Court confirms contractors’ “thickening” claims are legitimate
The Court has confirmed that a contractor can, at least in principle, claim for and recover ‘thickened’ overheads resulting from employer culpable delay or disruption events.
Prior to this recent case there was already judicial and academic commentary confirming circumstances where a contractor could recover a contribution to its overheads. This includes the situation where it is entitled to loss and expense under the contract. To do so it is necessary to prove that if the delay hadn’t occurred it would have secured work which would have produced a contribution to head office overheads.
An issue identified in Fluor is that overheads are fixed, i.e. incurred at roughly the same rate every month. Tenderers will include an allowance for overhead (and profit) for the specified period they expect to be on site. However, the contractor may, for example, use more plant than expected due to an employer culpable event. It would be entitled to recover the direct cost of hiring additional plant but the fixed overheads would have remained unchanged if there is no delay to completion.
It is not uncommon for contractors in such circumstances to claim ‘thickened’ overheads. In confirming that contractors could legitimately claim a contribution to overheads in these circumstances, the Judge gave the following example:
“Suppose that in its head office a contractor employed six accountants, whose activities concerned the administration of the business generally and were not project related. As a result of the substantial extra administration required to deal with problems caused by a sub-contractor's breach of contract, such as those with Shipment No 1 at Vlissingen, the company's most experienced accountant, Mr Cruncher, is required to spend half his time dealing with those problems. However, fortunately his five colleagues are not overworked and are able to deal with the balance of Mr Cruncher's work in their ordinary working time. But when further problems arise – such as those with Shipment No 2 – the contractor decides that Mr Cruncher will be required to spend all his time dealing with those problems. Now his colleagues are no longer able to cope with the balance of his work and so a new accountant, Mr Bean-Counter, is taken on. Being inexperienced, Mr Bean-Counter is assigned relatively menial tasks, none of which has anything to do with the breaches of contract. In those circumstances, in spite of the fact that Mr Bean-Counter was not involved with the problems caused by the breaches, it seems to me that the cost of employing him would have been a direct consequence of those breaches and would therefore be recoverable as damages… It represents a ‘thickening’ of the head office costs.”
The Judge did acknowledge that in practice it may well be very difficult for a contractor to put forward and justify a precise figure for such ‘thickening’. In which case there was little the Court could do: it certainly would not “pluck a figure out of the air” in order to compensate the contractor, so it did not in this case.
The case: Fluor v Shanghai Zhenhua Heavy Industry Co Ltd