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Disruption costs claims on construction projects are known to have a lower success rate than their rich cousin, the prolongation costs claim. There are two main reasons for this: (1) a lack of understanding of their nature and how they relate to other types of additional cost claim; and (2) an inability to demonstrate their essential ingredients.
Disruption is often referred to as inefficient working. This is not far off the mark, but a more accurate definition is found in the SCL Protocol which defines disruption as “disturbance, hindrance or interruption to a Contractor’s normal working methods, resulting in lower productivity or efficiency.”
A useful simplification for distinguishing disruption from delay is that ‘delay is not disruption, but disruption may lead to delay’. In terms of how this translates into claims for additional cost, claims for disruption costs are for the contractor’s direct additional costs due to the reduced productivity, whereas prolongation costs are indirect costs incurred as a result of remaining on site longer than planned. Consequently, a prolongation costs claim made on the back of an approved extension of time claim will also not necessarily compensate the contractor for its full loss without also considering, and claiming where possible, the disruptive effect of that delay.
On this note, a common misconception is that disruption triggers a universally recognised right of claim in itself. In fact, under most standard form contracts, that is not the case. For example, FIDIC Red Book 1999 (unamended) contains neither any reference to disruption, nor to any right to prolongation costs for an extension of time. In that sense, the legal basis for claim for disruption costs is no different to prolongation costs – that is, in the absence of any specific provision, the claim is for damages for breach of contract. Even where the standard form is amended to provide for compensable delay for certain events for which the Employer is responsible, the compensable events are usually narrow.
Why is this significant? Well, primarily because it means the contractor must show, in addition to an actual breach by the Employer, that the breach caused the contractor to incur the additional costs. There can be no damages for breach of contract without evidence of cause and effect.
The key aspect in which contractors most often fail is demonstrating that the events for which the employer is responsible actually caused disruption, by giving any details of the relationship between the events and resource allocation. This is unsurprising, as the vast majority of claims for disruption are not prepared until the end of the project, or close to the end. Indeed, the contractor normally does not realise the full extent to which they have suffered a loss of productivity until late in the project, and only then begins to analyse it in any detail.
This approach itself puts the contractor at a disadvantage. At worst, it may even be fatal. FIDIC Red Book 1999 (unamended) requires such a claim (being a claim for “any additional payment” that is either under the contract or otherwise in connection with it) to be the subject of an initial notice of claim within 28 days of the event (being the date the contractor became aware or should have become aware of the event). A fully detailed claim must then be submitted within 42 days, unless the Engineer approves a longer period. As we have seen in Panther Real Estate in the DIFC Courts, a failure to give the first notice of claim (within 28 days) will indeed be fatal. While that case concerned a contract governed by DIFC law, it would be very unwise for contractors to take their chances under UAE law-governed contracts.
In terms of identifying the cause of the disruption, contractors often bundle up many events which it believes caused, or even conceivably might have caused, an impact on progress. This effectively puts it into the ‘global’ claim category, which should always be considered a last resort. Instead, what is required is to identify the specific obligations breached by the Employer, not merely pointing to circumstances for which the contractor was not responsible. This may overlap with the event/s relied upon for an extension of time claim, but not necessarily so.
Demonstrating the effect of the disruptive events on productivity is the next key challenge.
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- First, the objective is to demonstrate the cost over and above that which would have been incurred had it not been for the disruption events (see section 18 of the SCL Protocol). In other words, it is not an exercise of planned cost vs. actual cost (although the reasonableness of the planned productivity may be relevant).
- The quality of record keeping is also critical. Specifically, it is the records of progress and the level of resourcing on site (including a record of what the labour and plant is actually doing) that is most relevant. Quality records, however, are not a substitute for a timely claim.
- There are various analytical methods used, such as the measured mile analysis. While this is perhaps the most frequently used, it is not bulletproof, especially in circumstances where there is no reliable baseline method of productivity that can be observed, or on less ‘linear’ projects.
In formulating the claim, the contractor will also need to consider whether it can demonstrate that it took any reasonable steps that were available to avoid or minimise the impact of the disruptive events. The Employer will almost invariably argue a failure to mitigate as a means of resisting the claim. The contractor should assume that it will need to demonstrate its decision-making for the use of resources in the face of the disruptive events, eg. the ability to re-direct resources to other work fronts or to stand down those resources. Again, the quality of records here is vital. A contemporaneous record of these matters will always have more evidentiary value than a retrospective account (which will be open to criticism as being self-serving).
Mitigation should be distinguished from acceleration. The general duty to mitigate does not oblige the contractor to incur additional costs in order to mitigate the effect of an Employer risk event. If the contractor intends to deploy additional resources or otherwise incur costs, without agreement with the Employer on the entitlement to be compensated for those costs, the contractor will be doing so at its own risk.
The same applies where the contractor accelerates merely to avoid the risk of liquidated damages due to the lack of an approved EOT which it believes should have been issued (a.k.a constructive acceleration). Not only is this a dubious strategy in purely commercial terms (as a constructive acceleration claim virtually never succeeds outside of the U.S), we have seen numerous contractors claim that they had ‘no choice’ but to accelerate, which is not the case. Ideally, the contractor should trigger the contractual dispute resolution provisions, or at least give notice setting out the reasons it is proposing to accelerate, the proposed steps, and a revised programme.
Where there is no contractual provision for acceleration but the contractor and employer reach agreement that the contractor should accelerate, this should be recorded in writing – ideally as an addendum to the contract or similar. The terms of such an agreement should be carefully drafted (with legal input). A seemingly straightforward arrangement, if not expressed properly, may well have unintended consequences which wreak havoc on the approach to the assessment of both past and future extension of time and prolongation costs claims.
Authors: Josh Kemp and Scott Lambert