Breaking Down the Walls: A Series on Construction Delay

This is the first in a multi-part series on construction delays by the authors

In the fast-paced world of construction, delays can pose significant challenges to project success. In this Breaking Down the Walls series we simplify the fundamentals of construction delays, providing readers with the necessary tools to proactively identify and assess delays on their own projects in Canada, and focus on the damages that are often claimed as a result of schedule delay.

PART A: Delay Claims: Understanding the Basics

Construction delay is debated on nearly every construction project in Canada, from the smallest renovations to record-breaking megaprojects. Delay leaves various stakeholders asking seemingly simple questions like: Why was the project late? Who caused it? The answers to these questions, however, can be immensely complex.

We start with analysing the concept of construction delay and identifying the steps to successfully assert or defend a delay claim. The first step is understanding what delays are.

Exactly what is “Delay”

The term “delay” in the construction context encompasses more than its ordinary grammatical meaning. Merely observing that an activity has taken place later than planned is only the first piece in a complex puzzle to ultimately determining whether there has been a “delay” to the overall project.

The Society of Construction Law’s Delay and Disruption Protocol[1] (“SCL Protocol”) provides a good starting-point in appreciating the meaning of “delay” and the importance of “delay analysis” in the construction context:

In referring to ‘delay’, the Protocol is concerned with time – work activities taking longer than planned. In large part, the focus is on delay to the completion of the works – in other words, critical delay. Hence, ‘delay’ is concerned with an analysis of time. This type of analysis is necessary to support an [extension of time] claim by the Contractor.[2]

Delay analysis is the process of assessing when and why work started later, ended later, or took longer than planned and how these delays affected the overall project schedule. This ultimately allows parties to assert and defend claims for relief, often in the form of an extension of time (“EOT”) claim.

Not all delays are treated equally, and consideration must be given to the contractual entitlement to an analysed delay. There are generally three categories of delay:

1. Critical vs. Non-Critical Delay
2. Excusable vs. Non-Excusable Delay
3. Compensable vs. Non-Compensable Delay

Critical vs. Non-Critical delay

A delay analysis will most frequently employ the Critical Path Method (“CPM”), which endeavours to determine the project’s “critical path.” The critical path is the “longest chain of logically connected activities in a project schedule that, if delayed, will delay the end date of a project.”[3] Critical path delays are discrete (associated with specific events), happen chronologically (occur over time), and accumulate to the overall project delay (discrete delays add up to the total delay).[4]

All projects have a critical path, even if one is not readily identifiable from the schedule. The art of identifying critical activities and piecing together the critical path is aided by an understanding of multiple aspects of the project, including: (i) the ultimate project deliverable; (ii) the contractor plan and schedule; (iii) contractual requirements for sequencing; (iv) the logical relationship between activities; and (v) the physical or logistical constraints of the project; and (iv) how the project events actually occurred (the “as-built” schedule).

To illustrate a critical path delay, consider the example of a high-rise condominium tower. In order to construct the tower, a logical sequence of work activities is identified in the baseline (“as planned”) schedule. These activities have been simplified and are presented in Figure 1, below.

 

 

 

 

 

 

Figure 1 - Example Critical Path

The planned critical path of our condominium tower begins with site excavation, followed by foundations, structural steel erection, mechanical/electrical/plumbing (“M/E/P”) rough-ins, and finishes. The completion of finishes marks Project Completion. The construction of this condominium tower is planned to take 12 months in total.

We now move four months forward into the construction period, with the status being shown in Figure 2, below.

 

 

 

 

 

 

 

 

Figure 2 - Example Critical Path Four Months into Construction

Both the excavation and foundation activities have been completed during these first four months, consistent with the planned critical path. However, the construction team has now learned that structural steel deliveries are delayed by two months, meaning that the structural steel installation is also delayed by two months and cannot be installed according to the original plan. Because structural steel erection is on the critical path, this two-month delay to the start of structural steel erection will also result in a two-month delay to Project Completion if structural steel erection and all other activities are completed according to the go-forward plan.

A comparison of the two schedules (the as-planned schedule versus the schedule after four months) shows how the critical steel delivery delay is projected to impact Project Completion, shown in Figure 3, below.

