Loss and expense is the term often used in many contracts to describe the additional costs incurred by a Contractor as a result of disturbance to the regular progress of the works caused by matters either within the Employer's control or by breaches of contract by the Employer.
Loss and expense costs may be incurred as a result of:
i. delay to the works (also known as prolongation costs). For example, if the works are delayed the Contractor may be entitled to an extension of time but it may also incur additional costs as it will probably have to maintain its site facilities for longer than expected
ii. disruption to the works. For example, if the Employer gives the Contractor information late, the works may need to be carried out in a different order and therefore less efficiently and the Contractor may incur extra costs due to the disruption caused
Most construction contracts set out the circumstances under which a Contractor is entitled to claim for loss and expense.
Claims for loss and expense should reflect the additional costs which the Contractor has incurred. Claims are commonly brought under one or more of the following heads:
i. increased preliminaries
ii. overheads
iii. wasted management time
iv. loss of profit
v. loss of productivity or uneconomic working
vi. increased costs resulting from inflation
vii. interest for non-payment of money
viii. finance charges
Increased Preliminaries
Preliminaries may include, for example, scaffolding, cranes, storage facilities, electricity for the works, or supervision. Preliminaries are frequently time-dependent and a delay in completion will usually mean that their cost has increased because certain resources have been required for a longer period. They may therefore be included in a Contractor's claim for delay.
Overheads
Overheads are similar to preliminaries in that they constitute expenditure on support services, both on and off site, and general running costs. Whereas preliminaries refer to particular expenditure on the site and contract works, overheads are the costs of running the Contractor's operation as a whole, including, for example, the rental of the Contractor's buildings and general support and supervisory staff costs.
Wasted Management Time
It may also be possible to claim the costs of staff/senior employees who are dealing with the consequences of a breach of contract—provided, of course, that the same costs are not also claimed elsewhere, for example as overheads. Managing the consequences of a breach can include investigation of the breach, assessing and dealing with it, and undertaking mitigatory steps. The Contractor will need to show that staff time was diverted (including the extent of time diverted) and provide evidence that this diversion caused significant disruption to its business
Loss of Profit
Contractors commonly claim a loss of profit arising out of a reduction in turnover, but in order for a claim to succeed, as with overheads, it must show that the lost turnover could have been used profitably. A claim for loss of profit will not fail just because a particular project is unprofitable. The test is what the Contractor could have done with the turnover had it been received at the planned time. Such claims will, once more, depend on it showing that but for the delay or disruption it would, in fact, have been able to earn additional profit elsewhere.
Loss of productivity or uneconomic working
Loss of productivity or uneconomic working claims are sometimes made where there has been a delay or disturbance to the Contractor's regular progress, even though, ultimately, the delay in completion may be minimal. Disruption may well involve some loss of productivity, for example because labour, plant or other resources are standing idle or at least being inefficiently employed.
Identifying the actual loss of productivity can be problematic. In theory, the comparison should be between a baseline of achievable efficiency, and the level of efficiency which has in fact been achieved. See more on the measurement of loss of productivity in our recent blog Untangling Delay and Disruption
Inflation
Inflation claims are simply a claim for increased costs of resources due to inflation as a result of them having to be purchased at a later date due to the delay on a project.
Inflation claims can form part of a loss and expense claim that flows from compensation events, even when fluctuation or cost variation clauses have been delated.
Finance charges
In some cases, a Contractor will have had to borrow money and will incur finance charges at a higher rate than that at which interest will be awarded. Should that occur, financing charges may therefore be included in a Contractor's claim for delay.
The standard form contracts all contain provisions which allow a contractor to claim for loss and expense.
However, in any standard form contract, it is crucial to confirm whether any schedule of amendments alters the standard loss and expense provisions before the contractor makes a claim or the employer considers it.
In certain cases, a failure by the contractor to comply with the contractual provisions may result in the contractor losing its entitlement to claim for loss and expense. These type of clauses are generally referred to as condition precedent or time-barred clauses.
Historically, global claims were treated with extreme caution by the courts. However, the courts recognised that, in principle, a global claim can be made, and they are now relatively commonplace despite their difficulties and limitations.
All the standard forms of construction contract provide a mechanism through which a Contractor can claim monies additional to the contract sum. These monies typically compensate the Contractor for the effects of changes and other events for which it is not responsible.
Each contract contains a procedure which needs to be followed if a claim is to be successful.
The following measures can, if properly applied, assist both Contractors and Employers in avoiding prolonged and disputed final account settlements.
