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Explanatory Notes on the Contractual Grounds for the

Compensation of Prolongation Costs in addition to those


provided in the Engineer’s letter ref. DOHWA-RRMSD-II-M-
249-19

The following notes provide explanations in terms of established principles of valuation based on
the time-related resources which are widely adopted by construction sector, and the remedies as
well that are available under the Contract for Modernization of Tbilisi-Rustawi Section of the
Tbilisi Red-Bridge (Azerbaijani Border) Road Project for the purposes of facilitating issues
specific to the compensation of prolongation costs arising from the delays incurred in course of
performance of the Works.

1. Prolongation cost is generally the time (& not fixed) related costs that are actually incurred
at the time the delaying events impacted the progress of the Works, and normally represent
the costs of the Contractor's overheads, general plant and various other expenditures. In
principle the prolongation costs claimed are:

(i) based on the actual additional cost incurred by the Contractor,


(ii) stripped out all the direct costs (i.e. fixed costs and task / volume related costs
linked to units of work) and any other one off costs / fixed charges that are not time
related e.g. mobilisation and demobilization charges, site utility installation costs
and office furniture and equipment costs (except for operating costs) and
(iii) not capable of being mitigated e.g. off hiring of plant /equipment, lowering of
resources or redeployment of resources to unaffected activities, and
(iv) not contemplated to be compensated in the original Accepted Contract Amount.

2. The established principle in claiming for prolonged site overheads is that the loss is the total
of time-related costs incurred in respect of resources (typically overheads) which, because
of the delaying event (for which the Employer is responsible under the Contract), were
detained on site for a longer period than contemplated in the Contract.

3. The prolongation costs claimed are grouped under the following heads:

A. Indirect costs comprising of Management Costs, Other Staff Costs, Indirect Labour
Costs, Staff Accommodation Costs, Labour Camp Accommodation Costs, Site & Office
Running Costs and Head Office Overheads
B. Additional Depreciation / Amortization of Equipment and Plant

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Explanatory Notes on the Contractual Grounds for the Compensation of Prolongation Costs
C. Overhead Costs incurred in connection with Insurance and Bank Guarantee Letters

4. In context of these notes the term ‘prolongation costs’ is used to describe the loss incurred
by the Contractor in respect of the additional site running costs, arising from delays to the
Time for Completion. These losses have been differentiated from those losses arising from
disruptions to the Works that do not lead to delays to completion of the Works overall.

5. The Contractor’s obligations in terms of the Contract include, but are not limited to,
supervision of the Works, the operation of equipment and the provision and maintenance of
the Contractor’s facilities for the duration of the original Contract period. Any prolongation
in the period of construction of the Works consequently extends the period of performance
of these obligations resulting in the Contractor incurring additional costs.

6. Society of Construction Law Delay and Disruption Protocol1 Clause 20 (Basis of calculation
of compensation for prolongation) provides that “Unless expressly provided for otherwise
in the contract, compensation for prolongation should not be paid for anything other than
work actually done, time actually taken up or loss and/or expense actually suffered. In other
words, the compensation for prolongation caused other than by variations is based on the
actual additional cost incurred by the Contractor. The objective is to put the Contractor in the
same financial position it would have been if the Employer Risk Event had not occurred.”

7. In the Sub-clause 20.1 of the same Protocol it has been stated that delay causes
prolongation, and prolongation causes increase in costs to be incurred by the Contractor. It
is also determined that any prolongation costs resulting from Employer Risk Events
(including but not limited to design changes and lack of possession of and access to all parts
of the Site) must be borne by the Employer and the compensation for prolongation so
resulted is to primarily comprise the Contractor’s extended use of time-related resources,
notably its site overheads.

8. The criteria used for the compiling of the subject costs is that all of these costs are in
addition to those that the Contractor would have incurred should there have been no delay
to the progress of the Works, and they are necessary to continue the running of the site in
accordance with the terms of the Contract. As a consequence of the resultant delays, which
are beyond the Contractor’s control, to the progress of the Works, the Contractor is left with
no other option but continue to maintain the site establishment and supervision means for a
period of time beyond that envisaged in the Contract.

9. Society of Construction Law Delay and Disruption Protocol Clause 22 dated October 2002
(Period for evaluation of compensation) states that ‘the recoverable prolongation
compensation is to be assessed by reference to the period in which the effect of the
Employer Event Risk was felt.’ It is clearly intended therein that, once it is established that

1
This Protocol was published in October 2002 by the Society of Construction Law for determining extensions
of time and compensation for delay and disruption.

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Explanatory Notes on the Contractual Grounds for the Compensation of Prolongation Costs
additional payment is due for prolongation resulting from Employer-oriented delays, the
evaluation should relate to the period when the effect of the delay occurs and not to the
overrun period at the end of the contract. Accordingly, the Contractor in the submissions of
IPA No. 26 and IPA No. 27 has included his Claim for the expenses that were reasonably
incurred in the course of performance of the Works under the Contract during the periods
from 01 March to 31 March 2019 and 01 April to 30 April 2019 after the Time for Completion has
been expired on 28 February 2019.

10. In the paper titled “Prolongation Costs: Where Now After Costain V Haswell?” by Dr Ronan
Champion published by the Society of Construction Law on September 2011, it has been
emphasized that upon the incurrence of a delay to a construction contract, assuming it is a
critical delay (i.e. causing a delay to the date for completion), a number of consequences,
among others, follows:

(i) the activity or activities most directly involved will be delayed,


(ii) the delayed activities will usually delay those which follow,
(iii) if the project's duration is extended, the site management team and plant and site
accommodation will need to remain on the site for a longer period, through to the end
of the project.

