The so-called “ Hudson Formula “ has no basis in law or logic. It is generally accepted that damages and off-site overheads cannot be proven by a formula. The formula barely gets a mention in Hudson’s Building and Engineering Contracts, however, since it is frequently referred to in texts and sometimes in judgments, an understanding of the flaws in the Hudson formula is important.
There are several different formulas masquerading as the Hudson Formula. They fall into two categories which, for convenience will be called :
1- The Extra cost formula, and
2- The lost chance formula.
The Hudson formula has been extensively cited, and used, especially in the United Kingdom and other common law jurisdictions. The Hudson formula is constructed in a very simplified manner to calculate overheads and profits as follows:
There are problems with this formula, however, as it is relying on a number of assumptions. The main problem is that the calculation is derived from a number which already contains an element of head office overheads and profits, causing double counting, which cannot be avoided.
Another problem is that the formula does not provide any assistance to the determination of the percentage rate for profit and overheads recovery for a particular case. In general, there is a preference for the other two formulas, which are considered as slightly more precise even though, due to its simplicity, the Hudson formula is still frequently used in practice.
Why is the Hudson Formula used?
The formula is used by contractors in an attempt to avoid the necessity for proof of loss. As can be seen from the various books and papers that promote the use of the Hudson Formula, contractor might be excused if they believe that the formula can be used to prove claims.
Contractors would be better advised to ignore formulas when trying to prove damages for delay. In attempting to use a formula the claimant is likely to become embroiled in an argument on the applicability of the formula. It is an interesting legal argument and is likely to make the law reports. However, the argument is unlikely to succeed, it is likely to prove expensive to run and it will divert attention from the real issue which is to prove the contractor’s actual loss. A contractor should explore the question of whether the delay has in fact caused any loss of income and if so how that loss can be demonstrated.
If the contractor is separately paid the direct costs incurred during the period of delay and they are less than the income which could have been earnt but for the delay, the balance represents the loss of profit and contribution to overheads. There is no need to demonstrate the usual margin for profit or for overheads or that the contractor would have earnt a profit.
Relevant issues include:
1. The probability of the contractor earning extra income but for the delay;
2. The amount of income which but for the delay the contractor might have earnt;
3. The savings [ amounts which the contractor would have had to expend to earn that income, the expenditure of which has been saved];
4. Whether the loss of income would reasonably have been within the contemplation of the parties at the time of contracting .
This is not an exhaustive list. There may be issues of mitigation. The contractor may have to answer arguments that the contractor could have mitigated the loss of income by hiring plant [to replace that tied up on the delayed contract] or engaging subcontractors or more staff or paying overtime. It is most unlikely that a contractor could, in the face of an argument from the other party, persuade a court that a formula is a valid substitute for proof of any matter. If an alleged loss cannot be proved otherwise than by recourse to a formula, then it is time to question whether the loss in fact occurred.