Construction Contract Claims

Loss and Expense Claims

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 Outline
A. Introduction
– Background
– Contract Provisions: GCC and COPA
– Legal Provisions: The Ethiopian CIVIL CODE
B. Cost Claims in Construction Contracts
– Types of Cost claims in Construction Contracts
– Sources of Cost Claims in Construction Contracts
– Presentation of Loss and/or Expense Claim
C. Evaluation of Cost Claims
– Common Heads of Cost Claims
– Principles for Analysis of Loss and Expense Claim
– Cost Claims Analysis Techniques
 Prolongation Claim, Loss of Profit or Opportunity Cost Claim, Disruption & Loss of
Productivity Claim, Acceleration Claims, Rate Revision Claim

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 A. INTRODUCTION
A1 - Background
A2 - Contract Provisions: GCC and COPA
A3 - Legal Provisions: The Ethiopian CIVIL CODE

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 A1 – Background
 Claims Management
 Claim management is not concerned primarily with
whether or not a claim is valid.
 It is concerned with the procedures that should be
followed and the information that should be recorded at
the time that the events to the claim take place.
 It is essential that a potential claim situation is recognised
when it happens and that full and contemporary records
are kept of anything that may have relevance to any claim
that could arise.
 These records have added value if they have been agreed
to be accurate by representatives of the Contractor and
Engineer at the time they were prepared.
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 A1 – Background (Contd.)
 “A wise construction lawyer once said that there were
three simple rules to follow for success before any
tribunal. They were: keep good records, keep good
records and finally, keep good records.”
(Loss and Expense Explained Page 85)

 Objectives of the Presentation

 Highlight the types of cost claims in construction
contracts.
 To indicate the most common sources of cost claims
in construction contracts.
 To show up the principles for analysis of cost claims.
 To outline the cost claim analysis techniques

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 A2 - Contract Provisions
Clauses 53 - Procedure for Claims

 Sub-Clause 53.1- Notice of Claims

 if the Contractor intends to claim any additional
payment pursuant to any Clause of these Conditions or
otherwise, he shall give notice of his intention to the
Engineer, with a copy to the Employer, within 28 days
after the event giving rise to the claim has first arisen.

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 A2 - Contract Provisions (Contd.)
 Sub-Clause 53.2- Contemporary Records
 the Contractor shall keep such contemporary records
as may reasonably be necessary to support any claim
he may subsequently wish to make.
 Without necessarily admitting the Employer's liability,
the Engineer shall, on receipt of a notice under Sub-
Clause 53.1, inspect such contemporary records and
may instruct the Contractor to keep any further
contemporary records.
 The Contractor shall permit the Engineer to inspect all
records kept pursuant to this Sub-Clause and shall
supply him with copies thereof as and when the
Engineer so instructs.
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 A2 - Contract Provisions (Contd.)
 Sub-Clause 53.3- Substantiation of Claims
 Within 28 days, or such other reasonable time as may
be agreed by the Engineer, of giving notice under Sub-
Clause 53.1, the Contractor shall send to the Engineer
an account giving detailed particulars of the amount
claimed and the grounds upon which the claim is
based.
 Where the event giving rise to the claim has a
continuing effect, such account shall be considered to
be an interim account and the Contractor shall, ...send
further interim accounts giving the accumulated
amount of the claim and any further grounds upon
which it is based.
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 A2 - Contract Provisions (Contd.)
 Sub-Clause 53.3- Substantiation of Claims (Contd.)
 In cases where interim accounts are sent to the
Engineer, the Contractor shall send a final account
within 28 days of the end of the effects resulting from
the event. The Contractor shall, if required by the
Engineer so to do, copy to the Employer all accounts
sent to the Engineer pursuant to this Sub-Clause.

