Prolongation Cost Claims

Prolongation Cost Claims – 6 Notable Issues

Nowadays, Prolongation Cost Claims have become an indispensable element in the management of any Construction Contract. Accordingly, Prolongation Cost Claims may be interpreted as a form of financial compensation for Contractors when the Time for Completion of Work is prolongated beyond the planned schedule.[1]

From the legal perspective, Prolongation Cost Claims are a form of request for compensation that occurs when there are losses or damages incurred by the Contractor resulting from the construction being prolongated due to the Employer’s failure to comply with contractual obligations.

The purpose of empowering Contractors to file Prolongation Cost Claims is to rebalance the rights and obligations between the Parties, thereby allowing the Contractor to maintain their original legal status during the conclusion of the Contract.

Therefore, in order to succeed in Prolongation Cost Claims, the Contractor must prove (i) the existence of delay events, and (ii) the actual loss incurred by the Contractor due to such delay events.

Delay events

The definition of delay events may vary depending on the Contract and the applicable legal system. Therefore, there is no accurate, comprehensive, and clear answer as to the number of delay events, due to which [delay events] Contractors are entitled to Prolongation Cost Claims

Referencing FIDIC Red Book 1999, there are 16 delay events in which Contractors are entitled to Prolongation Cost Claim. Specifically:

No	Delay event	Reference
1	Delayed Drawings or Instructions	Clause 1.9
2	Failure to give the right of access to the Site within the specified time by the Employer	Clause 2.1
3	Errors in original points, lines, and levels	Clause 4.7
4	Unforeseeable Physical Conditions	Clause 4.12
5	Belated testing attributable to the Employer	Clause 7.4
6	Variation	Clause 8.4(a)
7	Exceptionally adverse climatic conditions	Clause 8.4(c)
8	Unforeseeable shortages in the availability of personnel or Goods caused by epidemic or governmental actions	Clause 8.4 (d)
9	Delay, impediment, or prevention caused by or attributable to the Employer, the Employer’s Personnel, or the Employer’s other contractors on the Site	Clause 8.4 (e)
10	Delays Caused by Authorities	Clause 8.5
11	Suspension not attributable to the Contractor instructed by the Engineer	Clause 8.8 & Clause 8.9
12	Interference with Tests on Completion	Clause 10.3
13	Changes in Legislation	Clause 13.7
14	Suspension by Contractor	Clause 16.1
15	Consequences of Employer’s Risks	Clause 17.4
16	Consequences of Force Majeure	Clause 19.4

Based on the responsible party, delay events could be categorized into 2 groups

The first group is delay events directly caused by or attributable to the Employer, for example, the Employer’s belated authorization of access to the site or the occurrence of force majeure events.

The second group is delay events attributable to the Contractor, such as lack of capacity or poor management of construction due to lack of experience

Two groups of cause for delay events

Regarding costs, almost all delay events attributed to the Employer likely result in the Contractor being entitled to compensation for incurred costs. Vice versa, if the Contractor is responsible for the delay event, the Contractor bears all incurred costs. Furthermore, the Contractor may be held liable for all the damages and losses incurred by the Employer due to the delay in project completion.

Prolongation costs

As “Cost” is fundamentally the damages and losses incurred by the Contractor due to the extension of time, the most comprehensive interpretation is advised. Accordingly, “Costs” could be interpreted as “all expenditures reasonably incurred (or to be incurred) by the Contractor, whether on or off the Site, including overhead and similar charges, but does not include profit”[2]

Definition of Cost

With the only limitation being the non-inclusion of Profits, the Prolongation cost could be any cost incurred, whether directly or indirectly, for the implementation and completion of the Construction. Hence, the Contractor might submit any and all incurred costs resulting from the Extension of time.

However, practice has shown that not all Prolongation Cost Claims are accepted by the Employer as cases of Prolongation Cost Claims being refused, rejected, or greatly reduced in value are aplenty

Moreover, cases in which Parties could not agree on the Prolongation cost and had to resolve disputes via litigation or arbitration are also in abundance.

