Can a Contractor Claim for Loss of Profit ?
Claim under standard forms of contract
All standard Forms of Contract provide for the Architect or the Engineer to order variations to the Works, and such variations may include omissions.
Whenever variations are ordered that omit work, and particularly if such omissions are substantial in nature, contractors often argue that they should be entitled to claim the loss of the profit that they would have earned on such works. But is such a claim valid?
The answer is not clear, and depends, firstly upon whether the instruction omitting the works was a valid variation order, and secondly, if the variation is valid, upon what form of contract the instruction was given.
desirable for the satisfactory completion or functioning of the works. Thus under such conditions works cannot be omitted, for example, to save time for completing the works, or to save the employer money.
Lost Profits Damages Law and Legal Definition
Lost profit damages are an estimate of the total sum of money lost due to the buyer’s breach of agreement. It is the computation of benefits that would have been made by the seller on a sale if the buyer had adhered to the contract. The plaintiff can claim lost profit damages from the buyer by showing that the buyer’s demand was met by the seller according to the terms of the agreement, and that no alternative remedy exists. In laws regarding patents, lost profits damages refer to the loss caused to the patent owner due to actions of the infringer.
The matters in respect of which claims for cost are made are breaches of contract. The inclusion in the Conditions of the claims Clauses provides the Engineer and the Contractor with the mechanism for agreeing damages, instead of the Contractor having to sue for them. The cost recoverable by the Contractor must therefore follow the common law damages rule. This relies on showing that the damage flows from the breach, or the cost flows from the event complained of. This is causation. The Contractor must link cause and effect. He should not be required to provide as much evidence, especially oral evidence, as he would in arbitration, because the Engineer should be well acquainted with the facts.
Nevertheless, the Engineer must ask himself if the cost flows from the event. There can be a temptation on the part of contractors to include all costs in their claims, without any apparent attempt to link cause and effect. The measure of damage can be a difficult matter. The general rule is that damages should put the claiming party back into the position he would have been in, had the breach not taken place. It is often helpful for the Engineer to ask himself, what would the Contractor have done, but for the breach?
Particulars of cost should not prove to be a problem. Direct costs are the site labour and plant. Any sensible contractor will have record sheets. They will show who and what was on site. What they probably will not show is (1) what the resources were doing and (2) why they were doing it. This will inevitably lead to some assessment being made.
Head office overheads can usually be proved by reference to pricing information behind the tender, or by using the Contractor’s audited accounts. If the accounts for years, other than those in which the Works were carried out, are used, care should be taken to ensure that the attribution of overheads to the project is appropriate, and not inflated.
Financing charges became a head of claim as a result of the case. It established that there are two types of financing charge. One is the loss of interest on capital which the Contractor has not been paid and been able to put into his bank account. The other type is the interest he incurs by way of overdraft in using his own money to finance work, whereas he would normally expect to use the money paid to him under the Contract.
Financing charges are a secondary cost. If his claim for costs fails, his claim for financing will fall with it. If the primary cost claim succeeds, it can be inferred that he has incurred financing charges. There is not usually anything to be gained by looking at bank statements. They may show the Contractor had an overdraft, but that could be due to any reason, not necessarily connected with the matters claimed. In general, it is sensible to use a typical bank lending rate, plus 2%.
This adherence to aligning the profit with the Tender’s specifications serves to promote fairness and consistency in project contracts. By referring to the pricing information provided in the Tender, both parties involved can ensure that the profit earned on the incurred costs remains within the agreed-upon boundaries. This practice not only fosters trust and transparency but also prevents any potential disputes or allegations of unjust enrichment.
Furthermore, the Contractor’s willingness to produce evidence of the profit earned demonstrates a commitment to accountability and professionalism. Being prepared to substantiate the profit calculations adds credibility to the Contractor’s claims and can facilitate effective communication and resolution of any potential disagreements regarding the profit margin.
Additionally, the requirement for producing evidence of profit on cost underscores the importance of maintaining accurate and detailed records throughout the project. By diligently recording and documenting the costs incurred and the corresponding profits, the Contractor can establish a solid foundation for supporting their claims and defending against any challenges that may arise.