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 A2 - Contract Provisions (Contd.)
 Sub-Clause 53.4- Failure to Comply
 If the Contractor fails to comply with any of the
provisions of this Clause in respect of any claim which
he seeks to make, his entitlement to payment in
respect thereof shall not exceed such amount as the
Engineer or any arbitrator or arbitrators ... assessing
the claim considers to be verified by contemporary
records
 (whether or not such records were brought to the
Engineer's notice as required under Sub-Clauses 53.2
and 53.3).

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 A2 - Contract Provisions (Contd.)
 Sub-Clause 53.5- Payment of Claims
 The Contractor shall be entitled to have included in
any interim payment certified by the Engineer
pursuant to Clause 60 such amount in respect of any
claim as the Engineer, after due consultation with the
Employer and the Contractor, may consider due to the
Contractor provided that the Contractor has supplied
sufficient particulars to enable the Engineer to
determine the amount due.

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 A2 - Contract Provisions (Contd.)
 Sub-Clause 53.5- Payment of Claims (Contd.)
 If such particulars are insufficient to substantiate the
whole of the claim, the Contractor shall be entitled to
payment in respect of such part of the claim as such
particulars may substantiate to the satisfaction of the
Engineer.
 The Engineer shall notify the Contractor of any
determination made under this Sub-Clause, with a
copy to the Employer.

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 A2 - Contract Provisions (Contd.)
 Sub-Clause 2.1 – Engineer’s Duties and Authority
a. The Engineer shall carry out the duties specified in the
Contract.
b. The Engineer may exercise the authority specified in or
necessarily to be implied from the Contract, provided,
however, that if the Engineer is required, under, the
terms of his appointment by the Employer, to obtain
the specific approval of the Employer before exercising
any such authority, particulars of such requirements
shall be set out in Part II: COPA. ... any requisite
approval shall be deemed to have been given by the
Employer for any such authority exercised by the
Engineer.
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 A2 - Contract Provisions (Contd.)
 Sub-Clause 2.1 – Engineer’s Duties and Authority
COPA Sub-Clause 2.1 (b),
 The Engineer shall obtain the specific approval of the
Employer before taking any of the following actions specified
in Part I:
(a) consenting to the sub-letting of any part of the Works under
Clause 4;
(b) certifying additional cost determined under Clause 12 or
Clause 53;
(c) determining an extension of time under Clause 44;
(d) issuing any variation under Clause 51, which exceeds Birr
100,000.00;
(e)  issuing any variation, if the sum of all variations issued has
exceeded 5% of the Contract Price;

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 A2 - Contract Provisions (Contd.)
 Sub-Clause 2.1 – Engineer’s Duties and Authority
COPA Sub-Clause 2.1 (b), (Contd.)
(f) certifying payment if the Contract Price will be exceeded;
(g)  authorising the use of provisional sums in excess of the
monetary limit for variations;
(h)  issuing any taking-over certificate;
(i)  certifying additional payment under Clause 65;
(j)  Issuing a Defects Liability Certificate.
(k)  Fixing rates or prices under Clause 52.

c. Except as expressly stated in the Contract, the Engineer

shall have no authority to relieve the Contractor of any of
his obligations under the Contract.

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 A3 - Legal Provisions
 Art. 3181. - Compensation
(1) The party who has contracted with the administrative authorities
shall be entitled to compensation equal to the loss sustained by
him by reason of the modification or termination of the contract.
(2) In fixing such compensation, regard shall be made to all the
benefits which the party could legitimately expect to derive from
the contract.
(3) The court may, however, limit the amount of compensation in so
far as it refers to loss of profit, where it appears that the
modification or termination of the contract is due to extraneous
causes and not to a fault of the administrative authorities which
have concluded the contract.

