NEC3 Option A: Contractor is claiming Prolongation costs greater than his preliminary costs

The Contractor raises a CE which also results in a change in the Completion Date. The prolongation costs for the time extension has been assessed by the PM using the Contractor’s Preliminaries breakdown which is identified in the Shorter Schedule of Cost Components. However, the Contractor has assessed their Prolongation Costs as being 80% greater than what is stated in their Prelims breakdown.

So instead of accepting say £100k per month (contract prelims), they now want £180k per month. Their reason for claiming this is that they had underestimated their preliminary costs at Contract formation and so have had to increase their site management resource. This was undertaken without any notification to the PM or the Employer. Within their contract preliminaries breakdown, there is no indication of what they had originally envisaged so it is difficult to understand by how much (in personnel) their management has increased by.

The Employer feels as though they have been ambushed somewhat by this. So, the question arises, what is the Contractor entitled to in regard to prolongation costs, and why?

1 Like

Clause 63.14 allows use of rates and lump sums to assess a compensation event IF the PM and Contractor agree, if there’s no agreement then assessment is based on Defined Cost plus Fee. The PM only has the right to make an assessment in 4 circumstances that are listed in clause 64.1 but the contract doesn’t give the PM the right to unilaterally use rates and lump sums for this which means the PM should use Defined Cost plus Fee.

How much the Contractor had allowed originally is irrelevant, you assess the compensation event in accordance with clause 63.1 and calculate the Defined Cost based on the Shorter Schedule of Cost Components (SSoCC) as per clause 11.2(22).

You don’t need to understand how much their management was increased by, if you accept the length of the extension of time then the resource included in the assessment is the resource that was on site during this extended period, valued in accordance with the SSoCC e.g. for people, “amounts paid by the Contractor” + % people overheads, and site accommodation at adjusted rates from published list or open market rates etc.

If the Monthly Preliminaries rate is a Defined Cost, as it’s part of the SSCC, then surely this is the rate to pay, plus the percentage fee on top of this? Otherwise it would seem the Cnntractor has ‘Carte-Blanche’ to charge what he wants by loading a site with additional staff during a period of Time Extension, and getting paid for them.

It’s difficult to comment as it seems your contract has been amended and I’ve not had sight of this - the standard ECC approach would not have a monthly prelims rate stated in the SSoCC and would follow the approach I’ve described. In your case the SSoCC must have been significantly amended to prevent duplication and inconsistency.

With regards to loading a site with additional staff, if the PM suspected this was a the case however he could exercise his right under clause 24.2 to instruct removal of an employee. Alternatively he could make his own assessment of the compensation event and include only the people he assesses were necessary to be there.

Yes, it has been rather heavily amended by my government client, and it has become rather troublesome. Thanks Neil. a very useful reply…

I think I slightly disagree with Neil here. I think it is relevant to understand what the original prelim cost was. 63.1 for assessing compensation events provides that the changes to the Prices are assessed as “the effect of the compensation event…”. Where prelim was short at the outset the increase caused by the contractor underpricing at tender is NOT part of the CE and therefore should not be part of the assessment.

Rob, isn’t the nub of the problem how we know what the Contractor had allowed at tender stage? There will no doubt be activities in the activity schedule but you don’t usually include the build-up to these activities in the contract. Therefore how does the PM have the right to see this build-up in order understand what was allowed? If it’s not in the contract it’s irrelevant. If the Contractor had allowed for 3 people and only used 2 then during the extended period only 2 people would be included in the compensation event. Similarly if he’d allowed for 1 person and used 3 then it would be 3 used in the compensation event. In either case it’s the resource on site at the time that’s used without reference to what he’d allowed for, or am I missing something?

1 Like

An interesting point Rob, but consider the following scenario. The Contractor omits to include an activity in the Activity Schedule for part of the Scope of Works. This means he doesn’t get paid for it. However, due to a compensation event this activity is delayed by 2 weeks which correspondingly delays planned Completion. I appreciate the original question related to prolongation and the associated ‘time related’ resources, although if the CE had not occurred then the Employer would not have paid for any such additional resources. Putting the Contractor back into the position they would be in had the CE not occurred, I would think that the extended time period would have to be included in a quotation assessment.

Neil, yes there may be a factual/evidential issue around what was allowed but that doesn’t mean you move away from what 61.3 says which is you value the consequence of the CE. In your two examples, if the Contractor allowed 3 and used 2 because the number needed reduced because work was more spread out there could actually be a reduction to consider. If the Contractor allowed for 1 and used 3 the question is why did he need 3. If this is because he underallowed then the addition is nothing to do with the CE and cannot be priced as part of it.

Andrew, a fair point under Option A but it doesn’t change my approach and in fact reinforces it I think. The contactor, no matter how well or badly he priced the works, is entitled to Defined Cost caused by any CE. Even if he priced something at nil (or omitted it) the Defined Cost of changing that is payable but ONLY the Defined Cost caused by the CE not the entire cost of the work nil rated or omitted.

So, would I be correct is stating that ONLY the ‘People Costs’ of the Main Contractor required to execute the CE should be claimed for? As an example. additional M&E work will add a month to the programme (M&E work value is small but time consuming). Realistically, the Main Contractor would need, say and M&E Manager, a Site Manager, and maybe one or two others to manage this additional item of work. however, the Main Contractor has included 10No staff from Director downwards at 100% utilisation for the additional month, even though the majority of them would not be required.

George, this takes us back to para 3 of my first response. Assuming that the month added to the programme is one month’s delay to planned Completion then all the prelim / overhead resource involved in Providing the Works during this period should be paid, subject to the cost being a valid part of Defined Cost in accordance with the SSoCC. The problem you have is that in your original post you mentioned that there is no indication of what they had originally envisaged. So you don’t know if they’d allowed for 3 people or 10 people and don’t know for sure if they’ve underpriced the original works or if they’re overpricing the compensation event. If you go back to first principles, without the compensation event none of them would be there so an argument about utilisation would only be relevant if you didn’t think the director was 100% on your project. The director probably falls under the second bullet point under component 1 BUT only if his cost was incurred in order to Provide the Works - so cost incurred whilst visiting other projects / clients should not be included.

George, no its not about carrying out the CE works its about being caused by the CE. These are different concepts. It sounds like you have a knotty issue there and probably best to get some specific advice which can then take into account all of the facts. As with so many questions, the contract position is only half the answer and the facts are critical, even small changes in the facts can change the outcome quite dramatically.