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 3 - Example Project Completion Delay from Late Steel Deliveries

Conversely, a non-critical delay would be a delay to an activity that does not impact the completion of the project. These activities can be delayed on their own without impacting the critical path and can be said to have “float”. Using the M/E/P rough-ins from Figure 3 above as an example, any discrete activity delay which does not impact the contractor’s ability to install the M/E/P rough-ins at the beginning of Month 8 is not critical. For example, if the design were received later than planned, but still prior to the start of Month 8, that design delay is not critical because the start of M/E/P rough-ins is controlled by the completion of structural steel erection at the end of Month 7.

For purposes of developing the critical path, non-critical delays are set aside because they do not delay completion of the project. That is not to say that non-critical delays may not result in a claim – they could; however, the claim would be for the discrete impacts caused by the non-critical delay and not, for example, overall prolongation.

Identifying critical versus non-critical delays is a key component of schedule delay analysis, and often one of the most contested facts during a construction dispute. The fundamentals of schedule analysis and critical path delay identification will be discussed further in Part 5 of this Breaking Down the Walls series, “Forensic Schedule Analysis Techniques”.

Excusable vs. Non-Excusable Delay

Once the critical delays are identified, the next stage of analysis involves determining whether the critical delay events are either excusable or non-excusable. This is a legal analysis which examines both the terms of the contract and the applicable jurisdictional legal principles to determine a party’s entitlement to claim relief for the delay.

Often, excusable delays are delays caused by an unforeseeable event beyond the control of the contractor or subcontractor, also referred to as an “Employer Delay”.[5] 

Classifying a delay as excusable depends on several factors, most importantly the allocation of risk under the contract; however, generally, the following are considered excusable delay events:

1. Acts of God (also known as force majeure events), which include various natural disasters, fires, or floods;
2. Labour strikes or changes in law, which force the contractor to suspend or delay works;
3. Delays caused by the owner or its agent, including but not limited to design changes, failure to provide undisturbed access, or errors and omissions in plans or specification provided by the owner;
4. Differing or concealed site conditions, such as unknown utilities; or
5. Lack of action or interference by outside agencies, such as permit approvals.

When a delay is excusable, a contractor is entitled to an EOT, also referred to as an “Employer Risk Event”.[6] Thus, a contractor cannot be held in default for a delay that is deemed to be “excusable”. However, an EOT does not necessarily mean that a contractor has an entitlement to additional compensation (this differentiation is addressed in the next section).

A delay is non-excusable when it is driven by a contractor action or inaction for an activity that falls within the contractor’s control or responsibility (such as a subcontractor). Again, the contract is typically the controlling source for identifying responsibility for a “Contractor Risk Event”[7]. The following are some examples of what are generally considered non-excusable delay events:

1. Late performance by subcontractors;
2. Late supply of contractor-responsible material;
3. Defects and deficiencies; or
4. Failure to mobilize sufficient labour or equipment.

These lists are by no means definitive, as a contract or the law of a particular jurisdiction may allocate risk for delays differently. A non-excusable delay will not entitle a contractor to an EOT, which means it is the end of the road in determining whether there may be any entitlement to compensation in the form of delay damages. Identifying a critical path delay as excusable is thus a prerequisite to compensation.

Compensable vs. Non-Compensable Delay

Once it has been determined that there is a critical, excusable delay, the contractor is entitled to an EOT. However, as alluded to earlier, this does not mean that the contractor is entitled to compensation in the form of prolongation costs, often referred to as “delay damages”. Therefore, the final analysis is to determine if a delay is either compensable or non-compensable.

Again, whether a delay is compensable depends primarily on the terms of the contract. In most cases, the contract will specifically identify which delays are non-compensable. For example, a standard form CCDC 2 – Stipulated Price Contract governs compensability as follows:

6.5.1 If the Contractor is delayed in the performance of the Work by an action or omission of the Owner, Consultant or anyone employed or engaged by them directly or indirectly, contrary to the provisions of the Contract Documents, then the Contract Time shall be extended for such reasonable time as the Consultant may recommend in consultation with the Contractor. The Contractor shall be reimbursed by the Owner for reasonable costs incurred by the Contractor as the result of such delay.