In conclusion, allowing profit on cost entails the responsibility of ensuring consistency with the Tender’s specifications. By referencing the Tender’s pricing information and being ready to provide evidence of the profit earned, the Contractor can uphold transparency, trust, and fair dealings in project contracts. Maintaining meticulous records further enhances accountability and strengthens the Contractor’s position in profit-related discussions.
Loss of Profit
Determining the loss of profit in such circumstances entails inherent challenges. The quantification of financial damages incurred due to extended project durations requires a comprehensive analysis of various factors, including the projected profit margins, the estimated duration of the original project timeline, and the opportunity cost of not pursuing other potentially lucrative ventures.
However, the evaluation of loss of profit is often hindered by its inherent complexity and subjectivity. It necessitates the consideration of numerous unpredictable variables, such as market fluctuations, unforeseen events, and changes in client requirements. These factors can significantly impact the actual profitability of both the current and potential future projects.
Moreover, establishing a causal link between the delayed project and the exact amount of profit lost is often an intricate task. The contractor must provide substantial evidence to demonstrate that the prolongation of the project directly resulted in the inability to pursue another profitable opportunity. This burden of proof can be onerous, as it requires a thorough examination of financial records, project timelines, and correspondence with clients and stakeholders.
Furthermore, the concept of “remoteness” poses another challenge when quantifying loss of profit. Courts and arbitrators often scrutinize the proximity between the contractor’s actions or omissions and the alleged loss, questioning whether the loss was a reasonably foreseeable consequence of the delay. Demonstrating the direct causation between the extended project duration and the missed opportunity for profit can be demanding, especially when intervening factors and external events are involved.
In conclusion, loss of profit resulting from prolonged project durations presents significant complexities in its assessment. It requires a meticulous examination of multiple variables, an evaluation of causation, and the consideration of the concept of remoteness. Given the inherent challenges and speculative nature of such claims, establishing the precise quantum of loss of profit is a complex endeavor within the realm of construction and project management.
Whereas a contract using one of the 1999 FIDIC forms for major works may be suspended or terminated in certain specified circumstances, the conditions permitting such a drastic action by either of the contracting parties differ. The differences are important to consider and remember, since what is permitted for the Employer may not be so for the Contractor.
Limitation of damages in practice
Most contracts deal with the general principle that a party will not be able to recover all its losses by imposing a limit on liability. The International Federation of Consulting Engineers (FIDIC) provides model contracts that companies base their contracts on. Its Conditions of Contract Clause 17.6 says:
“Neither Party shall be liable to the other Party for loss of use of any Works, loss of profit, loss of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract…”
So what types of loss can be recovered by contractors under FIDIC contracts? Only some of the items which contractors will usually seek to recover are included. These break down as follows:
direct loss and expense: if these fall within FIDIC’s definition of ‘cost’ – “all expenditure reasonably incurred (or to be incurred) by the Contractor whether on or off the Site, including overhead and similar charges but [not including] profit” – and are directly linked to the clause giving rise to the claim, they can be claimed;
preliminaries: as above, these are also recoverable;
overheads: also recoverable – the cost of running the business as distinct from general site costs is expressly allowed for in the definition of Cost;
loss of productivity/disruption: in principle this is recoverable, but in practice proving this loss is difficult. The ‘measured mile’ approach compares work in disrupted and undisrupted conditions, with the difference between the two being the disruption factor;
profit: this is not recoverable unless expressly allowed for in the Contract. Profit is excluded, from both the definition of Cost and by Clause 17.6;
interest: recoverable; the Contractor has an express right to interest on any unpaid sums under the standard FIDIC forms;
finance charges: recoverable – under English law, it is possible to claim finance charges as part of a claim for direct loss and expense;
inflation/exchange rate fluctuation: not recoverable – increased costs resulting from inflation/exchange rate fluctuation are classed as ‘consequential loss’ and are therefore excluded by Clause 17.6;
claims preparation costs: may be recoverable – under English law, these can be recovered in principle but such claims are hard to establish;
lost commercial opportunity and business interruption: generally not recoverable.
FAQs (Frequently Asked Questions):
- What types of losses can be claimed by a contractor?
- How long does the contractor claim process typically take?
- Can a contractor claim for loss of profit if the project is completed on time?
- Are there any specific industry regulations regarding contractor claims?
- What should I do if my contractor claim is denied?