Quantifying delay costs – preliminaries – the applicable period and duration of delay for the assessment of delay costs
My last article, DD16 provided a case law scenario based on CMC v WICET, which examined the assessment of delayed preliminaries on a basis other than cost and touched on issues in relation to the applicable period(s) during which the contractor’s entitlement to financial recompense due to the delay should be assessed.
This article takes a more in-depth look at the applicable period(s) during which the contractor’s entitlement to delay costs should be assessed.
Applicable period for the assessment of delay costs
In Thiess Watkins v Commonwealth of Australia and CMC v WICET the court in both cases had to consider, among other issues, the applicable period in which to conduct the contractor’s assessment for financial recovery due to delay.
The scenario in this article is based on Thiess Watkins v Commonwealth of Australia and is in relation to the applicable period and also the duration to be used for the assessment of delay costs. However, this scenario also covers some of the wider inter-related issues in Thiess Watkins v Commonwealth of Australia concerning the adoption by the Referee deciding the dispute of a broad-based percentage increase on the claimed delay period to allow for ‘neutral delays’ within the period of extended delay, and the extent to which ‘extra’ costs are recoverable but ‘loss’ is not.
Thiess Watkins White Construction Limited (“Thiess Watkins”) constructed a building for the Commonwealth of Australia (“CoA”) pursuant to an NWPC3 (1981) contract. The general conditions of contract gave CoA the power to cancel the contract if Thiess Watkins suffered the appointment of a receiver or manager. A receiver and manager were appointed and on 6th June 1990 and CoA cancelled the contract.
Among other things, disputes arose between Thiess and CoA as to entitlement to an extension of time, additional costs, and liquidated damages. The issues were first referred to a Referee, Mr T M McDougall, for enquiry and report. The issues for the Referee to decide included:
(a) Whether at 6th June 1999 Thiess Watkins was entitled to extensions of time pursuant to clause 35.4 of the contract in addition to those already granted by the Superintendent, and, if so, to what extended date for practical completion;
(i) Subject to (c) below, Thiess Watkins was entitled to payment of the amount of various claims in its final statement of claim for work done pursuant to the contract and (as a separate amount depending on the answer to (a)) to payment for extra costs for the further extended time pursuant to clause 35.4, and, if so, how much;
(ii) Depending on the answer to (c), CoA was entitled to liquidated damages pursuant to clause 35.5 of the contract, and, if so, how much; and
(c) Whether, pursuant to clause 44.6 of the contract:
(i) All or some of any payment to which Thiess Watkins was entitled for the various claims for the reimbursable delay costs could be forfeited to CoA.
The Referee decided that:
(a) Thiess Watkins was entitled to an extension of time beyond the cancellation of the contract;
(b) Thiess Watkins was entitled to some, but not all, of its various claims for reimbursement for delay costs; and
(c) CoA was not entitled to liquidated damages.
In relation to the Referee’s findings, Thiess Watkins and CoA made several challenges which came before the court. Some challenges were abandoned, and some were added. The issues for the court to review included:
(i) The rejection by the Referee of Thiess Watkins’ entitlement to payment for the further extended time attributable to delay by CoA;
(ii) Whether off-site overheads should be included; and
(iii) Whether the Referee had dealt with claims in accordance with the rules of natural justice, in particular giving the parties the opportunity to make submissions with regard to the adoption of a broad-based percentage increase for neutral delays within the period extended because of CoA’s delays.
The court held that:
1(a). Where neutral delays occurred within a period of delay attributable to a party which warranted an extension of time under the contract, and the Referee had found that it was rarely, if ever, possible to identify the extended periods due to specific causes (and hence the neutral delays within them) with any precision, it was appropriate that a percentage of 17% by reference to overall delays related to neutrally caused delays, may be an appropriate method of assessment. The court referred the matter back to the Referee for further consideration to allow the parties to make submissions on the percentage increase.
1(b). Clause 35.4 referring to extra costs incurred…by reason of or as a result of or arising from the exercise of the Superintendent of the power to grant or allow any extension of time…does not refer to all costs incurred by reason of delay. It refers to extra costs incurred by reason of the delay, as distinct from those costs that would have been incurred had there not been delay, but where the effect of the delay is that other work cannot be undertaken, and the contractor’s income is less. Only the former (extra costs incurred) are recoverable under the clause.