6.5.2 If the Contractor is delayed in the performance of the Work by a stop work order issued by a court or other public authority and providing that such order was not issued as the result of an act or fault of the Contractor or any person employed or engaged by the Contractor directly or indirectly. then the Contract Time shall be extended for such reasonable time as the Consultant may recommend in consultation with the Contractor. The Contractor shall be reimbursed by the Owner for reasonable costs incurred by the Contractor as the result of such delay.

[emphasis added]

GC 6.5.1 and GC 6.5.2 of the CCDC 2 reference delay events which would entitle a contractor to claim compensation, whereas GC 6.5.3 below, serves as an example of delays which, although excusable, are non-compensable:

6.5.3 If the Contractor is delayed in the performance of the Work by:

.1 labour disputes, strikes, lockouts (including lockouts decreed or recommended for its members by a recognized contractors' association, of which the Contractor is a member or to which the Contractor is otherwise bound),

.2 fire, unusual delay by common carriers or unavoidable casualties,

.3 abnormally adverse weather conditions, or

.4 any cause beyond the Contractor's control other than one resulting from a default or breach of Contract by the Contractor,

then the Contract Time shall be extended for such reasonable time as the Consultant may recommend in consultation with the Contractor. The extension of time shall not be less than the time lost as the result of the event causing the delay, unless the Contractor agrees to a shorter extension. The Contractor shall not be entitled to payment for costs incurred by such delays unless such delays result from actions by the Owner, Consultant or anyone employed or engaged by them directly or indirectly.

[emphasis added]

The question remains, what is the benefit of an EOT without compensation? An EOT prevents an owner from claiming delay damages against a contractor from the original project completion date through the new EOT date. Many contracts also include a liquidated damages (“LDs”) clause, which serves as an agreed upon pre-estimate of damages to cover the costs for each day of delay it takes the contractor to complete the project past the agreed-upon completion date. An EOT provides a contractor with relief from the owner applying LDs, as the agreed-upon completion date is extended by the same amount of time as the contractor’s EOT entitlement.

Whereas a non-compensable EOT is a shield to protect the contractor from a claim for delay damage by the owner, a compensable delay serves as both a sword and shield, allowing the contractor to claim compensation, as well as protecting it from delay damages.

The fundamentals for claiming and defending prolongation costs will be covered in Part 2 of this Breaking Down the Walls series, “Delay Damages”.

The Delay Claim Decision Tree

Each of the above factors can be represented in a form of decision-tree to allow parties to assess the general impacts of a potential delay event:[8]

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 4 - The Delay Claim Decision Tree

Once it is determined that there is a compensable delay, parties can focus on the damages that are often claimed as a result of critical, excusable, and compensable schedule delay.

PART B: Time is Money - Understanding Delay Damages

Delay damages, also referred to as ‘prolongation’ costs, are generally considered to be the time-related costs incurred because of delay to a project. In this article, we explore some of the key aspects of delay damages, including:

1. Distinguishing delay damages from discrete damages,
2. Typical contractor delay damage categories,
3. Typical owner delay damage categories,
4. Determining the period of time that delay damages should be quantified, and
5. The legal framework for claiming delay damages in Canada.

Distinguishing delay damages from discrete damages

One of the core principles in the SCL Protocol provides the following outline of what ‘prolongation’ costs (or delay damages) include:^[9]

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.^[10]

The SCL Protocol limits prolongation claims to those costs would make the parties “whole” had the delay event not occurred, unless otherwise stipulated in the contract. A fundamental characteristic of delay damages is that they are limited to the time-related costs actually incurred by the parties. The time aspect of delay damages will be discussed in more detail later in this article.

Delay damages can be contrasted from the additional, discrete costs directly attributable to a change in work or scope. Discrete damages are separate from delay damages and may be incurred whether the discrete impact results in delay. Therefore, if a discrete damage event does result in critical project delay, the delay damages should be assessed and put forth separately from the discrete costs, when possible.