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 A3 - Legal Provisions (Contd.)
Art. 3184. - Upsetting of contract
The balance of the contract shall be deemed to be upset where new
circumstances impose on the party contracting with the administrative
authorities additional obligations which certainly surpass the extreme
limits which could be expected by the parties on the making of the
contract.
 Art. 3186. - Provisions for the, variation or revision of prices.
The existence in the contract of a provision relating to the variation or
revision of prices shall not prevent compensation being due where:
(a) such provision has not been enforced; or
(b) it appears that the enforcement of such provision is not sufficient
to remedy the effects of the economic upsetting of the
contract, as in the case where there are fluctuations affecting
elements other than those which have been chosen as an index in
the, variation clause.
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B. Cost Claims in Construction
Contracts

B1 - Types of Cost Claims in Construction Contracts

B2 - Sources of Cost Claims in Construction Contracts
B3 - Presentation of Loss and/or Expense Claims

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 B1 - Types of Claims
 The following are the most common Cost
Claims
– Disruption Claims
– Prolongation Claims
– Acceleration Claims
– Quantum Meriut Claims
– Ex-gratia Claims
– Global Claims
– Breach of Contract Claims

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 B1 - Types of Claims (Contd.)
 Disruption Claims
– A contractor’s work is disrupted if he is prevented from
carrying out the works in accordance with the planned
orderly timing and sequence.
– If the prevention results from one or more of several events
provided for in the contract, the contractor is able to claim
for an extension of time, additional costs or both.
– Typical causes of disruption are:
• delays in access to site,
• changes in design,
• delays in providing drawings,
• delays in providing instructions

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 B1 - Types of Claims (Contd.)
 Disruption Claims (Contd.)
– Delay due to disruption may cause loss of productivity and
uneconomic use of equipment and may support a claim,
provided that they do not result from an event that is the
responsibility of the contractor.
– Many disruption claims fail because the Contractor is
unable to show that the additional costs were caused as a
result of matters for which the Employer/other party was
responsible.
– Hence, comprehensive contemporary records are
essential.

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 B1 - Types of Claims (Contd.)
 Prolongation Claims
– Prolongation is a delay to a critical activity, which extends
the time for completion of the whole of the works.
– If the cause of the delay is not the responsibility of the
contractor, an extension of time to the Contractor will be
justified.
– Extensions of time carry with them additional costs to the
contractor associated with the increase in the length of the
contract period.

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 B1 - Types of Claims (Contd.)
 Prolongation Claims (Contd.)
– The extra costs could arise from:
– maintaining the contractor’s site facilities;
– providing facilities to the engineer;
– extended use of equipment, which might be required for another
project;
– off site and head office costs;
– finance and insurance costs; and
o many other potential related claims.

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 B1 - Types of Claims (Contd.)
Site Overhead Costs
– The extra site overhead costs due to prolongation are those
incurred after the original contract completion date and up
to the extended (or actual) completion date.
– Some may prefer the costs incurred during the actual
period of delay.
– Documents/information to substantiate the actual costs
incurred:-
 Organization chart/site diary records showing the staff involved.
 Staff salaries payroll records or contract of employment.
 Insurances / Bonds Premium receipts for the prolongation period.

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 B1 - Types of Claims (Contd.)
Head Office Overhead Costs
– Components of head office overheads may be listed as
follows:-
a. Rent and rates of offices, plant and yards;
b. Maintenance and running costs;
c. Directors’ salaries and expenses;
d. Head office, technical and administrative staff salaries and ‘on
costs’ (surveyors, planners, purchasers, accountants, typists,
messengers, cleaners, maintenance staff and the like);
f. Administrative expenses, such as postage, printing, stationery,
telephones;
g. Traveling expenses, including the provision of motor cars for
directors and staff;
h. Legal and professional fees;

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 B1 - Types of Claims (Contd.)
Extended use of Equipment (Depreciation)
– Where a monetary claim arises from a substantial delay to
the contract period, necessitating the Contractor’s plant
and equipment to be held on site for much longer than
planned, then the Contractor incurs a depreciation in the
value of those assets. This loss would be recoverable.
– Documents/information to substantiate the actual costs
incurred:-
 Site and plant records showing the plant involved.
 The site diary could be better completed with relevant
information.
 All such records must then be verified and signed by the
supervision consultant as an accurate record.