2. The reasoning in 1(b) above applies in this case to off-site overheads, because the Referee had validly distinguished between off-site overheads incurred generally and those which were caused by the extension of time.
A closer examination of CoA’s and Thiess Watkins’ challenges to the Referee’s report/findings and the appeal court’s decisions now follows.
CoA made several challenges to the Referee’s report and two of them are examined in this case law scenario. One of CoA’s challenges was made under the heading ‘natural justice’ which was the Referee’s application of a 17% increase to overall delays to determine the extent of ‘neutral delays’ and the other concerned the applicable period for the assessment of delay costs. Each of the two challenges are considered in this case law scenario.
The 17% increase
Although made under the head of natural justice, the CoA’s submissions on the challenge to the Referee’s decision also went to the Referee’s finding of fact and reasoning which is what this case law scenario will focus on.
The Referee noted that Thiess Watkins had calculated its time-related costs without reference to the effect of lost time for neutral delays. The Referee in his report said:
“It is a truism that if a job is delayed for a certain number of working days, it can be expected that, within the extended period, there will also be some non-working days arising from the effects of neutral delays occurring within that period. Hence, in order to evaluate properly the extra costs of the initial delays, the figures obtained per working day need to be inflated to allow for the consequential cost of neutral delays within the extended period. It is rarely, if ever, possible to identify the extended periods due to specific causes and hence the neutral delays within them with any precision. I propose to allow a general percentage increase on the daily costs, being a ratio of all neutral delays within the period on site to the total potential working days on site after excluding the neutral delays. From the extension of time summary handed up by counsel for CoA, the former figure is 100 days. Mr Hammond’s job calendar in Exhibit 25 shows the total working days to 6 June 90 as being 687. The ratio in question is thus 100/(687-100) or 17%.”
The Referee assessed the delay costs accordingly.
CoA considered that, in addition to there being a breach of natural justice because Thiess Watkins had not called evidence and made no submissions on the point, what the Referee did could not be supported as a matter of principle. In relation to the second point raised by CoA, CoA made a number of arguments as follows:
- Thiess Watkins’ time-based costs were as of the time they were assumed to occur, and therefore took account of increases in costs by reason of the affluxion of time. The court explained that the point was not the effect of inflation when neutral delays mean costs are incurred later. The point is the incurring of costs for the periods of neutral delay to which Thiess Watkins would not have been subjected but for the original owner caused delay.
- The CoA argued that the 17% increase had the result that it had to pay for the extra costs incurred for the neutral delays when, under the contract, it was not liable for these costs. The court said that it was argued that the Referee could not do directly that which could not be done directly and said that it does not think any such question arises. Nor did the court accept the argument as a matter of principle. The court said that “it is a matter of causation” and gave the following example:
“If an owner-caused delay of five days commencing on day 15 means that a contractor which would have completed the works on day 20 still has five days’ work to do, and there is a neutral delay on day 23, I see no difficulty in principle in concluding that the time-based costs incurred on day 23 were caused by the original delay. It is a question of fact, although usually arising in a much more complicated situation.”
- The court said, in tacit recognition that the question is one of causation, that CoA said that the correct approach was to identify any particular period of neutral delay into which Thiess Watkins had been thrust by an owner-caused delay rather than strike a percentage in the manner undertaken by the Referee. CoA considered that, if this was not done, there would or might be a distorted result. The court said that, on the one hand, if there is a neutral delay of 10 days commencing on day 5 in the hypothetical 20-day contract, the ratio of 11:25 will increase the contractor’s recovery for the five days of owner-caused delay by 44%; on the other hand, if there is only one day of neutral delay prior to day 23 the increase will only be 8%. The difference would not be related to the owner’s fault because the relevant time lost for neutral delays will in each case only be one day.
The court considered that there is force in this, but it must be remembered that (in the Referee’s words) “It is rarely, if ever, possible to identify the extended periods due to specific causes and hence the neutral delays within them, with any precision.” The court said that, in the present case, the Referee was not faced with a period of neutral delay added on to the end of an otherwise discrete period of performance of the works.
