A lot of people understand how delays in certain things can have undesirable consequences that they want to avoid. In the construction industry, delays extending construction projects brought construction companies a lot of financial implications. Architects, engineering firms, contractors, construction companies, and other related firms haven’t been spared.
Such kind of consequences may have some positive financial outcomes but in most cases, the outcomes of such issues are often in the red zone. This usually depends on the cause-effect and liability for the delays involved.
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The kind of delay factors present in the construction industry
Numerous contractors understand how construction contracts contain provisions for time extensions due to delays created by unforeseeable issues. However, compensation does not necessarily need to be the reason or cause for delays that happened.
There are essentially two kinds of them: Excusable delays and Compensable delays. In the former, (delay excusable) factors like weather, natural disasters and other natural acts not within control of humans etc. cause them to happen.
WHereas in the latter, the delays caused by other parties or influences which often weren’t foreseeable by the contractor at the time of the contract (i.e. when the contract got signed). They involve factors such as sudden changes in design, extra work orders, stoppages in work, contract modifications and vice versa.
Recovering from the financial consequences of such kinds of delays requires contractors to be able to demonstrate that the cause, effect, and liability for such delays can be attributed to other parties that are part of the contract. Else, they will have to bear the brunt.
The kinds of damages that contractors can recover from – what are they?
Here are the kinds of damages that contractors can recover:
- Extended field overhead.
- Additional materials stored.
- Additional costs of financing and bonding.
- Cost escalation.
- Loss of profit that was anticipated.
- Unabsorbed home office overhead.
- Labor and equipment in idle state.
Quantum analysis experts based in Dubai will now briefly discuss the key ones that often need resolution in the best possible time frame.
Escalation of cost
An example of cost escalation happens: If a contractor’s operation was delayed by a compensable delay from one labor agreement period to the other one. This causes the contractor to pay a higher hourly wage, and then they might be entitled to more compensation.
The same can apply to material acquisition where a compensable delay takes place and consequently the materials’ cost rises during that period. Damages resulting from such are often found by calculating the difference between the cost of labor, equipment, or materials the contractor incurred.
In case there had been no delay and the actual cost of labor, equipment or materials the contractor now has to pay for carrying out work later than the original date of start means that the cost did not escalate.
A contractor’s recovery of escalation damages is caused by numerous factors. But, it is often related to either a critical delay or an extended duration of project(s).
Extended field overheads
They are caused due to a critical project delay, or an extended project duration. Field overhead costs consist of indirect costs required to support work in the field. In the obvious sense, they are related directly to the costs of construction work carried out. Its common components are as under:
- Field office rental.
- Salaries of field office staff.
- Field office staff vehicles.
- Utilities and consumables of the field office.
Unabsorbed Home Office Overheads
They are quite commonplace in construction. Yet it is more complex by nature. Just like the extended field overhead, they are caused by a crucial project delay or extended project duration. Unabsorbed Home office overhead costs are expenses that are borne to support construction work.
But, they are not related directly to the costs of the work of a specific project due to their indirect nature. These costs generally include the following:
Home office ownership costs/rental.
- Corporate taxes.
- Insurance costs (especially those that cannot be assigned to a specific project).
- Home office utilities, equipment, and maintenance.
- Salaries of home office staff (company officers, payroll clerks, estimators, receptionists, etc.)
Construction claims experts reveal that the following formulas can calculate home office overhead:
- Eichel formula.
- Carteret formula.
- Fixed percentage approach.
- Allegheny formula.
- Canadian formula.