This distinction can be illustrated by a simple example. Let’s say a design issue arises which is causing critical path delay to the project. To resolve the issue, the contractor’s project manager retains a specialist to evaluate the owner-issued design. The specialist’s time is not a delay cost – it is related to a discrete additional task – and should be claimed as a discrete cost. However, the project manager’s cost would be included in the delay damages as it is a time-driven expense. The project manager, as a dedicated project resource, is now required on the project for longer than planned because of the critical path delay. Using the same example, if the delay were not critical, the specialist’s time could still be claimed as a discrete damage claim, but the project manager’s time would not.

In summary, discrete damages are specific, not time related, and tied to individual events or impacts, whether or not there is a critical path delay to the project. Delay damages, on the other hand, capture the time-related impact of extended project durations. This article focuses on the latter: delay damages.

Contractor Delay Damages

Contractors and owners feel the financial pain of delay in different ways. In broad terms, a contractor’s pain is driven by committing resources to the project for longer than planned, and an owner’s pain is driven by the inability to utilize the constructed asset. It follows, then, that prolongation costs included in a contractor’s delay claim may differ from the prolongation costs included in an owner’s delay claim.

A contractor’s delay damages can materialize both on site (in the “field” or, “on-site”) and at the contractor’s home office (or “off-site”).

1. Extended Contractor Field Costs

Under a typical construction agreement, the contractor is responsible for supplying the resources necessary to support construction. These costs are often referred to as “indirect” or “general condition” costs, and the agreement may even include a schedule outlining the monthly general condition expenses. If a compensable delay is encountered, a contractor may be entitled to claim for these extended general conditions. It is important to note that only time-related general condition costs should be included in a contractor’s delay claim – as opposed to discrete general condition costs.

When delays occur, general condition costs continue to accrue even if construction is stalled, resulting in added costs to the contractor. For example, rental payments for a site office trailer are time-driven, while contractor mobilization and demobilization are generally considered task-related, because they are incurred regardless of project duration.

While each project will have its own time-related costs, the following general condition cost categories are commonly included in a contractor’s delay claim:

• Project-specific field staff,
• Site office rental,
• Site maintenance,
• Site office equipment,
• Temporary utilities,
• General site equipment, and
• Project insurance.

A claim for general condition costs is often calculated as an “average daily rate” multiplied by the number of critical path days of delay.

2. Increased Contractor Direct Costs

Project delays can also result in increased direct costs, including labour, equipment, and material costs. When a contractor’s period of performance is shifted to a later time, there are several areas where increased costs may occur. These include:

• Standby time waiting to proceed on a delayed work front,
• Storage/warehousing costs for procured materials which cannot be installed,
• Price escalation associated with inflation, market changes, or union agreements, and

• Non-availability of specialty subtrades, equipment, or materials which require a more expensive substitute or replacement.

Many contracts include a clause requiring a contractor to mitigate its damages while delayed, such as standing down trades or resequencing work. However, these additional costs may be unavoidable depending on the project and circumstances. For example, projects delayed in the COVID-19 pandemic highlight these escalation costs.

As the construction industry has seen, the COVID-19 pandemic significantly disrupted global supply chains, leading to widespread shortages, shipping delays, and unprecedented price escalations for materials and labor. These disruptions have impacted construction projects around the world, compelling contractors to navigate a volatile market where costs can fluctuate dramatically. Depending on the contractual provisions and factual circumstances, these cost fluctuations have been claimable in certain instances.

To successfully claim for such price escalation, parties must demonstrate that there is a causal link between the delay and the increased costs. Quantification of the associated damages is fundamentally a comparative exercise, where documentation is critical to the success of a contractor’s claim. Simply, records related to bid pricing, price changes, supply chain disruptions, and supporting communications, can make or break a claim.

As a final comment on increased direct costs, contractors often submit delay claims which include alleged cost impacts from lost labour productivity. While some productivity losses may be linked to project delays, these claims are typically treated separately from quantification of delay damages. We will cover this topic in Part 3 of this Breaking Down the Walls Series: Delay vs. Disruption.

3. Extended Home Office Overhead

A contractor typically maintains a “home office” away from site which incurs its own operational costs to support the project. These off-site operational expenses are not specifically related to one project and include items such as rent, management and administrative staff, marketing, and other costs which allow the home office to function and support the contractor’s portfolio of projects.

