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struction Claims: Recovering The Costs Of Additional Preliminaries - Real Estate and Construction - United Arab Emirates

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Last Updated: 17 February 2011

Article by Dean OLeary

Al Tamimi & Company

United Arab Emirates: Construction Claims: Recovering The Costs OfAdditional Preliminaries

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Part 1

Those involved in the region's construction industry will be well aware that over the last couple

of years there has been a rapid expansion in the number of construction claims and disputes.

A head of claim that is oftenmade bycontractors against employers is for prolongation costs,

i.e., those costs sought by a contractor for having to remain on site longer than it originally

anticipated due to the actions of an employer.

Much has been written about the recoverability of head office overheads and, more specifically,

whether such claims can be proven by way of reliance on a formula or whether actual cost data

is required.

However, an important aspect of prolongation claims that is oftennot addressed by

commentators on construction claims is the basis and evaluation of claims for additional

preliminaries (or job site overheads as theyare known in the United States). In short,preliminaries are comprised of fixed costs, time related costs, activity related costs and value

related costs.

This article seeks to provide a brief overview of what to be mindfulof when making or facing a

claim for additional preliminaries.

When faced with any claim, an employer should always remember that the onus is on a

contractor todemonstrate (i.e, prove) its entitlement to the relief being claimed. In short, it is not

for an employer to disprove a contractor's claim; rather, it is for a contractor to prove its claim,

both in terms of liability and quantum: he who asserts must prove. As basic as this restatement

of the underlying principle of construction claims is, it is surprising how often it is overlooked by

employers, contractors and their advisers.

All too often, and despite express contractual provisions that require the timely submission of

detailed claims, a contractor will submit a claim for prolongation costsas part of its final account

exercise and simply assert that because it suffered anemployer caused delay to a critical

activity (or series of activities) during the progress of the works the original completion date was

missed; hence, it claims for its costsassociated with its prolonged presence on site until such

time as the works were finally completed. In theory, and provided the employer was responsible

for any critical delay, there is no problem with bringing sucha claim (subject, that is, to satisfying


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any procedural requirements). The problem, however, usuallyarises out of the contractor's

method of valuing its losses arising from its prolonged presence on site.

It is common for a contractor to value its claim for additional preliminaries on the basis of the

period that a project has overrun, i.e., from the original completiondate to the actual completion

date, by simply relying upon its preliminaries at the end of original contract period and

continuing them during the extended period. This type of claim is colloquially knownas a 'pro

rata prelims claim'.

However, an employer may be ill advised to make payment of a contractor's prolongation costs

claim on the basis of a pro rata prelims claim. Similarly, a contractor may be short-changing

itself byclaiming for itsadditionalpreliminaries in this way.

Whilst there may be occasions when the early settlement of a contractor's claim is

commercially viable, it should be noted that a pro rata prelims claim is likely to be either

inappropriate or wrong for the reasons set out below.

The first reason why a pro rata prelims claim is wrong is because it is dealing with the wrong

period. A claim for additional preliminaries should be assessed at the date of the breach itself,

i.e., when the delays actuallyoccurred. Take a simple example, a small project has a 3-month

contract period and during the first month delays occur which delay the final completion date by

a further month. In this scenario the appropriate period for assessing the preliminaries to be

claimed is the first month, i.e., the period when the delays actually occurred, and not the

extended month.

Unfortunately, this problem is often compounded by reason of the fact that an employer will

often pay a contractor for all of the claimed preliminaries over this delayed period without

making an adjustment for the contractor's actual progress. By making such payment the

employer exposes itself to a financial risk later in the project because at some future point all of

the activityand time related preliminaries included in the contract price will have been paid by

the employer, but the contractor will have not completed the works.

Another potential problem with pro rata prelims claims is the risk of double recovery. In short, if

the cause of a delay to a project's completion has been the issuance of variations or the

carrying out of dayworks then the employer should ascertain if the cost of additional

preliminaries for carrying out those variations or dayworkshas been included within the

valuation of the same (though, this tends to be more of an issue in terms of a claim for head

office overheads and profit). Therefore, employers should carefully scrutinise a pro rata prelims

claim which is based on delays caused by variations.

A further potential problem with pro rata prelims claims (leaving aside arguments that thepreliminaries figures in the Bill of Quantities may not represent a contractor's actual costs when

the works are carried out) is that a contractor will often fail to apportion those costs included

within its activity or time related preliminaries between those which are recoverable as part of a

claim and those which are not. In other words, if a delay is suffered to a critical activity it may

well be that some aspects of the overall preliminaries can still be put to good use onother

activitiesduring this period of delay. In a recent Englishcase the risks of a party failing to

properly apportion its preliminaries in this way were made all too apparent. In this particular

case the learned Judge had this to say on the point:

"But the contractor will not recover the general site overheads of carrying out all activities on


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site as a matter of course unless he can establish that the delaying event to one activity in fact

impactedon all the other site activities. Simply because the delaying event itself is on the critical

path does not mean that in point of fact it impacted on any other site activitysave for those

immediately following and dependant upon the activities in question... But no evidence has been

called to establish that the delaying events in questionin fact caused delay to any activities on

site apart from [critical buildings]. That being so, it follows, in my judgment, that the prolongation

claim advanced by [the Claimant] based on recovery of the whole of the site costsof the

[project] site, fails for want of proof."

The Claimant, or more properly its quantum expert and legal team, had failed to make any

attempt to apportion between the preliminaries associated with those activitieswhich wereon

the critical path and those which were not.

It is suggested that the above proposition of apportioning preliminaries ties in with the UAE

principle of proof of damages. That being said, it is acknowledged that there may be

circumstances in a particular case where no such apportionment can or need be carried out.

What is also interesting to note about this particular case is that whenproceedings commenced

the Claimant sought to recover GBP3.5million. However, during the course of proceedings it

reduced its claim to GBP1.5million (for which the learned Judge believed the Claimant had

exaggerated its initial claim and this had subsequent implications in terms of recovering its legal

costs). The Claimant was actuallyawarded GBP163k! Given that the Claimant's legal costs in

the case were approximately GBP1.6million and that the Defendant was ordered to pay

approximately 40% of the Claimant's costs one cansee how this became somewhat of a

pyrrhic victory for the Claimant.

In summary, employers and their advisers should be wary of entertaining pro rata prelims

claims. The onus is always on a contractor to prove its entitlement to a claim both in terms of

liability and quantum. Clearly, if a contractor has suffered a loss then, as a matter of law, it

should be compensated, but only insofar as it is able to properly demonstrate its loss.

NB: The above article does not constitute, and shouldnot be interpreted or relied upon, as legal

advice.

The content of this article is intended to provide a general guide to the subject matter.

Specialist advice should be sought about your specific circumstances.

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