Observations have shown that there exists differences of understanding regarding Extension of Time and Prolongation between the Employer and the Contractor. Some notable differences are the following:

The nature of Prolongation Cost.
Necessary procedure for which the Contract must comply, as well as
Submission of necessary evidence and documents to persuade the Employer.

3 necessary elements in Claim for extension of time and prolongation cost

In order to reduce the possibility of disputes and disagreements pertaining to Prolongation Costs and promote cooperation for the overall objective of the Project, Parties must take particular note of the following 6 issues, namely:

First – Extension of Time and Compensation Costs – two separate issues

In principle, any compensation request would require cause, consequence, and the causal connection between the cause and consequence.

Therefore, when any delay event occurs, the determination of the nature and the liable party of such event should be prioritized over the review of the consequence.

In other words, if a delay event is attributable to the Contract or unattributable to the Employer, the Contractor is not entitled to compensation of the Cost

In the 4 situations in which extensions of time may be granted, there is only one case in which the Contractor is entitled to cost compensation, which is extensions of time due to causes attributable to the Employer. To illustrate:

Extension of Time and Compensation Costs are two separate issues

Attention:

Delay events may be understood as events originating from mistakes and/or violations of either or both of the Parties for which the consequence(s) leads to the overall delay[3]

In cases of delay events due to causes unattributable to either of the Parties, FIDIC – throughout their published works – endorses the view that the Contractor is entitled to cost compensation. This is explicitly demonstrated in Clause 4.12, 8.4(c), etc. However, even under contracts based on FIDIC Red Book 1999, the Employer would often only approve the Extension of time claim and not the claim for prolongation cost.

Second – Claimed Cost must be actual cost

Should there be any delay events, the Contractor will likely have to bear multiple types of costs, for example:

Site Maintenance Costs: salary, allowance for site personnel – including the Management Board, costs, for utilities (electricity, water, gas, etc.), and maintenance costs such as office, cleaning personnel, etc.
Cost for Machinery and Equipment: maintenance costs for machinery and equipment on site that have yet to completely fulfill their purposes; costs for extension/renewal of equipment rental contracts, etc.
Financial Costs: Costs relative to renewal of bonds/insurance
Overhead: Costs of headquarters resources spent on support for project operations;
Miscellaneous costs: Costs for payments to third parties, e.g.: compensation for subcontractors, procurement providers for maintenance of utilities, plants, and utilities for later construction.

Types of Costs relative to Extension of Time

However, the Contractor may not always be able to Claim all of the above costs. To illustrate, let’s look at the costs of the purchase and renewal of insurance in construction contracts.

If the terms and conditions of the insurance contract between the Contractor and the insurer specify that “the insurance contract shall be renewed automatically without any increase of the insurance premium if there are notifications of Extension of Time in writing from…”, it’s not feasible for the Contractor to claim the insurance fee corresponding to the duration of the Extension of time in this situation.

In the aforementioned hypothetical situation, the delay event indeed lead to the renewal of insurance duration in insurance contracts, however, the Contractor would not be able to claim the insurance renewal fee since the Contractor does not actually incur any relevant cost.

Similarly, claims for subsequent costs such as the ensuing consequences may also be another challenge for the Contractor. To clarify, delay events, in particular, the Contractor may be compensated for the direct and actual costs as listed above, however, costs such as loss of business opportunities, expected income, expected interest, or any other costs of similar nature would not be compensated.

Specifically, the Contractor is unable to request that the Employer reimburse un-incurred costs or Costs that are indirect, consequential, and speculative in nature.

Compensable costs for Extension of Time

Third – Claimed cost is neither the rate nor the unit price specified in the Contract

During the preparation and submission of the Prolongation Cost Claim, the Contractor would often refer to the established amount and price in the Contract.

In many cases, in order to calculate the Prolongation Cost, the Contractor would take the value specified in the corresponding Item in the general price quotation, divide it by the number of days in the Original Duration, and then multiply the result with the number of days of the Extended Duration.

Prolongation Cost

Unit Price of an Item

Original Duration

Extended Duration

The Claimed cost is neither the rate nor the unit price as specified in the Contract

However, as a form of damage compensation, the Claimed cost must be either actual costs that were incurred by the Contractor or costs that are the inevitable and direct result of the Prolongation. Therefore, the Contractor cannot rely on the rate or unit price of each Item(s) specified in the Contract.

