Keywords: Delay; Extension of time; Damages; Liquidated and ascertained damages; Loss and expense; Head office and profit recovery; Formulae; Emden, Hudson & Eichleay; Ascertainment; JCT suite of contracts; McAlpine –v– Property and Land and Contractors [1996] 76 BLR 59; Norwest Holst –v– Co-Operative Wholesale Society [1997]

Those that work both in and on the construction industry will not need reminding that trading conditions are currently extremely challenging.  Contractors have been especially hard hit as they rely on live projects to generate income for the overhead structure.   Even when work is secured, there will be greater financial risk when compared with ‘normal’ trading times in delivering projects, as there will be little contingency funds to fall back on in the event of unforeseen problems like, for example, delays.

But of course, with any construction project there is always an inherent risk that the completion date will be delayed, no matter how vigilant a construction team may be.  But even where an extension of time is granted, there are still contractors and members of the professional team that believe monies automatically flow from receiving an extension, and that bringing forward various formulae to calculate its overhead losses is an acceptable method of determining appropriate compensation levels.  It’s not!

Time and money are separate entities.  An extension of time protects a contractor from the possibility of having damages being claimed by the employer for delay.  Any loss or expense incurred by a contractor associated with delays is a separate claim and must be proved on balance.  But many contractors circumvent the requirement to adduce the necessary level of evidence, and inevitably put forward formulae that purports to calculate the amount of overhead and profit loss.

It is settled law that when a contractor becomes entitled to reimbursement for delay to its Works, it may recover the return it would have achieved on other work had its resources not been detained on the Works due to the delay, including a claim for Head Office Overheads and Profit. 

Emden, Hudson and Eichleay

The Head Office Overheads and Profit element of such a claim can be a significant value, and it is for this reason that a contractor must adduce the necessary level of proof to demonstrate the loss.  But, the three most common formulae used in calculating such loss, is neither an appropriate nor acceptable means of calculating the loss.

These three formulae are Emden, Hudson and Eichleay.  But contrary to common belief, these formulae do not calculate the actual loss incurred nor have they received judicial approval. 

Further, standard form of contracts including the JCT suite, require loss and expense claims to be ascertained.  In McAlpine –v– Property and Land and Contractors [1996] 76 BLR 59, it was held that formulae do not ascertain.

Bespoke Formulae

In Norwest Holst –v– Co-operative Wholesale Society [1997], unreported (OR), it was held [at paragraph 350], that [an Emden-style] formula is sustainable and may be used as the basis of ascertaining a contractor’s entitlement to payment for loss and expense in the following circumstances:

1. The loss in question must be proved to have occurred.

2. The delay in question must be shown to have caused the contractor to decline to take on other work which was available and which would have contributed to its overhead recovery.  Alternatively, it must have caused a reduction in the overhead recovery in the relevant financial year or years which would have been earned but for the delay.

3. The delay must not have associated with it a commensurate increase in turnover and recovery towards overheads.

4. The overheads must not have been ones which would have been incurred in any event without the contractor achieving turnover to pay for them.

5. There must have been no change in the market affecting the possibility of earning profit elsewhere and an alternative market must have been available.  Furthermore, there must have been no means for the contractor to deploy its resources elsewhere despite the delay.  In other words, there must not have been a constraint in recovery of overheads elsewhere. 

The learned judge in Norwest Holst, HHJ Thornton QC, stated that in this case and by way of distinction with McAlpine, clause 13.1 of the sub-contract requires the parties to agree the loss and expense rather than ascertain.  In default of the agreement the arbitrator must determine what the parties should have agreed, namely what is to be reasonably regarded as the relevant loss.  In appropriate cases, that agreement might be reflected by a formula-based calculation.

Clause 13.1 stated: "If the regular progress of the subcontract Works is materially affected by any one or more of the Relevant Matters… the agreed amount of any direct loss and/or expense thereby caused to the subcontractor shall be recoverable from the contractor as a debt.”. 

Norwest Holst did not find that an Emden formula was sustainable in measuring a contractor’s entitlement to payment for loss and/or expense, but was a bespoke formula which had been devised by the arbitrator which was a reduced formula for unabsorbed overheads.

Comment

Whether it is asserting or defending claims that relate to overheads and profit loss, formulae are not an acceptable means of establishing loss.  The adoption of a bespoke formula must be approached with caution as it will only be appropriate in limited circumstances, and will only be successful if it meets with the test laid down in Norwest Holst.  Therefore, whether a loss is ascertained or a bespoke formula is used, there is no substitution for adducing the necessary level of proof.

© Michael Gerard Consulting Limited
January 2011