Claims for Losses on Account of Overheads and Profit due to Delay in Performance of Construction Contracts
Construction projects invariably get delayed for variety of reasons in India and also elsewhere. Under the well settled law, a contractor is entitled to compensation for the delayed completion, if the delay is caused by breaches of contract conditions committed by the Employer. Claims of compensations invariably include significant sums by way of overheads and expected profit. A contractor seeking compensation has to prove the actual loss incurred. The overheads include several dozens of heads of expenses incurred by the head office for a company as a whole and which are neither attributable to an item of work in a given contract nor for a given contract as a whole. It is, therefore, difficult to establish actual loss on account of overheads in a given contract except on pro-rata basis. The books of accounts and balance sheets of a company show the actual overheads for the company as a whole for each year as also the total turnover of the company or receipts from the contracts. From these known elements the percentage of overheads incurred by a company vis-a-vis its turnover can be worked out. Compensation for overheads is generally worked out based on the said percentage.
The following three formulae have been traditionally used in calculating such loss.
The Hudson Formula
The Emden Formula, and
The Eichleay Formula.
Unfortunately all of them have crucial defects in their use in practice. It is high time the industry as also judiciary takes note of the fourth method suggested by B. S. Patil in his book: Building and Engineering Contracts now in its 6th edition of 2011. (Published by Mrs. S. B. Patil, “Saish”, 120, National Society, Pune 411007 India). The method suggested by the author is not only based on the basic principle of assessing damages but also incorporates all the best features of the above three well-known formulae minus the deficiencies noticed in them. The author claims he had successfully used the method suggested by him in his practice in India for the past over 32 years. The reason for success, it appears is its basis: the universally accepted principle for assessing damages.
The Principle for Assessment of Damages:
This has been stated in Anson’s Law of contract, 26th Ed. at page 494 thus:
The object in award of damages for breach of contract is to place the plaintiff, so far as money can do it, in the same situation, with respect to damages in respect of the loss of gains of which he has been deprived by the breach.
To apply the above principle Patil divides the period of performance of a contract into two parts: Period originally stipulated in the contract and the extended period beyond the said original period.
Unfortunately none of the three popular formulae take cognizance of the actual loss incurred at the end of the stipulated period and consider only the extended period as the basis for assessing damages.
He suggests the expected gain lost at the end of the originally stipulated period should be worked out based on the reduced turnover. The reduced turnover from a contract is worked out by deducting the actual turnover from the contract sum. Assessment of damages is done thus:
Damages = Percentage of OHP (overheads and profit expected) x Reduced Turnover.
The continuing loss during the extended period is also to be ascertained on the same basis by ascertaining the reduced turnover, if any. To ascertain the reduced turnover, pro-rata turnover agreed in the contract per week/month is multiplied by the delay in weeks/months and actual turnover achieved in the said period deducted from it. Thus, this method takes care of additional work, if any, executed during both the periods, original as also extended. It is also possible to add to the turnover disputed claims allowed in the adjudicating proceedings to assess the reduced turnover. The author, it is noteworthy, does not stop by giving the format to calculate the damages, but also insists on the proof to be tendered.
Patil claims, and rightly so, it is submitted, many advantages his formula has over the other formulae, none of which unfortunately will give even an approximation of the true loss of overheads and profit in most prolongation situations.. It incorporates all the best features of the other three formulae minus almost all deficiencies pointed out in the other formulae. Other main advantages include: applicability to cases where the delay is disproportionate to the balance work, additions and alterations resulting in change of the scope and cost of the contract work; termination of contract before full performance during the extended period, flexibility available to adjudicatory tribunals to correctly assess the actual loss in any factual matrix different from the originally contemplated by the parties. For example, some of the delay period might be for non-reimbursable events, and adjustments could be made in any reimbursement calculations. Similarly, the nature of the Contracting company’s business and the way the components making up head office costs interrelate can be analysed in sufficient detail on the basis of evidence expected to be produced; and the overheads’ percentage accordingly adjusted. There is no possibility of duplication of relief.
It seems The Patil Formula recommends itself rather than placing reliance upon the traditional formulae.
About Author -
Bajirao Patil has published many books on civil engineering and contract law. Visit https://www.bspatil.com to know more about his books,
Book- 1. Nine Steps to Realize God;
Book- 2. Building and Engineering Contracts
Book- 3. The Law of Arbitration and Conciliation
Book- 4. Civil Engineering Contracts and Estimates Crown Size