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 B1 - Types of Claims (Contd.)
 Acceleration Claims (Directed and Constructive)
Directed Acceleration
– An employer, faced with an excusable delay which could
result in a claim for an extension of time from the
contractor, may consider it to be in the best interests of the
contract to direct the contractor to accelerate the works in
an attempt to meet the contract completion date.
– However, the employer is only able to do this if there is a
clause in the contract that gives it such authority.
– This type of acceleration is referred to as 'directed
acceleration'.

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 B1 - Types of Claims (Contd.)
 Acceleration Claims (Contd.)
Directed Acceleration …
– If the employer considers this to be a favorable route to
take it will ask the contractor for acceleration proposals in
terms of time and cost and will either accept them, reject
them or negotiate on them in the usual manner.
– If the contractor takes the acceleration measures agreed
upon yet still fails to meet the contract completion date, it
will be entitled to the balance of the extension of time
which it would otherwise have been entitled to, had
acceleration not been directed.

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 B1 - Types of Claims (Contd.)
 Acceleration Claims (Contd.)
Directed Acceleration …
– Where the contract provides for acceleration, payment for
the acceleration should be based on the terms of the
contract.
– Where the acceleration is instructed and/or agreed, the
contractor is not entitled to claim prolongation
compensation for the period of the Employer delay
avoided by the acceleration measures.

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 B1 - Types of Claims (Contd.)
Constructive Acceleration
– A refusal by the employer to recognize in a timely manner
that the contractor has encountered an excusable delay for
which it is entitled under the contract to be granted an
extension of time and which, because of the employer's
failure to acknowledge this entitlement, results in the
contractor having to accelerate its programme in order to
attempt to complete the contract requirements by the
existing completion date.
– This situation may arise either because the employer
refuses a valid request for an extension of time or because
it grants one at an inappropriate time.

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 B1 - Types of Claims (Contd.)
Constructive Acceleration …
– It is a widely accepted principle adopted in the negotiation
and settlement of construction claims in the US and
Australia, but it is not acceptable in England and Wales.

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 B1 - Types of Claims (Contd.)
 Quantum Meriut Claims
– “The amount the Contractor deserves” or “what the job is
worth”
– Payment on a quantum meriut may arise:-
 Where there is no contract at all;
 Where changes are made under a contract to a degree
which renders the work carried out substantially
different from that contracted. (Scope change)

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 B1 - Types of Claims (Contd.)
 Ex-gratia Claims
– Claims which the Employer is under no contractual
obligation to pay.
– No legal base, but are claims which the Contractor
considers the Employer has a moral duty to meet, e.g. if he
has seriously underpriced an item whose quantity has been
increased substantially because of the variation which will
cause him considerable loss.
– The Employer has no obligation to meet such a claim, but
may be prepared to do so on grounds of natural justice or
to help the contractor where otherwise he might be forced
into liquidation.

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 B1 - Types of Claims (Contd.)
 Global Claims (Rolled-up or Total Loss Claims)
– Loss and/or expense attributable to more that one head of
claim at a time.
– When it is impracticable to disentangle the parts directly
attributable to each head of claim.
– A claim that relies exclusively on global or total loss
methodology is likely to fail.
– FIDIC and other forms of contract require that claims must
be substantiated

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 B1 - Types of Claims (Contd.)
 Claims for Breach of Contract

– The claim is based upon clauses in the contract,

– which define the events that create breaches of contract
and the remedy that is available to the injured party
– Default of Contractor - Clause 63
– Default of Employer - Clause 69.