Moreover, the use of rate or unit price of the work item(s) specified in the Contract, especially the Overhead costs, to calculate the Prolongation Cost is also unreasonable because the calculation method for Overhead cost and Prolongation Cost are fundamentally different.

Specifically, the main objective of Overhead cost is to establish and cover miscellaneous work items, such as utility, hoist device, tower crane, electricity, water, security, hygiene, and any other similar costs, including costs for issue and maintenance of guarantees requested by the Contract.

For the calculation of Overheads, the Contractor would often use the specifications in tender documents and their consideration of how competitive the tendering process would be. Therefore, part of the Overhead could be allocated to or hidden in the unit price of different items.

Meanwhile, the Prolongation Cost is the compensation for the direct and actual damage incurred by the Contractor due to the Extension of Time. Therefore, Prolongation Costs that overlap with costs of other work items or have yet to arise (such as the above costs of insurance) will not be approved.

Therefore, it could be concluded that the rate and unit price specified in the Contract (for each specific work item) could only serve as a reference during the calculation or the review and assessment of the Prolongation Cost.

Fourth – origin of the Prolongation Costs calculated affecting the interests of both parties.

A source of potential conflict between Parties relative to Prolongation costs is the issue of “From which point is the Contractor entitled to Prolongation Cost?”

For instance, assuming that the Contractor is entitled to an Extension of Time and Prolongation Costs due to the extension of equipment and machinery lease. However, at the time of the submission of the Detailed Claim, the Contractor has yet to make payment or reach an agreement with the procurement provider and subcontractor on the rate/value of the increase in rent price, deposit/advance, or payment schedule. Succinctly, these Costs, while inevitable, have yet to be incurred at the time of the submission of the Detailed Claim.

Similarly, under the same assumption except that the Contractor is instead obligated to renew the Performance bond and advance payment bond corresponding to the extension of time. However, at the time of submission of the Detailed Claim, the above-mentioned bonds remain valid, and no renewal has been performed by the Contractor.

In the aforementioned situations, could the Contractor request the Employer to pay for a certain amount of estimated costs that the Contractor would certainly bear in the future?

From the perspective of the Employer, they would find payment of non-incurred costs to be unconvincing. However, if the Contractor does not receive the payment of these costs from the Employer, the Contractor not only has to bear the cost themselves, but also remains uncertain of the possibility and timing of the compensation of these costs by the Employer.

Calculation of the Extension of Time

Obviously, there is no correct and satisfactory answer for either of the parties with respect to the origin from which the Contractor is entitled to Prolongation Costs. Based on the consideration of each party’s specific situations, each will have their own unique approach. Therefore, the most appropriate answer is to act – take action – in accordance with the Contract and the legal system.

However, based on Clause 1.1.4.3, FIDIC Red Book Contract 1999 (as well as almost all other FIDIC Contracts), the Contractor may claim future costs if such costs are reasonable.

The “reasonability” of costs is decided based on multiple criteria and the most important issue that must be proven to the Employer by the Contractor is the direct connection between the costs and the delay event. In other words, once a delay event occurs, the Contractor has no feasible method to prevent these costs from being incurred

Furthermore, it should be noted that claims for Prolongation Costs could be made in any submission until the delay event ends and the Employer/Engineer has the power to decide the final value based on concrete evidence. Which means the:

Contractor may submit future costs even if these costs have not, in fact, been incurred;
Contractor updates and adjusts the actual incurred costs continuously via subsequent submissions;
Final Prolongation Costs are verified or amended upon the submission of the Final Detailed Claim along with all necessary documentation and materials.

Fifth – Costs must be transparent

After the right to Prolongation Costs has been established, the Contractor needs to explicitly specify (i) the value of the Claimed Costs; (ii) the basis for the calculation of said value; (iii) the documents and materials used to substantiate the Claimed Cost.

3 Requirements on the Transparency of Costs

Accordingly, to specify the value of the Claimed Costs, the Contractor would often prepare a Total Sum of the Claimed Costs along with detailed explanations for each Cost item.