Notices
Contractors should observe the notice provisions of the contract and provide a prompt notice to the Employer of matters affecting progress. Most standard forms of construction contract provide for the Contractor to issue a notice to the Employer of the occurrence of an event that the Contractor considers might entitle it to claim loss and expense, within a specified timescale. In fact, some contracts make the timely provision of such a notice a precondition to recovery of additional monies. The Contractor’s notification must be clear and unambiguous.
Programme Management
In order for a Contractor to succeed with a loss and expense claim in relation to either prolongation or disruption, it will have to prove that its original method of working or planned progress has been affected by a particular event.
The analysis prepared needs to be an accurate representation of what happened. In order to do this it will need to provide a comparison of planned and actual progress following the particular delay or disruption event.
To enable this, Contractors should maintain accurate programme and progress records, including, if necessary, weekly progress programmes and reports, which should be issued to the Employer. If this is done, the Contractor should be able to prepare an accurate as-built programme that is capable of supporting any entitlement to either have the completion date extended and/or for additional money.
The foundations of a good loss and expense claim are the records which the Contractor has compiled in order to prove its case. The records would include photographs, progress charts, letters, instructions, meeting minutes, file notes etc. The parties may find it helpful to collate all records they have in a separate file for each event.
Labour Allocation
The recovery of additional cost of disturbed labour efficiency is notoriously difficult and without labour records almost impossible. With accurate labour allocation records it is possible for Contractors to accurately document the location of labour, tasks performed, abortive works and standing time. This information is invaluable in the detailed quantification of labour disturbance claims.
Valuation of Variations
The valuation provisions of most standard forms of contract provide for the valuation of varied works to account for changed character and circumstances under which the varied works are carried out.
It is a common feature of many disputed variation accounts that the Employer's valuation fails to account for the changed character and circumstances.
There is a fine line between whether a claim for extra money due to changed character or circumstances should be part of the valuation of a variation or included within a loss and expense claim. Generally, requests for payment for variations are better received than requests for items more typically categorised as claims.
The key to the successful recovery of payment for such variation type items (whether included in a variation or a loss and expense claim) is for the Contractor to convince the Employer that the circumstances of the variation are such that it is entitled to be paid an amount above that determined by simply applying contract rates and prices, perhaps by preparing planned versus as-built working method statements for the works in question. These statements should readily identify the differences between the two sets of circumstances and provide a framework for a revised valuation.
Quantification of Claims
As well as proving to a Employer that an event has caused delay and/or disruption, the Contractor also has to quantify and prove what the financial effects have been or are likely to be as a result.
In order for a financial claim to succeed, the Contractor has to prove that it has incurred costs over and above that which it would have incurred, as a direct result of an event. This is often a very difficult task particularly where there are several events all happening simultaneously.
Once again, to assist this process, Contractors should maintain accurate details and records of the cost effects of the disturbances and delays to the works from the first day of the project.
The Contractor may however find that when formulating its loss and expense claim, it cannot separate the individual causes and consequences of events in order to establish the loss that has followed from each of them, in which case it may consider making a 'global claim'. Global claims are discussed in more details below.
In simple terms, a global claim is one where a Contractor has suffered loss caused by two or more different events which are Employer-risk events, but is unable or unwilling to identify the loss or delay caused by each individual event. Therefore there is one claim for all of the losses arising out of the various events.
In cases where global claims are successfully advanced, the causal link between specific events and specific losses cannot be established due to various factors such as the existence of overlapping events or the prohibitive cost involved in carrying out the sort of delay analysis which would be necessary to produce the relevant nexus between cause and effect.
Historically, such claims were treated with extreme caution by the courts. However, the courts recognised that, in principle, a global claim can be made, and they are now relatively commonplace despite their difficulties and limitations.
The courts found that in circumstances where the complex interaction of events—all of which were at the Employer's risk—made accurate apportionment difficult or even impossible, there was no point in trying to make an artificial apportionment which would have no basis in reality.
32. However, a Contractor should be cautious about making a global claim—pursuing such a claim has, in the past, been referred to by the courts as a ‘risky enterprise’. It is not an alternative to pursuing individual claims where it is possible to link individual events to their effects and demonstrate causation. The success of a global claim will turn on the facts and circumstances of the individual case.
To ensure claims for loss and expense are correctly brought, make sure to adhere to the following:
i. Be sure to make a clear and unambiguous notice of claim
ii. Include enough information to allow the Employer to ascertain the amount of loss and expense
iii. Ensure accurate programme and progress reports are kept on a regular basis
iv. Ensure accurate records are kept, i.e., labour and plant allocation sheets and site diaries etc.
