Typical Issues
There is an over reliance on various established formulae, which are presented without proper reflection. The HOO calculation must make adjustment for the true connectivity of head office costs directly attributable to project delays. In assessing unrecovered HOOs, the following typical issues arise:
- Demonstrating that there has been a missed opportunity due to other work opportunities being turned away and the Contractor’s resources being retained longer due to Employer delays.
- A formula-based approach using Hudson, Emden and Eichleay provides a broad calculation of proportionality of head office overheads relative to tender, company turnover, and portfolio of project expenditure. Adjustments must be made to reflect the circumstances of the claim.
- Formulae have been criticised and need a quantification that considers the monthly overhead expenditure relative to the overall project portfolio.
- The production of accounting records needs to be sufficiently detailed so that the posted annual accounts can sufficiently scrutinise direct head office costs.
Insight
In our experience, professional judgement needs to be taken in making a reasonable calculation of damages and this will require analysis on a case-by-case basis, depending upon the circumstances and the nature of the Contractor’s work.
Major civil engineering Contractors may have in house head office capability, including research and development, amortisation of high value equipment such as offshore vessels or onshore lifting equipment, or proprietary construction systems, which contribute to HOO. These may be key to winning subsequent work on other projects.
Where equipment is retained due to Employer delays, such that the Contractor misses out on bidding and potentially winning work, the Contractor may have corresponding return on investment claims where the Contractor could have used the plant elsewhere.
Where resources are tied up, a Contractor may miss out on earning HOO contribution through the Contractor being unable to deploy its resources elsewhere and contributing to HOO (but for the Employer delay).
Another issue regarding the use of formula is the calculation of an appropriate percentage, which may comprise a percentage for HOO and a percentage for profit. The Contract may contain applicable percentages and some claims are made based on unproven HOO percentages and by reference to percentages provided for the valuation of variations or the like. In the alternative, accounting information can be assessed to compute an applicable percentage.
Formula-based claims rely upon equating a run rate per day for HOO as a burden relative to the time-related delay on a specific project. HOO analysis must consider those costs that would have been incurred in any event in central overhead functions in running the business versus the head office support incurred relative to extended site operations. One off costs and irrelevant costs, such as marketing or executive suite can be separately identified as costs that would be incurred in any event.
To provide a credible assessment of head office overheads the accounting information needs to be examined, because therein lies the constituent parts of the central overhead function. Statutory accounts often include a general and administrative record of the HOO costs. These can be analysed to understand the subcomponent costs of HOO, ideally by reference to audited accounts.