Articles

The Principles of Valuing Delay and Disruption

Introduction
What is meant by disruption and prolongation; how do you value these in the context of a contract and the project which it regulates? Although these questions are found most often in construction disputes, the principles that underpin them - the nature and timing of damage and how to begin the process of establishing its value - are applicable to a much wider class of disputes.

In the following article I will attempt to describe the general principles underlying the valuation of delay and disruption and, hopefully, stimulate debate on the application of these principles in areas outside construction . The items we will consider are specifically value related, but as will become apparent, the issues cannot be considered in isolation of the delay itself - notwithstanding that most contracts treat the two subjects separately. Some common themes arise, such as concurrency; however, they are not always treated in the same way.

So, what exactly are we trying to describe? Perhaps a couple of definitions; disruption is a noun meaning to interrupt or impede the progress or continuity of a process. Prolongation is a noun meaning: a prolonged or extended form; an added part; amount or degree or range to which something extends.

Whether a party will be entitled to recover costs and if so the extent and nature of that recovery will be dictated by the contract, common law and possibly statute. Typically the contract will provide that a party is entitled to recover the actual costs that it has incurred as a consequence of a particular delaying event. Alternately the contract may refer to pre-agreed rates and/or cost components that are to be applied in such an event. (A good example of this is the new Irish Government public works contracts, which include for the pricing of the effect of delay prior to contract, disallowing any other recompense up to the levels defined in thresholds set in the contract documents).

Where the contract is silent on the basis of recovery, but nonetheless provides for recovery, the actual costs incurred would typically be the default position.

So what is actual cost? It is the cost incurred as a result of the delay not necessarily, you notice, the costs incurred during the delay. To gauge whether a cost is as a consequence of the delay it must be: relevant, demonstrable and have a close proximity to the delay event.

One of the most powerful tests for the relevance and proximity of a cost is the 'but for' test; but for the event I would not have incurred the cost. This is a very useful test to apply; if applied correctly it will assist greatly not only identifying what types of costs are relevant but also which elements of each are relevant.

Relevant
The phrase which sections are relevant may seem, at first glance, strange, surely if a cost is incurred as a result of the event it must be relevant, but this is not always exactly as it appears. If the resource had a planned use in any case during the period of delay it is clearly not an actual cost of the delay; it was not incurred 'but for' the event. If the cost planned for was for two weeks but the delay resulted in it being incurred for four weeks, the two week balance would, in principle, be claimable. This part incurrence relies also on the reasonableness of the cost being incurred. For instance, if a large item of plant is retained for an additional two weeks as the direct result of the delay, its cost should be claimable; what, however, is the position if the plant is retained for an additional two months? Whether the cost is recoverable would also depend on whether the cost could reasonably have been avoided; in other words would it have been less costly to off hire or remove the plant and re hire it once the work could proceed. Clearly this question would depend on the circumstances, but if the retention of the plant was far more costly than if it had been removed and brought back when needed, the question of reasonableness will arise.

Demonstrable
The cost and its proof will depend on detailed records. As with all maters to do with this and related subjects you just cannot keep too many records.

So what type of records should you keep? The best place to start is at the beginning, the original quotations and order for supply/hire; preferably with tender back-up to show that you have achieved the best price reasonably available. (It is essential that if any question of incurring the costs over a longer period than is necessary could arise that a detailed cost benefit analysis - including technical and logistic questions - is undertaken and re-evaluated regularly. It is necessary to make sure, particularly if the delay is protracted, that you keep the cost position under review and show that if the circumstances change you have taken the necessary reasonable action to mitigate the costs being incurred.)

It is also important to remember that you are concerned with the cost incurred because of the delay only; not the overall cost of the delayed element. Just because the tender allowance is high for instance (high enough to perhaps cover the original cost and the cost of the delay as well) does not mean that cost has not been incurred and is reimbursable. The original bargain is not subject to alteration (whether too high or too low) it is the extra over cost of the delay that is in question.

The final element of the records, as always, is proof of payment; you must be able and prepared, to prove your cost and invoices are not actual proof of payment, only of potential liability.

Lastly, when exactly is the delay and therefore the cost, incurred? Many parties rely on the calculation of the delay and the additional time that results, for the period of the cost. This is not correct; time and cost are not the same thing and must be treated separately for the following reasons.

It is entirely possible to incur a cost for delay without incurring a delay to the contract completion date; any delay can occur and result in cost, during a period of float on a task and not have any effect on the critical path.

Another consideration is when the cost occurred. The additional time that results from delay will always, from necessity, be added to the end of the period in question. The cost however may have been incurred much earlier. The costs involved in the early part of a contract - when work is beginning, staff levels are typically low and plant, equipment and site overheads are low - are likely to be significantly different to those incurred at the end, when the additional time is added.

And finally, concurrency. Time for delay is concurrent, it does not add when in parallel; there is only one arrow of time (well for our purposes anyway). Cost is always cumulative when in parallel; three activities any or all of which are on the critical path, delayed during the same week for a week, result in a single week delay. However, there are still three separate and cumulative, cost events.

The points are taken from the point of view of the party incurring the costs but, the questions they pose are equally appropriate from the point of view of the party who caused or is responsible for, the delay in question. Just because you are liable for a bill does not mean you are liable for any bill that is presented.

Keith Strutt MSc MCIOB MCIArb
Director Hill International (UK) Ltd, June 2008

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