The court said that the Referee was concerned with a montage of owner-caused, contractor-caused and neutral delays, and implicit in the Referee’s report was that the Referee could not identify particular periods of neutral delay into which Thiess Watkins had been thrust by CoA-caused delays. In the court’s view, it was open to the Referee, if he thought that a percentage increase arrived at in the way he did was the most suitable method in the circumstances of assessing the reimbursable costs, to allow that percentage increase.
What about the rules of natural justice? The court considered that it had no doubt that the Referee thought that the percentage increase met the description given above. However, CoA did not have the opportunity to suggest to the Referee why it did not, or to invite the Referee to take an approach which would have led to a different percentage. The court did not think that CoA can seek to put further evidence before the Referee. However, the court said there was no question raised before the Referee concerning the increase in time-based costs to allow for the consequential costs of neutral delays within the extended period, and in the court’s view, the Referee should have drawn to the attention of the parties that he had in mind such a question in order that they might address him on the matter.
The court therefore decided to remit this part of the matter to the Referee for further consideration.
The applicable period for the assessment of delay costs – it’s a question of causation and thus a question of fact
The court said that, late in the hearing, CoA raised a new challenge to the calculation of delay costs. The court explained that time-based costs per potential working day varied according to the resources on site from time to time, and that the Referee assessed the extra costs as if they had been incurred at the time of the relevant delays. CoA made the argument that extra costs only begin to bite when a contractor remains on site after the original date for practical completion as extended by reason of employer-caused and neutral delays.
CoA said that the extended date in this case was 10th January 1990 and that if the costs for the days after 10th January 1990 were taken the result would be $241,348 and not $432,480. This is the case because, whilst some figures were larger and some smaller, in general, the resources on site towards the end of the work are less than the resources on site at earlier times and hence the daily rates for the delays after 10th January 1990 were less overall.
In relation to this point the court said:
“It does not seem that this argument was put to the Referee. When a contractor incurs extra costs as a result of delay is a question of causation, and thus a question of fact. It is not correct to tack the owner caused delays on to the end of the contract and take the extra costs as the costs then incurred. The extra costs incurred by reason of the delay must be assessed by regard to the impact in fact upon the contractor’s progress, bearing in mind of course the Referee’s warning that it is difficult to identify the extended periods due to specific causes. Since this argument was not put to the Referee I doubt that it is open to CoA to now raise it, but there was no error in principle in the Referee assessing the extra costs as if they had been incurred at the time of the relevant delay: that must have been, in the Referee’s view, the most appropriate reflection of when the delays caused the extra costs.” [Author’s emphasis added]
In relation to where in the program the extra costs due to delay should be assessed. The positions on this point were:
- The Referee assessed the extra costs as if they had been incurred at the time of the relevant delay; and
- CoA argued that the extra costs only begin to bite when a contractor remains on site after the original date for practical completion as extended by reason of employer caused and neutral delays.
The author emphasises that the court agreed with the Referee in that the additional costs incurred due to the delay should be assessed at the time of the relevant delay.
The CoA may be correct, to a large extent, that the additional costs only begin to bite after the original date for practical completion; however, this does not mean that the period after the date for practical completion is the correct period for the assessment of delay costs and this point is examined in further detail in my next articles DD18 and DD19.
The court’s guidance on these points should be emphasised, and in summary, is:
- When a contractor incurs extra costs as a result of delay is a question of causation, and thus a question of fact;
- The extra costs incurred by reason of the delay must be assessed by regard to the impact in fact upon the contractor’s progress; and
- That there was no error in principle in the Referee assessing the extra costs as if they had been incurred at the time of the relevant delay.
My next article will examine in more detail the contractor’s entitlement to financial compensation/recompense due to delay and further examines issues in relation to the applicable period(s) during which the delay costs should be assessed.
If you have any queries in relation to any matter in these articles, or any other issue, please do not hesitate to contact us.
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 Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd  QSC 85
 Thiess Watkins White Construction Ltd v Commonwealth of Australia (1998) 14 BCL 61