Episode 48:

Hello and Welcome to the Part3 with me podcast, 

The show that helps part 3 students jump start into their careers as qualified architects and also to provide refresher episodes for practicing architects. I am your host Maria Skoutari and this week we will be talking about Loss and Expense Claims — PC1, PC3 & PC5 of the Part 3 Criteria.

So last week we talked about Claims in general, how they can rise, the process followed depending on the claim received and their financial implications. 

Today we will be looking in more detail at Loss and Expense Claims:

Loss and expense claims are considered to cover the items of expenditure that arise from the progress of the works and is materially affected by an act or omission of the employer or the employers agent. In order for the contractor to claim loss and expense they will need to put together an application for reimbursement of direct loss and/or expense, the most common causes for this request can be site overheads, profit, inflation, finance changes, loss of productivity, costs of preparing the claim and so on.

Looking at overheads to start with, these will typically include site set-up and mobilisation costs, time-related costs, work-related costs and demobilisation costs. The contractor should be fully reimbursed for the expenditure of necessary additional costs and to cover these sometimes the preliminary costs are adjusted in the contract bills pro rata. And under a Standard Building Contract, it will be for the architect/CA to decide on the appropriateness of the claimed costs.

But the contractor must prove that a loss has been incurred in the first place by firstly identifying and proving the loss as required by the contract and Courts. If there is no evidence the contractor should try to use the formula for calculating the overheads which is:

Tender Overhead and profit/100x(contract sum/period in weeks)x delays in weeks this is done for all items and people and then you take the total project billings / total company billings x head office overhead and profit which lead to the Contract overhead and profits / no. of days on site x no.of days of compensable delay.  

The formula approach may find acceptance with and adjudicator or arbitrator if the results are realistic and proportionate. 

If the results from the formula are realistic and proportionate it may be accepted by an adjudicator or arbitrator, but sometimes the formula method isn’t really accepted or deemed as reliable so the contractor will have to find other means to prove their loss.  

Now looking at profit:

The contractors main aim, as we all know, is to be able to make profit from each project they tender for. Sometimes, due to additional works required that were outside the contractors scope, they will try and claim loss of profit or argue that they have lost the opportunity to earn profit elsewhere due to the delay incurred on the project causing the programme to overrun. Some may go as far as saying that they lost another big project contract because the project they’re on has overrun and absorbed all their staff and labour. In such circumstances, the contractor will have to have very persuasive evidence for any judge or arbitrator to even consider awarding them any losses. Such claims typically fall under a common law damages claim for breach of contract and will be treated as ‘special damages’. 

Then we have claims caused by inflation:

This typically occurs if the project has overrun. So you might have a fixed price contract and the project goes beyond the fixed price end date, so under such circumstances the contractor is usually entitled to some compensation which would be the excess amount incurred as a direct result due to the prolongation of the project after the fixed price end date. But the contractor will again be expected to support such a claim with evidence by providing records kept to show how the labour and material process were higher when the work was carried out compared to the prices stated within the contract. 

Next we have claims due to loss of productivity and acceleration:

This type of claim tends to be the most difficult to approve due to lack of clearly identifiable evidence. If the contractor keeps accurate records clearly demonstrating that there has been a financial loss due to disruption caused by the employers default then the contractor can seek to be reimbursed under the contract. Ideally the contractor should demonstrate using an updated programme that shows the actual progress of the works on how the disruption affected the tender programme and workforce. This enables the contractor to demonstrate and assess the impact of the employers disruption but they need to be wary not to point out any issues they may have caused themselves to the programme. Many claims under loss of productivity tend to fail because of lack of good and comprehensive record keeping in demonstrating that the disruption and/or delay was evidenced to the current site progress, that the cause for the disruption/delay is the liability of the employer and the damage claimed is in fact linked to the disruption/delay caused. 

There is another claim that falls under loss of productivity, which is the acceleration claim. Not many contract forms give the authority to the employers representative to instruct the contractor to accelerate work, so when assessing a contractors entitlement to extensions of time under the contract, the contract administrator should remember that the contractor may impliedly have a duty to accelerate due to the wording of the contract, for example the JCT Standard Building Contract has a clause stating that the Contractor should constantly use their best endeavours to prevent delay in the progress of the works. In the absence of any specific acceleration clauses, to ensure reimbursement under such a claim, the acceleration and associated costs must be agreed between the parties before work is speeded up. 

In the cases, however, that acceleration costs haven’t been agreed, then the evaluation for an acceleration claim should be based on factual evidence similarly like the process for evaluating disruption. In many cases, the reason why acceleration claims arise and result in drop of productivity for a number of reasons, some of which include new operatives or labourers coming on board the project to finish the work quicker but until they get into the flow of the process they will be less productive, might be due to fatigue from long working hours, too many people working in the same area, increase pressure from increased supervision and so on. So again excellent record keeping is key under acceleration for a contractor to be able to successfully claim and be reimbursed for it.

