Prolongation Cost Calculation in The World

Once a Contractor has secured an extension of time (EOT) and relief from liquidated damages, thoughts
will quickly turn to recovery of the costs incurred due to the delayed completion date – i.e.
“Prolongation Costs”.
If you ask an Employer’s QS how such costs should be determined the answer is often an unequivocal
statement that rates and prices from the Preliminaries BoQ shall be divided by the original contract
duration and the derived rate for preliminaries shall then be applied to the extended duration.
The sharp witted Employer’s QS may even refine this logic with the caveat that the BoQ rates and prices
should first be adjusted to remove the fixed costs, mobilization and demobilization costs, overheads and
profit.
Whilst both answers are quite wrong, these approaches are often used in order to achieve result,
despite the inaccurate answer. The problem is that neither approach attempts to address the underlying
question of what costs / losses were actually incurred by the Contractor as a consequence of the
delaying events for which the employer was responsible.
The answer to this question cannot be found in the BoQ, but can (and should) be found in the detailed
analysis of the contractors cost records. The express wording of the contract will dictate which heads of
claim are admissible, but in general terms an accurate understanding of Prolongation Cost entitlement
can be derived by application of the following basic principles:
- Identify the events that gave rise to the extension of time – as it is the cost / loss arising from
these events that the Contractor is entitled to recover.
- Identify the point in time the delay occurred – a common mistake is to identify the costs that
were incurred over the extended duration at the end of the contract period. This is incorrect.
The delay may have occurred prior to full mobilization and thus the actual costs incurred at that
time may be lower.
- Identify the direct costs that follow from the compensable delay events – the Contractor is not
entitled to costs arising from delay events for which it is responsible. Separation of two can
defeat arguments that the claim is global and includes elements of the Contractors own
culpability.
- Assess only time related costs and not one off capital costs – time related costs are those which
necessarily arise as a consequence of additional time spent on the project and would typically
include staff salaries, insurances, rents, utilities, bonds, accommodation, office services, car
leases & running costs, etc. but would not include purchasing costs of offices, photocopies,
vehicles etc.
- Exclude task related costs – a common mistake is to include task related costs (e.g. labor, plant
hire or scaffolding costs) that would have been incurred in any event. These costs may only have
been incurred at a later point in time and are therefore not additional. Such costs would need to
separately recovered through a properly formulated disruption cost claim.
- Exclude profit – the purpose of the claim is to put the Contractor back into the position it would
have been, but for the delay. ‘Profit’ is not cost and thus any claim for profit can only be by way
of ‘loss of opportunity’ claim – which may be expressly precluded by the wording of the contract
and would in any case have to be proved, i.e. that opportunities did in fact present themselves
and were refused because key resources could not be released from the delayed project.
- Allow for off-site records – costs incurred in the Contractors head office (and elsewhere) may be
as a direct result of the project delay. The fact that these costs were incurred off site does not
mean that the Contractor is not entitled to receive them; if possible, avoid formulae for
determining overheads (e.g. Hudson’s, Emden’s etc.) - unless you are a Contractor and you fully
understand the basis of your loss of opportunity claim and how to present it. By identifying
actual incurred overhead costs rather than relay on theory based formulae that commonly
produce high assessments.
- Interest / Finance Charges – remember that charging interest on a debt may be prohibited in
your jurisdiction or by your contract. Most interest of finance clams suffer from a lack of facts
and are commonly; unsupported, theoretical assessments of loss. However, a skilled claimant
can often find ways to lend credibility to this type of claim.
- Calculation of Costs. Once the Contractor is granted an extension time with costs, the
computation of the recoverable items must also be substantiated with properly maintained
records and invoices. Normally, the contractor should prove actual loss from records. Only
where this is not possible, and as an extension rather than the rule, will calculation be allowed
by reference to formulae such as the Eichleay formula, and the Hudson or Emden formulae. The
formula is applied to assess loss where certain things have been established proving that the
contractor did actually suffer loss. The Contractor must show that it would have secured work
on another contractor and would have been recovering overheads from this other project, and
that there was profit capable of being earned elsewhere and there was no change in the market
thereafter affecting profitability of the work.
It must also be established that the contractor was unable to deploy resources elsewhere and had no
possibility of recovering the overheads from other sources, e.g., from an increased volume of work. Thus
such formulae are likely only to be relevant and of value if the event causing the delay has the
characteristic of a breach of contract.

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Once a Contractor has secured an extension of time (EOT) and relief from liquidated damages, thoughts

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