11. The claims raised by the Contractor in the IPA No. 26 and IPA No. 27 have arisen from delays
caused by the Employer and concerns only increased site running costs or site overheads
which corresponds to the cost of site-based staff, accommodation and some plant being
retained on the site for a longer period than that stipulated under the Contract, namely
beyond 28 February 2019.

12. In the paragraph 6-075 of Hudson's Building and Engineering Contracts2 it is said in relation
to claims for additional site overheads that:

‘Site or job-related overheads include the non-productive costs which a contractor will
view as a necessary expenditure to carry out the works. These costs will include such items
as supervision and site accommodation and will include elements of plant ... It is obvious
that, if these costs are time-related, any delay to the project will be likely to increase the
cost to the contractor of undertaking the work and should be reimbursed to the extent that
the Employer has caused the overall delay to the project.’"

13. There has been an accepted practice that it is only if, and when, the project as a whole is
extended or prolonged beyond its programmed completion period as a result of the delay to

2
Hudson's Building and Engineering Contracts provides an in-depth explanation of the law and interpretation of
construction contracts, taking into account the practical and commercial realities relating to construction
projects.

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Explanatory Notes on the Contractual Grounds for the Compensation of Prolongation Costs
the progress of works that the Contractor would be involved in the extra employment of
resources over and above that allowed in the Accepted Contract Amount. It is therefore that
the delays arising from reasons attributable the Employer including but not limited to the
failure in the provision of possession of, and access to, the all parts of the Site and issuance
of instruction for Variation Orders, resulted in the Contractor having been forced to stay in
the Site beyond the date for Time for Completion (as set under the Contract at 28 February
2019) and incur costs that have not been contemplated in the Accepted Contract Amount.

14. It is the undisputable fact that the Employer has been responsible for delays to the progress
of works, and as direct result of these events the Contractor has been delayed in the
completion of the Works and suffered additional costs in performing the Works. In other
words the additional costs incurred for the period of March 2019 and April 20119 as claimed
respectively under IPA No. 26 and IPA No. 27 have arisen as a result of the delay events for
which the Employer bears liability. It is patently clear that, but for the delay and disruptive
events, the cost to the Contractor would have been less than it actually incurred.

15. It is also fact that the delays were unforeseeable and uncontrollable by the Contractor and
that they are critical and causative in nature. It is also evident that an extension to the Time
for Completion has been yet to be granted by the Employer and that the Contractor has the
right to claim compensation by the Employer of the losses and expenses incurred as a
specific consequence of the Employer-caused delays in the period between 01 and 31 March
2019 as included in the IPA No. 26 and those forthcoming submissions that will be made
under cover of separate IPAs.

16. It has been an accepted practice by the industry that the correct means of evaluating
prolongation costs is to be by reference to actual expenditure, justifiable upon
contemporary records that have been kept by the Contractor as has been and shall continue
to be demonstrated in the submission of IPAs.

17. The view taken by construction practitioners is that valuation of loss should be made at the
point when the delay occurs. In other words, when ascertaining the contractor’s entitlement
to additional costs, the calculation must be related to the actual costs incurred at the time
the relevant delay occurred, not in the extended period at the end of the contract.

18. In paragraphs 458-459 of the Keating on Construction Contracts3 it has been advised
regarding the valuation of prolongation costs that prolongation costs ordinarily is to begin
to be recoverable from the Completion Date.

19. The circumstances that have cumulatively caused delay to the Time for Completion of the
Works resulting from the reasons attributable to the Employer includes but not limited to:

3
Keating on Construction Contracts is a first port of call for all research on the history and principles governing
building contracts, their practical application and their interpretation by the courts.

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Explanatory Notes on the Contractual Grounds for the Compensation of Prolongation Costs
1. Right of access to and possession of all part of the Sites
2. Variation Instructions and Changes to the works
3. Unforeseen soil conditions encountered at the site

20. Under the Contract, the failure by the Employer to grant access to and possession of the all
parts of the Sites to the Contractor in compliance with the Phased Schedule and
Requirements provided for in the Sub-Clause 2.1 of the Contract requires an extension to be
made to the Time for Completion for any such delay arising therefrom.

21. The Sub-Clause 17.3 [Employer’s Risk] sub-paragraph (g) stipulates that “design of any part
of the Works by the Employer’s Personnel or by others for whom the Employer is
responsible” has been a risk that the Employer is to bear under the Contract.

The Sub-Clause 17.4[Consequences of Employer’s Risks] dictates that If and to the extent
that any of the risks listed in Sub-Clause 17.3 results in loss or damage to the Works, the
Contractor shall be entitled to an extension of time under Sub-Clause 8.4 [Extension of Time
for Completion].

22. Pursuant to the Sub-Clause 1.9 [Delayed Drawings or Instructions] in the event of a delay
incurred in the issuance of the drawings or instructions, this situation shall require an
extension to be made under the Sub-Clause 8.4 to the Time for Completion for the
corresponding delay.

23. The Sub-Clause 4.12 [Unforeseeable Physical Conditions] stipulates that if and to the extent
that an Unforeseeable condition is encountered at the Site, this situation requires an
extension under the Sub-Clause 8.4 to be made to the Time for Completion for the
corresponding delay resulting thereof.

24. It is to be noted that until such time as the Employer grants extension to the Time for
Completion for the delays he is liable and settles the accounts in respect of the
compensation of the prolongation costs, the Contractor shall continue to submit monthly
prolongation costs by way of including in the respective Interim Payment Applications in
future for certification purposes.

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Explanatory Notes on the Contractual Grounds for the Compensation of Prolongation Costs