Home office overheads can be categorised as dedicated overheads or unabsorbed overheads. Diligent contractors may, through careful record keeping, allocate certain costs or time to a specific project or even delay event.^[11] In such instances, it may be possible to accurately apportion these costs to quantify delay damages, leading to a straightforward claim calculation. However, where these records are not available, contractors often rely on an estimation of the unabsorbed overhead amount associated with a specific project.

The entitlement and methodology for quantifying a contractor’s claim for home office overheads, particularly through use of a formula, are debated topics in the industry. On entitlement, the SCL Protocol recommends that a certain burden of proof lies with the contractor to show that the contractor was unable to pursue other work because of the delay:

If the Contractor intends to rely on the application of a formula for the assessment of lost profits and unabsorbed head office overheads, it will first need to produce evidence that it was unable to undertake other work that was available to it because of the Employer Delay. These records may include the Contractor’s business plans prior to the Employer Delay, the Contractor’s tendering history and records of acceptance or rejection of tender opportunities depending upon resource availability.^[12] [emphasis added]

Apart from entitlement, unabsorbed head office overheads can often be difficult to calculate, particularly in large corporations with numerous active projects that are being constructed simultaneously. There is simply no standard methodology appropriate for every claim situation. For this reason, various formulae have been developed as quantification tools to estimate a contractor’s loss. The SCL Protocol prefers use of the Emden and Eichleay formulae.^[13]

The Emden formula, commonly used in the UK, calculates a contractor’s overhead losses as a proportion of the contract amount during the planned period of performance. This formula is based on the contractor’s historical average overhead and profit margin,^[14] which is applied to the contract amount. The Emden formula can be defined as:

 

 

Take for example a $1M contract which had an original duration of 100 days, with 25 additional days of compensable delay. If the contractor’s overhead and profit that year was $500k on a total business revenue of $5M, the contractor’s overhead compensation under the Emden formula would be $25K.^[15]

In contrast, the Eichleay formula, commonly used in the US, is based on the contractor’s home office effort during the actual period of delay for the project in question rather than its historical performance. This approach tends to provide a more precise estimate of the home office loss from a delay, but also requires more precise financial records. This calculation can be summarized in three steps:

Step 1 – Determine the allocation of contract billings to overall company billings during the contract period of performance:

 

 

Step 2 – Determine the daily allocable overhead rate using the period of contract performance (including delays):

 

 

 

Step 3 – Determine the estimated home office overhead loss during the compensable delay:

 

 

 

Using the same example project as above, the Eichleay formula results in an estimated $20k in home office overhead losses for the same delay, or 20% lower than when using the Emden formula.^[16]

Although courts in Canada have accepted use of both the Emden and Eichleay formulae, a contractor should be prepared to prove that the delay caused a loss, and that the loss could not be mitigated.

This article speaks to the Emden and Eichleay formulae, but other formulae have been successful in asserting and defending claims for damages such as the Manshul and Hudson formulae. The authors are not endorsing any specific formula as best, because the formula selection is ultimately dependent on specific project facts and availability of information. That said, consulting with experienced legal counsel and quantum experts will help a contractor put their strongest claim together based on the facts at hand.

Owner Delay Damages

If a forensic delay analysis concludes that the contractor caused a non-excusable delay, the owner may be entitled to claim delay damages from the contractor. These damages can be outlined in the contract as liquidated damages, or they can be quantified discretely based on the actual damage suffered.

1. Liquidated Damages

Owners often pre-estimate their delay damages in the form of liquidated damages, which are reflected as a fixed amount payable for each day (or some other unit of time) past the contractually agreed project completion date. In Canada, liquidated damages are deemed enforceable where they represent a genuine pre-estimate of the damages an owner will likely suffer because of delay caused by another party. Where it is apparent that a liquidated damage amount is excessive and objectively unreasonable, the courts may declare it a penalty and therefore unenforceable.

Because liquidated damages are a predetermined amount, a savvy contractor may evaluate its own costs against the liquidated amount to understand the cost-benefit of mitigating a non-excusable delay. In this way, liquidated damages are not a deterrent to contractor delay, but rather a contractual vehicle for the owner to recover its estimated losses.^[17]

In the absence of a liquidated damages clause, or if the liquidated damages expire after a certain number of delay days, an owner may be entitled to recover its actual delay damages. The contract will typically outline the owner’s and contractor’s rights to claims and damages.