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 B1 - Types of Claims (Contd.)
– Sub-clause 63.1: Default of Contractor
if the Engineer certifies to the Employer, with a copy to the Contractor, that, in his
opinion, the Contractor:
(a) has repudiated the Contract,
(b) without reasonable excuse has failed
(i) to commence the Works in accordance with Sub-Clause 41.1, or
(ii) to proceed with the Works, or any Section thereof, within 28 days after
receiving notice pursuant to Sub-Clause 46. 1,
(c) has failed to comply with a notice issued pursuant to Sub-Clause 37.4 or an
instruction issued pursuant to Sub-Clause 39.1 within 28 days after having
received it,
(d) despite previous warning from the Engineer, in writing, is otherwise
persistently or flagrantly neglecting to comply with any of his obligations
under the Contract, or
(e) has contravened Sub-Clause 4.1,

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 B1 - Types of Claims (Contd.)
– Sub-clause 69.1: Default of Employer
In the event of the Employer:
(a) failing to pay to the Contractor the amount due under any certificate of the
Engineer within 28 days after the expiry of the time stated in Sub-Clause
60.10, within which payment is to be made, subject to any deduction that the
Employer is entitled to make under the Contract,
(b) interfering with or obstructing or refusing any required approval to the issue
of any such certificate,
(c) becoming bankrupt or, being a company, going into liquidation, other than for
the purpose of a scheme of reconstruction or amalgamation, or
(d) giving notice to the Contractor that for unforeseen economic reasons it is
impossible for him to continue to meet his contractual obligations, the
Contractor shall be entitled to terminate his employment under the Contract
by giving notice to the Employer, with a copy to the Engineer. Such termination
shall take effect 14 days after the giving of the notice.

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 B2 – Sources of Cost Claims in
Construction Contract
 Sub Clause 6.4 – Delays and Cost of Delay of drawings
 Sub Clause 12.2 – Not Foreseeable Physical
Obstructions or Conditions
 Sub Clause 17.1 – Setting-out
 Sub Clause 27.1 – Fossils
 Sub Clause 36.4 – Cost of Tests not Provided for
 Sub Clause 38.2 – Uncovering and Making Openings
• Opening for inspection and testing where materials are
found to be in accordance with contract.
 Sub Clause 40.1 – Suspension of Work

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 B2 – Sources of Cost Claims in
Construction Contract (Contd.)
 Sub Clause 42.2 – Failure to Give possession
 Sub Clause 52.1 – Variation
 Sub Clause 59.2– Nominated Subcontractors; Objection to
Nomination
 Sub Clause 65.3 – Damage to Works by Special Risks

Not all grounds entitling Contractor to extension of time

lead to automatic recovery of loss and expense.

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 B3 – Presentation of Claims
 Claims should be presented in a way that enables them to be
understood as easily as possible
 Claims should be presented in a professional manner
 Facts are indisputable
 Facts must be separated from opinion
 Written site records and correspondence should be supplied,
supplemented by charts and schedules;
 to establish any statement of delay;
 to verify instructions given or responses not given;
 to substantiate periods of exceptionally adverse climatic conditions;
 to confirm periods when the contractor’s plant or labour was idle or
working inefficiently; and
 to support any other facts upon which the claim relies.

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 B3 – Presentation of Claims (Contd.)
 A claim must state under which clause of the contract it is
made
 It should not be necessary to read pages of supporting
documentation to understand the basis of the claim
 All documentation necessary to support the arguments
presented in the claim should be provided in well referenced
and indexed appendices
 A poorly prepared or badly presented claim is more likely to be
rejected as the claimant’s arguments will be;
• unclear,
• poorly set out and;
• weakly substantiated
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 B3 – Presentation of Claims (Contd.)
 A well presented claim shall at least consist of the following
sections:
1. Introduction;
2. Contractual basis of claim
3. The narrative providing details of the claim;
4. An evaluation of the claim; and
5. Appendices of supporting documentation

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 B3 – Presentation of Claims (Contd.)
1. Introduction
• Sets the scene by providing basic details of the contract
including
• the parties to the contract,
• contract sum,
• important contract dates,
• a history of previous claims for extensions of time that have been
claimed and granted and
• similar relevant data

2. Contractual basis of claim

• detailing the clauses of the contract that give rise to the claim;

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 B3 – Presentation of Claims (Contd.)
3. The Narrative Section
• The narrative section provides full details of any delays
• their effect upon the programme
• Justification for payment

4. Evaluation of the Claim

• The evaluation of the claim will quantify the extension of time claimed
and
• any additional costs claimed for prolongation, disruption or any other
reason

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 B3 – Presentation of Claims (Contd.)
5. Appendices of Supporting Documentation
Documents that may be useful when preparing a claim include:
• contract documentation;
• Daily records of plant and labour;
• Drawing register;
• Correspondence;
• Programmes, both approved and as built;
• Minutes of meetings;
• Site diaries;
• Site instructions;
• Variation orders;
• Dayworks records;
• Materials orders, invoices and deliveries; and
• subcontractors’ records, etc.

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C. Evaluation of Cost Claims
C1 - Common Heads of Cost Claims
C2 - Principles for Analysis of Loss and Expense Claim
C3 - Cost Claims Analysis Techniques
 Prolongation Claim, Loss of Profit or Opportunity Cost
Claim, Disruption & Loss of Productivity Claim,
Acceleration Claims, Rate Revision Claim

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 C1- Common Heads of Claim
 Preliminaries or site establishment costs
 Head office overhead costs
 Profits
 Inflation
 Loss of productivity or acceleration costs
 Finance charges and interest
 Variations (Rate Revision)
 Costs of preparing the claim

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C2- Principles of Analysis of Cost Claim

 When a claim is received it must be checked to ensure that the

necessary components are included

 The facts that are presented in the claim should be checked to

ensure that;
– they are accurate
– supported by confirmatory documents
– Whether it indicates the clause or clauses on which it is based.

 Any claim must be assessed in a fair and impartial manner

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C2- Principles of Analysis of Cost Claim (Contd.)
 A claim shall be reviewed critically to determine whether it is
acceptable as a whole or in part

 Components of a claim shall be considered individually and

breaking them down into smaller parts if possible

 Communication (due consultation) is important at all stages of

a claim.

 Full and clear communication can moderate a claim or even

persuade a contractor that it should not be submitted

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C2- Principles of Analysis of Cost Claim (Contd.)
 A contractor is only entitled to compensation for delays
caused by the action or inaction of the Employer or his
agents, including the Engineer.

 If a stoppage of work occurs as the result of exceptional

inclement weather or some similar cause, which is not the
responsibility of either party, the contractor is entitled to an
extension of time but not to additional costs.

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C2- Principles of Analysis of Cost Claim (Contd.)
 In Conclusion, the following cautionary notes should be
looked into before starting analysis of a claim:

1. It must be shown that the loss in question has actually

been suffered.
2. The loss must as a matter of law have resulted from the
claim-provoking event.

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C2- Principles of Analysis of Cost Claim (Contd.)

 The issues of entitlement and magnitude should always be

separated to make claims procedures easier to manage.

 If it can be established that a contractor is entitled to claim, a

separate problem is the calculation of the amount of a claim.

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C3 - Cost Claim Analysis Techniques (Contd.)

 Definition of ‘Cost’

Sub-clause 1.1 (g)(i) “cost” means all expenditure properly

incurred or to be incurred, whether
on or off the Site, including overhead and other
charges properly allocable thereto but does not
include any allowance for profit.

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C3 - Cost Claim Analysis Techniques (Contd.)
 Head Office Overhead
• Head office overheads are the incidental costs of running the
Contractor’s business as a whole and include indirect costs
which can not be directly allocated to production.
• A Contractor may claim for net head office expenditure; i.e.,
total head office expenditure less total the amount included in
its tender. (Actual Cost Approach).
• The difficulty arises in identifying the increased expenditure
directly and indirectly arising from the delay on the project in
question.
• In practice, because of the enormous difficulties of accurate
quantification, contractors’ claims under this heading tend to
adopt a ‘formula’ approach. (The Lost opportunity Approach).

