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Don't paddle blindly up the river with loss and expenses claims

legal matters

In the heyday of construction law conferences, it seemed that organisers could promote a conference on any topic and, provided the words 'construction' and 'law' appeared in the headline, 90 or so people would pay good money to attend.

This theory was put to the ultimate test when I was asked to speak on the subject 'Cost, Overheads, Interest and Profit', and given the two o'clock slot just for good measure. Faced with the ultimate challenge of how to make loss and expense claims interesting, I was delighted to find Robert Fenwick Elliott's illustration of the workings of the Hudson Formula, which is, sometimes, used to calculate a contractor's claim for overheads and profit and is, invariably, an impenetrable subject.

In his dated but useful guide to building contract litigation, Fenwick Elliott compared the position of a contractor claiming loss and expense for delay, with a river steamer company that had hired out one of its steamers to a party of revellers for a four-hour trip around the lake for £400. In this analogy the revellers, who had been enjoying themselves at the bar, demanded a variation to the route which added another hour to the trip. The contract did not provide for this detour, save to say that it should be paid for in accordance with the ordinary principles of damages.

The Hudson Formula, which looks like this:

proceeds on the basis that during the period of delay, the contractor's head office resources are tied up, unprofitably, on the delayed contract when they could have been used, profitably, on a new contract. It also assumes that it is the availability of the contractor's head office resources that dictate whether it can take on work, rather than current market conditions. So, if the contractor cannot produce evidence to show that because of the delayed contract it was unable to tender for a new contract, it would have no claim.

Similarly, the steamer company could only recover the steamer's hourly hire charge if it could show that, but for the delay caused by the revellers, it would have let the steamer out to another party. Failing which, the most it can claim is the actual cost of the detour in, say, fuel.

Next, the contractor should give credit for any overhead and profit recovery made through the valuation of variations. If the delay is caused wholly by the requirement to carry out extra work, the contractor may be recovering most or all of its overhead and profit losses via payment for these works, just as the steamer company may recover its losses through the profits made from the bar as a result of the extra drinks consumed during the extended trip. The more drinks consumed, and the more expensive they are, the less the company's losses for delay.

The formula also assumes that the relevant percentage for overheads and profit is that used for the delayed contract. Logically and legally, however, the correct percentage is that which would have been recovered from the new contract. The steamer company would not necessarily recover £100 for the hour's detour.

Instead, it would recover whatever hourly rate it would have earned from the next party, waiting on the quayside: a budget party may generate less profit, an expensive party more.

It is not unusual for contractors held up on site for longer than the contract period for reasons (they would have it) wholly of someone else's making, simply to take a weekly rate for their preliminaries and multiply it by the number of weeks' delay. Equally, often those on the receiving end of such claims throw up their hands in horror at the prospect of unravelling the contractor's true entitlement. They should bear in mind that there is no magic to loss and expense claims. Unless the contract provides otherwise, contractors are entitled only to such losses as are actually caused by the delay. Similarly, the complexities of formulae such as the Hudson Formula can be simplified by Fenwick Elliott's useful analogy.

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