For example, to demonstrate the salary and allowances given by the Contractor to the Site personnel within the 60-days of extended duration, a Total Sum of Claimed Costs may be made as follows:

No.	Position	Quantity	Unit	Unit Price (USD)	Total
1	Project Director	60	Day	272.10	16.326
2	Construction Manager	60	Day	251.10	15.072
3	Contract & Cost Manager	60	Day	220.21	12.132
4	Safety Supervisor	60	Day	202.14	12.128
5	Site Leader	60	Day	150.20	9.012
6	Site Engineer	60	Day	85.01	5.101
7	Security	60	Day	60.23	3.614
…	…	…	…	…	…
Total (VAT not included)					…
VAT (x%)					…
Total (VAT included)					…

Following the Total Sum of Claimed Costs, the Contractor shall submit the details (such as timesheets) and sources for the unit price of each position (such as Employment Contract) and other relevant evidence, including pay slips, salary payment authorization (together with payroll), etc.

By demonstrating the statistics, via the above table, the Prolongation Costs are conveyed clearly and logically, thereby allowing the Engineer and/or the Employer to better grasp the components and value of the Claimed Costs and give their decision in a timely manner. Likewise, in this way, the Contractor is subject to fewer submissions and explanations.

Sixth, scientific archiving of Claim documents and materials for ease of access

During the implementation of the Work, once the Contractor recognizes the importance of Extension of Time and Prolongation Cost claims, the Contractor should establish a scientific archiving system for ease of access.

On the one hand, the most common and dangerous mistake made by many Contractors is the reliance on a shared archiving system throughout the construction as the basis for Prolongation Cost Claims.

The use of a shared archiving systems leaves the Contractor with practically no way to trace back to which resources are and are not used in the construction and whether they are utilized efficiently.

On the other hand, the archive system should be able to separate the documents, and type of costs and continuously update in due course, thereby systematizing the variety and complexity of the documents and materials used to prove the Prolongation costs such as: payment invoices, VAT invoices, confirmations, financial reports, payroll, and various contracts.

Another objective of the establishment of a scientific archiving system for Claim documents and materials is to support the Engineer, the Employer, or even the authorities and sponsors in their review, audit, and evaluation of the reasonability of the Contractor’s incurred Costs so that prompt and legal approval and/or acceptance may be made.

3 benefits of temporary archive system for Cost

Conclusion

Time is of paramount importance in construction activities, as whenever a project is prolonged, not only is the Employer affected due to the inability to utilize the project as originally planned, but the Contractor also faces the risk of having to reimburse for any damages and losses incurred.

Therefore, in order to avoid being held responsible before the Employer for the losses resulting from the prolongation, the Contractor must first ensure their rights to an extension of time. Afterwards, to maintain the legal status prior to the occurrence of the delay event, it is well-advised to comprehend and utilize the six issues above.

Incorrect or less than adequate comprehension and utilization of the six issues mentioned above will likely lead to the rejection of the Claim or disputes between Parties.

Contact

For clarification of this important information or to inquire more about in Extension of Time and Prolongation Cost Claims, please contact us at:

CNC Vietnam Law Firm Co. Ltd

Address: 28 Mai Chi Tho, An Phu Ward, Thu Duc City, Ho Chi Minh City, Vietnam

Phone: (84) 28-6276 9900

Email: contact@cnccounsel.com

Website: cnccounsel

Managed by

Mr. Le The Hung | Managing Partner

Phone: (84) 916 545 618

Email: hung.le@cnccounsel.com

Ms. Kieu Nu My Hao | Legal Assistant

Phone: (84) 366 192 305

Email: hao.kieu@cnccounsel.com

Disclaimers:

This article was prepared or used for the purpose of introducing or informing our clients on issues and/or developments of legal perspectives in Vietnam. The information presented in this article does not constitute advice of any kind and may be subject to change without advance notice.

[1] See more: Prolongation costs in construction disputes (pinsentmasons.com)

[2] Clause 1.1.4.3 of FIDIC Red Book 2019

[3] 10^th Definition, Society ò Construction Law Delay and Disruption Protocol 2017, 2^nd Edition