timeframe, such as a school or a public building, then it may be preferable to enter preliminaries and overheads at ‘nil’ and add the percentage to every single rate, in particular rates for items which they anticipate as increasing.
It is with this reality in mind that representatives of the parties need to approach any claim brought to them for consideration.
There is a distinct difference between delay and disruption; however, they often occur in tandem and contractors prevented from claiming for delay under a contract, or limited in the damages they may claim for delay, may attempt to present what is in effect a delay claim as a disruption claim. It is vital that practitioners are alert to this approach and know how to frame such an argument or argue against such an attempt.
The distinction between delay and disruption is exactly as the words indicate:
When an item of work is unable to finish at an anticipated date due to some event/s, and this item of work is on the critical path of a project programme, the project is delayed.
Where the item of work is not on the critical path, but the timing of the work has to be altered, the works are disrupted.
In practice it is rarely this straightforward:
- There are often a mix of critical path items and non-critical path items delayed and/or disrupted throughout a project.
- These delays and/or this disruption rarely arise from one simple event, but rather a multitude of events, some of which may be contractor caused.
- There are often a multitude of non-critical path items disrupted to such an extent that an overall project delay results and/or the project is disrupted and/or delayed in a general sense.
- There can be a multitude of events without any disruption and/or delay attributable to them in isolation; however, due to the number and nature of these events a delay and/or disruption claim arises therefrom.
These are real problems for contractors; when the programme is disrupted and/or delayed this can have serious financial consequences for a contractor and a contractor submitting a claim on this basis is not a claims conscious contractor in the bad sense in which the word is regularly used, he is merely enforcing his contractual rights or claiming for breach of contract.
The effects of delay and/or disruption are multiple, for example:
- Additional site management in rescheduling disrupted works.
- Additional head office management in managing disrupted works.
- Additional costs from the above if the completion date is delayed.
- Diversion of staff from working on other projects and making profit thereon/gaining a contribution towards their costs.
- Claims from affected sub-contractors who had scheduled the time to work.
- Reduction in the profitability of the project.
Critical to the preparation of claims is the availability of records, not just of the period of delay and/or disruption, but in particular the elements of the project which were not affected, thereby providing a benchmark against which to assess the delay and/or disruption. One of the first things representatives need to advise clients to do is to collate all possible information in a comprehensive manner.