Valuation matters: prolongation costs

In the article, I will cover the basics of entitlement, cause, effect and quantum so that you have some understanding of the end-to-end process and get some top tips along the way.

Contractual entitlement

Your recovery of prolongation costs starts with entitlement to recover these amounts, which will usually arise out of your entitlement to an extension of time.

Sounds simple, but demonstrating an entitlement to an extension of time is not straightforward, as not only do you have contractual barriers to overcome, but you also need to show that an event that was the risk of the other party caused a critical path delay and that it impacted the contract completion date and/or a key date / sectional completion date.

That said, not all events causing an extension of time allow recovery of prolongation costs. The event might be neutral in the contract in that the contractor gets relief for damages but does not recover prolongation (i.e. each party bears its own costs). These events tend to be those where neither the contractor nor the client are at fault for the delay so think national strikes, terrorism, etc.

This issue is probably an article series in its own right, so I won’t go much further other than to say this is the first hurdle to overcome; if there is no entitlement, there will be no payment.

Critical path programme delay

As previous, critical path programme delay could be another mini-series in its own right, so I will keep this section focused on the issue that is relevant to valuing prolongation costs.

A common mistake when preparing prolongation costs is to assume that the period used as the basis of your assessment should be the extended period, i.e. if the completion date moves from 01 Nov to 10 Nov, then that is the period to use. I can see why this happens because, in some ways, it is logical to claim the 'prolonged' costs, but this is technically incorrect.

The correct approach is to use the period in which the delay event occurred. Following on from the previous example, if a delay event occurred between 01 Oct and 10 Oct (which had the effect of moving the completion date from 01 Nov to 10 Nov), then that is the period you would use rather than the 01 Nov to 10 Nov adjustment to the completion date.

If the importance of the delay analysis wasn’t already obvious, then it should now be because unless you have analysis that confirms the periods relevant to each delay event, then your valuation will be undermined. You will either default to using the extended period because it is tangible or you will guess, and neither will stand up to scrutiny in a third-party process.

The period used can have a significant bearing on your valuation. If you think about a typical construction project, you often have a bell curve of resources with few resources at the start, quickly increasing to a peak in the middle, and then a tail off at completion.

So, if you are using the extended period for your valuation, then you are using a period where resources are reducing which may result in a lower valuation. If the delay event occurred at peak, then your loss and therefore your claim will be much higher.

Cost substantiation

You will not recover, unless you are extremely fortunate, more than your loss and, whilst the event may be the other party’s risk under the contract, the burden is on you to prove your loss.

An excel table based on the preliminary values in your contract sum will not be sufficient to prove your loss. In very simple terms, you need to demonstrate the time-related costs incurred for ‘non-productive’ resources (productive resources being those who perform the work on site) during the period of critical path programme delay and that a prolongation of that cost was directly caused by the delay event.

You can do this in numerous ways but at the core of it all is records, records, records.

Your financial system will show the costs incurred during the period of critical path programme delay. You will need to remove any fixed costs and satisfy yourself that the time-related costs were properly incurred. The quantity of resources (time allocation) should be supported by timesheets, and the rate should be supported by invoices; however, for staff costs (due to GDPR issues), you will need to show how those charges are allocated to the project.

The calculation will often need to stand up to some heavy scrutiny so a clean, well-prepared valuation will stand you in good stead.

Final reflections

In theory, prolongation costs are relatively straightforward.

In practice, however, when you factor in the fact that contracts are different, there are different methods of delay analysis, there are different financial systems, and there can be claims and counterclaims about a period of delay, and when that period occurred, then it starts to get very complicated.

From a valuation perspective, getting the cost data cleaned and structured will stand you in good stead because, as the issues and analysis develop, you can rework the cost data model to revise your valuation.

Next week, we will continue the focus of this valuation matters mini-series with a focus on variations.

Keep an eye out for that, and, in the meantime, enjoy the rest of your week!

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