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C3 - Cost Claim Analysis Techniques (Contd.)
 Head Office Overhead
• A notional daily or weekly contribution from the contract in
question to general business overheads and profits is identified,
and then multiplied by the number of days or weeks for which
the contractor is entitled to claim.
• There are three formulae commonly used for head office
overhead calculations:
 the Hudson formula,
 the Emden formula, and
 the Eichleay formula.
• Others
 Ernstrom formula, Manshul formula, Carteret formula, Allegheny
formula, etc.

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C3 - Cost Claim Analysis Techniques (Contd.)

1. Hudson Formula

Overhead / Profit Percentage Contract Sum

= X X Period of Delay
100 Contract Period

 It is based on the allowances actually made by the contractor in

tendering for the contract.
 This may bear little or no relation to the actual head office costs of
the contractor & therefore Hudson’s formula is often criticized as
unrealistic

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C3 - Cost Claim Analysis Techniques (Contd.)
2. Emden Formula

Total Overhead / Profit during Original Contract

Actual Contract Period Sum
= X X Period of Delay
Total Company Turnover for Original Contract
Actual Contract Period Period

 Here the figure used is the percentage that is relevant to the

contractor’s whole organization, found by dividing total overhead
cost and profit by total turnover.
 This formula has the advantage of using the contractor’s actual head
office/profit percentage rather than the one contained in the
contract.

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C3 - Cost Claim Analysis Techniques (Contd.)
3. Eichleay Formula
Total Contract Billings Contract
Total Head Office Overhead
Total Company Billings for X = Allocable
for Actual Contract Period Overhead
Actual Contract Period

Contract Allocable
Overhead
= Daily Contract Allocable Overhead
Total Extended Contract
Period

Daily Contract Allocable Overhead X Period of Delay = Sum Claimable

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C3 - Cost Claim Analysis Techniques (Contd.)
 Site Overhead
• This can be determined using the contractor’s breakdown of
costs, which shall be subjected to price adjustment if the
contract has such provision.
• Alternatively, it could be determined from the actual cost
suffered by the contractor based on acceptable documentary
evidences.
• While determining site overhead costs it is important to
differentiate the fixed (one off) elements from the time related
ones. For example:
 In cases of EOT – time related elements shall be considered
 In cases of omissions – fixed elements shall be considered

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C3 - Cost Claim Analysis Techniques (Contd.)
 Site Overhead Example
• Project A is a Road Construction project of 121 km with 36 months of contract
period, an original value of main works of ETB 237,152,561.00. After the
Contractor commenced the works the Employer through the Engineer has
issued a variation order to omit the last 22 km section as it was heavily prone
to land slide. While the variation order was given, the Contractor was
executing his works in the omitted section and the value of same was
ETB3,172,259.00. According to the Engineer’s assessment the revised value of
the main works was ETB 139,513,356.00. The Contractor had submitted his
breakdown of costs along with his proposal for the variation. Accordingly, the
total Overhead and Profit was indicated to be 23% [Site Over Head 15%, Head
office Overhead 1% and Profit 7%]. Assume 35% of the site overhead is a
time related element.

 What would be the cost that the Contractor may reasonably entitled to
due to the omission of part of the works?

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C3 - Cost Claim Analysis Techniques (Contd.)
# Description Formula Amount
1 Original Value of Main Works   237,152,561

2 Revised Value of Main Works   139,513,356

3 Value of omitted Works (1) - (2) 97,639,205

4 Value of Measured works in the   3,172,259

omitted section
5 Actual value of omitted works (3) - (4) 94,466,945

6 Loss of recovery OH&P 23% of (5)/1.23 17,664,551

7 Profit 7/23 of (6) 5,376,168

8 HO Overhead 1/23 of (6) 768,024

9 Anticipated OH recovery (6) - (7) - (8) 11,520,359

10 Fixed OH 65%* (9) 7,488,233

11 Time related OH 35%* (9) 4,032,126

12 OH Entitlement (10) + (7) + (8) 13,632,425

Total Due (ETB)   13,632,425

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C3 - Cost Claim Analysis Techniques (Contd.)
 Depreciation , Equipment Loss of Productivity
• Where the contractor’s own plant stands idle in a period of
delay, the claim shall be made based on depreciation and
maintenance costs, not on current hiring rates.
• Idle equipment shall be identified, considering the possible
reassignment of equipment to other activities.
• The contractor is responsible to provide evidences with respect
to rates for depreciation and other information, such as:
 Site and plant records showing the plant involved.
 The site diary could be better completed with relevant
information.
 All such records must then be verified and signed by the
supervision consultant as an accurate record.

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C3 - Cost Claim Analysis Techniques (Contd.)
 Rate Revision Claims
Sub –clause 52.1
• All variations referred to in Clause 51 and any additions to the
Contract Price which are required to be determined in
accordance with Clause 52, ... shall be valued at the rates and
prices set out in the Contract if, in the opinion of the Engineer,
the same shall be applicable.
• If the Contract does not contain any rates or prices applicable to
the varied work, the rates and prices in the Contract shall be
used as the basis for valuation ...
• failing which, after due consultation by the Engineer with the
Employer and the Contractor, suitable rates or prices shall be
agreed upon between the Engineer and the Contractor.

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C3 - Cost Claim Analysis Techniques (Contd.)
 Acceleration Claims
• An express term of the contract or a separate agreement
• The contractor is not entitled to unilaterally decide to
accelerate and expect the employer to pay the acceleration
cost.
• The Contractor is required to demonstrate the cost of resources
which would have been employed had no acceleration
measures been taken.
• The acceleration costs might consist of:-
i) Deployment of additional plant, formwork
ii) Deployment of additional workforce
iii) Working overtime
iv) Additional overhead and profit thereon

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C3 - Cost Claim Analysis Techniques (Contd.)
 Acceleration Claims
• Generally the process of accelerating the works may cause
a drop in productivity for the following reasons.
 Learning curve for additional operatives
 Drop in hourly production rates due to fatigue and long hours
 Congestion of working areas
 Increased pressure on supervision
 Higher proportion of defective work
• It is important that prior to any acceleration measures,
either party to take a step towards resolving their disputes
or any differences with respect to EOT

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C3 - Cost Claim Analysis Techniques (Contd.)
 Loss of Opportunity Claims
• Some contractual provisions only provide for recovery of
additional cost or expense, a claim for loss of profit is not
permissible
• The Contractor to show some evidence that he was given
the opportunity to tender for other projects and that he
could not reasonably take advantage of these opportunities
because of the fact that his resources were retained on the
delayed project.

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C3 - Cost Claim Analysis Techniques (Contd.)
 Loss of Opportunity Claims
• the Contractor would be advised to keep a record of the
following:-
i) All tenders submitted and awarded so that a success
ratio can be established;
ii) All projects for which the Contractor was invited to
tender, but which were declined or a deliberately high
tender submitted.
• If the Contractor can demonstrate that, on the balance of
probability, he would have been able to obtain other
contracts during the period of overrun, that alone ought to
be sufficient to establish the claim in principle.

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C3 - Cost Claim Analysis Techniques (Contd.)
 Other Claims
• Interest on late payment
• Change in legislation
• Inflation
• Financial charges
• Cost of preparing the claim

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 References
 International Construction Contract Management, D. Bryan Morgan, RIBA
Publications, United Kingdom, 2005
 SCL Delay and Disruption Protocol, October 2002, www.scl.org.uk, United
Kingdom
 Construction Contract Law and Management, John Murdoch and Will
Huges, Spon Press, United Kingdom, Third Edition, 2000
 Extension of Time Explained, Gillian Birkby and Paul Brough, RIBA
Publications, United Kingdom, 1999
 Loss and Expense Explained, Paul Newman and Jeff Whitfield, RIBA
Publications, United Kingdom, 1994

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Thank You !!!

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