2. Actual Owner Delay Costs

An owner’s delay damages are typically based on losses incurred from restricted use and enjoyment of the constructed asset, which may include:

• Storage costs,
• Additional or lost rental income,
• Extended project staff,
• Temporary lodging/space,
• Additional financing costs,
• Damages claimed by follow-on contractors, and
• Lost revenue of profits.

Recovery of these costs, however, is dependant on the type of project and the terms of the contract. Ultimately, each project is different and the contract between the parties is the guiding force to what can and cannot be included in a claim for delay damages by an owner.

Accurate and timely records are vital for assembling a strong claim for delay damages. Delay claim best practices, including guidelines for managing cost records when delays are encountered, will be discussed in Part 6 of this Breaking Down the Walls Series: Construction Delay Best Practices in Canada.

Operative Date for Determining the Delay Damages

According to the SCL Protocol,

Once it is established that compensation for prolongation is due, the evaluation of the sum due is made by reference to the period when the effect of the Employer Risk Event was felt, not by reference to the extended period at the end of the contract.^[18]

Calculating delay damages based on the period when the delay is “felt”, rather than at the end of the project, is essential for an accurate assessment of costs. During the peak phases of construction, daily on-site expenses – such as project management, supervision, equipment rentals, and temporary facilities – are generally at their highest, as multiple trades and resources are engaged simultaneously. However, as the project nears completion, activity typically tapers off, and these on-site overhead expenses reduce significantly. If damages were calculated with reference only to the extended period at the project’s end, when fewer resources are required, the true financial impact of the delay on the contractor would be underrepresented. By focusing on the actual period of critical path delay, the calculation better reflects the appropriately higher “burn rate” experienced during the more intensive phases of construction, resulting in fairer compensation that aligns with the contractor’s actual losses. Naturally, the relevant period used for the quantification of delay damages will be determined on a case-by-case basis.

The authors have mentioned (and will continue to mention) that the contract is the guiding force in assembling and presenting delay claims. An option available to the parties during a contract negotiation is to include a liquidated amount that will apply when delays arise. In this way, the dispute is focused on apportioning responsibility for delay. This streamlines the dispute resolution process and can greatly reduce the cost of retaining quantum experts and lawyers to assert or defend a delay claim.

Legal Framework for Claiming Contractor Delay Damages in Canada

1. Relevant case law

The delay cost categories outlined above (specifically, the contractor delay damage categories) find support in Schindler. There, Master Robinson summarised the seminal cases that preceded his judgment:^[19]

As explained by McRae J. in Brule Construction Ltd. v. Ottawa (City) (1989), 14 A.C.W.S. (3d) 121 (Ont. H.C.) [1989 CarswellOnt 688 (Ont. H.C.)] at para. 25, there are numerous consequential losses that may be suffered by a contractor when a contract is delayed:

25 When a contract is delayed, there are numerous consequential losses which may be suffered by the contractor. These losses are outlined in I.N. Duncan Wallace ed., Hudson's Building & Engineering Contracts, 10th ed. (London: Sweet & Maxwell, 1970) at 597-598;

(a) When delay in completion of the whole project results, a contractor will usually suffer:

(i) a loss owing to the fact that his off-site overheads, which will partly be independent of the actual site expenditure or even the period the contract takes to complete (such as head-office rents) and partly may be dependent (such as additional administrative expenditure in relation to a dislocated and longer contract) will have either increased in the latter case, or need to be recovered from a smaller annual turnover than that budgeted for in the former case;

(ii) a loss of the profit-earning capacity of the particular contract organisation affected, due to its being retained longer on the contract in question without any corresponding increase in the monetary benefit earned and without being free to move elsewhere to earn the profit which it otherwise might do;

(iii) an increase of cost in his running on-site over-heads, that is to say those elements of cost directly attributable to the contract which are governed by time and which are independent of the amount of work carried out — for instance supervisory costs, costs of permanent plant such as site huts, and certain special plant needed throughout the work;

(iv) in a contract without an applicable fluctuations clause, the inflationary or other increases in the cost of labour or materials (less any decreases) which he would not have incurred but for the delay.