Now let’s look at how disruption is valued:

Evaluating disruption can be quite difficult as it is based on the contracted work scope and variation work scope which can sometimes be difficult to differentiate or prove they are separate. In some cases it is very easy to demonstrate and measure the disrupted work, for example if the operating hours are restricted due to impact on an adjacent business causing work to be disrupted or stopped for a certain amount of hours, this type of incident of disruption can be easily measured and proven. But generally, most other instances of disruptive work are much more difficult to value and evidence, such as additional labour resources, additional preliminary items and so on. The best way to value disruption is by assessing and valuing the obvious expenditures and reduce the value to be determined by expert lawyers or expert advice.

Now sometimes contractor may seek to issue a claim for payment of interest. If they wish to pursue such a claim, they will need to issue a signed form or begin arbitration proceedings. The case then would go to the courts and the courts would decide whether to award the interest built up from the date the cause of action arose to the date of judgement. Arbitrators also have the power to carry out this decision. During the period of the claim if the contractor or claimant suffers additional losses of potential interest or as interest on overdraft expenditure then the judge or arbitrator can award those too as part of the contractor’s loss and expense claim. 

So how should loss and expense claims be presented:

All claims should be made in writing, it can be in the form of a statement or report and referring within it to any supplementary information provided, this approach gives the judge or arbitrator a good understanding of what the claim is about ahead of the hearing. The clearer and better prepared the claim documentation is this lowers the costs of the court and reduced the length of the hearings and as a result reduced the costs of lawyers and so on. 

There are three techniques that can assist a claimant in presenting their claim, these involve having a high quality presentation which includes good illustrative material to convey to the determining party the nature of the claim, concise and clear documentation and properly evidenced arguments. The document should of course have a title page and contents page and the claim should be broken into sections clearly stating the substance of the case and numbering of paragraphs so judges or arbitrators can easily reference them. To assist non-construction professionals, the claimant should include images to make their case clear and easy to understand and the length of the claim documentation to be kept to a minimum encouraging whoever is reviewing it to run through the whole document.

Every claim document should include the details of the parties involved in the dispute, the roles of the parties, the name and details of the originator of the document, an explanation of the dispute, a statement of events giving rise to the dispute, the effect of any breaches on the claimants work or performance, how the claimants performance was impacted by the breach, how the costs incurred relate to the breach, a full quantification of the damage incurred and a conclusion stating the sums of monies claimed. 

Before submitting any claim document, the claimant should ensure every statement, fact and figure can be substantiated by witnesses of fact or by referring to supplementary documents. Witnessed statements should be clear, concise and in the language of the person who is giving the statement.

So once the claim has been claimed, how can it be negotiated and what is involved in the negotiation process:

Under the negotiation process, the two parties come together to reach a joint agreement to resolve the claim. Parties should always consider negotiating before jumping to court or arbitration proceedings to avoid costly and lengthy processes that come with those two dispute resolution proceedings. The key reasons why negotiating first is always better, it offers the possibility of remedying and continuing on with a good relationship between the two parties, funding of resources to support the courts or arbitration process may be lacking and the process may be delayed in proceeding with a trial or hearing. A properly structured and managed negotiation can sometimes offer better results and in the fraction of the time it takes for arbitration or court proceedings and also at a fraction of the cost. 

The key to the negotiation process is to go in prepared, understand the claim, negotiate it and agree on a common ground or resolution. When it comes to specifically preparing for a loss and expense claim, it can involve a great deal of research in identifying the real issue behind the claim. The preparations can include checking the claim arithmetically as they can be mathimatically incorrect, checking the evidence provided, examining every area of weakness or absence of proof, considering how the claimant will respond to comments and try to be ready with responses, and making all efforts to understand the contractors allegations and prepare a rebuttal argument. 

A key point to highlight with negotiations is that all parties should have a clear view of what they would like to achieve from the negotiation and be ready to listen, concede valid points and make financial allowances if appropriate. 

The proposal and counter-proposal methos is common in loss and expense claim negotiations where the contractor and client go back and forth with proposals and eventually the gap is narrowed to a point where an agreement is made. Once an agreement is reached, the parties should record it in writing and signed as soon as possible for the parties to have as evidence in case another dispute arises later on. If negotiations fail, then the claim will have to follow and alternative dispute resolution method of adjudication, arbitration or litigation.

When it comes to loss and expense claims, it is generally good practice to make sure the most suitable form of contract has been chosen for the project, understand and recognise the difference between speculative and valid claims and contract claims or breach of contract, and identifying the most suitable form of dispute resolution, firstly always starting with negotiation. 

So to sum up what I discussed today: