How to Quantify Prolongation Costs

It's often the case that 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 delay.

A claimant must firstly identify the actual days of delay a respondent is culpable.

The appropriate method to identify actual days of delay is to complete a cause-and-effect 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, etc., if they can be proven that they are recoverable.

Separate into direct and indirect costs

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).

Indirect Costs

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

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.

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

1. Identify the actual days of non-culpable 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 effected 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.

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Paul