(b) Whether or not delay in completion results, the disturbance of a contractor's progress or planning may also result in lower productivity from the contractor's plant or labour.

[emphasis added]

When discussing delay damages, it is crucial to exercise caution with terminology, as definitions and interpretations can vary significantly across jurisdictions. Terms like “liquidated damages,” “direct damages,” and “consequential damages” may carry different meanings depending on local laws and practices, leading to potential misunderstandings. Moreover, the approaches to calculating and enforcing these damages can differ widely, influenced by regional legal frameworks and industry standards. Consequently, stakeholders involved in construction and contractual disputes should ensure they have a clear understanding of the specific terms and concepts relevant to their jurisdiction to avoid miscommunication and misapplication of the law.

In this instance, the court’s reference to “consequential” should not be confused with so-called “special damages”, but rather as a reference to causality (i.e. as a consequence). Be that as it may, the operative portion of this excerpt is the four categories of losses that can generally be claimed as a result of delay.

2. Profit-Earning Capacity

Assembling a proper claim for contractor loss of profits (often included in a home office overhead claim) is a challenge several reasons. First, it can be difficult for a contractor to demonstrate a lost opportunity to earn a profit, as it is not an “actual” loss in terms of money spent. Second, to preserve proprietary information, contractors are generally unwilling to provide the required insight into their operations or prospective projects to identify a missed opportunity or accurately quantify possible profits. Lastly, loss of profit or business opportunity is often one of the first things that parties contract out of.

For these reasons, it has become common practice to bundle claims for profit with off-site overheads into a fixed mark-up, usually expressed as a percentage, to cover these costs. The mark-up is then applied to actual costs incurred.

In Schindler, Robinson remarked on the issue of mark-ups as a factor of overhead and profit:

[An expert] accounts for a 5% markup for ‘WBP Overhead and Profit’ in his calculations, but provides no opinion on why that percentage markup is used or the basis for the markup. However, I accept that WBP’s actual loss for reimbursable costs as I have found them would be greater than the amount actually expended had they been compensable extras. I accordingly accept that some markup for overhead and profit is commercially reasonable in all the circumstances, and find that 5% is an appropriate amount.

[emphasis added]

Similarly, in Walsh, the Ontario Superior Court considered a party’s expectation to make a profit, the quantification of such profit, and the inclusion of profit in a mark-up to various claims.

On the first issue, the Toronto Transit Commission argued that Walsh was not entitled to claim mark-up on its claims, primarily because there is no guarantee of profit in a fixed-price contract. In short, Walsh as the contractor, carried the risk as to whether it would make a profit. The Court rejected this argument in instances where Walsh was not responsible for cost increases to the project. Indeed, the contract permitted a mark-up on changes and did not expressly exclude a mark-up in relation to compensation for delay.

As it relates to quantification, Walsh provided evidence that it expected to earn a total profit of $7.9M on its planned direct costs – profit margin of 5.95%. The Court seemed also to accept Walsh’s argument that it was able to negotiate a lower cost with many of its subcontractors and suppliers compared to the prices carried in its bid, which in effect would increase its profit margin by a further 3.94% (or a total of 9.89%).

On the final question as to which claims the mark-up should be applied, the Court agreed with the Toronto Transit Commission, stating that “whether a profit markup should apply to every head of damage is another matter. Each head of damage has to be looked at on its own.” Thus, mark-ups are to be considered on a case-by-case basis. For example, some contracts specify labour and equipment rates that may already include a component of profit and overhead. Adding a further mark-up to these rates would result in double compensation.

Conclusion

While this article is written from the perspective of a contractor claiming for delay, the principles apply equally to other stakeholders. An owner or party higher in the construction pyramid can apply the same principles while proactively defending a claim for delay or deciding on appropriate mitigation steps to decrease the impacts of a potential delay.

This article is for informational purposes only and is not intended to constitute legal advice or an opinion on any issues contained therein.

 

Any article or other information or content expressed or made available in this Section is that of the respective author(s) and not of the OBA.