FIDIC

Finance Charges on FIDIC Claims — Interest and Compound Costs

When employer-caused delay or non-payment forces a contractor to borrow or defer investment, the cost of that financing is recoverable as loss and expense. Yet it is routinely omitted from claims — leaving significant money on the table.

5 min read · Updated 23/05/2026

In this article

1. Entitlement to Finance Charges Under FIDIC
2. Actual Borrowing Cost vs. Opportunity Cost
3. Calculation Methodology
4. Documentation and Evidence
5. Rate Justification
6. Recovery in Arbitration

Key takeaway

Finance charges on FIDIC claims are a recoverable head of loss under Clause 20.2. They must be calculated on a compound basis from the date each cost was incurred, supported by evidence of actual borrowing cost or a demonstrably reasonable opportunity cost rate. Omitting this head of loss significantly undervalues the claim.

1. Entitlement to Finance Charges Under FIDIC

FIDIC Red Book 2017, Clause 20.2 expressly includes “financing charges” in the contractor’s entitlement to direct loss and expense. This reflects the commercial reality that every pound spent in consequence of an employer-caused event has a financing cost: the contractor must fund that expenditure and bear the cost of the funds used.

The entitlement is grounded in contract law principle (Hadley v Baxendale): the cost of financing additional expenditure is a probable consequence of the employer’s breach and was within the reasonable contemplation of the parties at the time of contracting. A commercial contractor operating on any size of project must finance its operations — the cost of doing so is the employer’s liability if the employer causes the need for additional expenditure.

The financing charge accrues from the date the cost is incurred, not from the date it is certified or paid. A site supervision cost of AED 100,000 incurred in Month 3 (because of prolongation) has financing cost from Month 3 onwards, compounding until either the cost is recovered or the claim is settled.

2. Actual Borrowing Cost vs. Opportunity Cost

The rate at which financing charges should be calculated depends on how the contractor financed the additional expenditure. There are two scenarios:

Actual Borrowing: If the contractor arranged a bank facility or overdraft to finance the additional costs, the rate charged by the bank is the appropriate measure. The contractor should provide evidence: the facility letter showing the interest rate, bank statements showing charges, or a calculation from the contract between the contractor and the bank.

Opportunity Cost: If the contractor did not borrow but instead deferred investment or drew down cash reserves, the appropriate rate is the contractor’s opportunity cost — the rate the contractor could have earned on that cash if it had been invested. This is typically calculated by reference to the contractor’s cost of capital or a published benchmark (the Central Bank base rate plus a margin, or LIBOR/SOFR equivalent).

The contractor should use actual borrowing cost where available — it is more defensible and typically reflects the contractor’s true financial position. If actual borrowing is not available, a reasonable opportunity cost rate (typically 4–7% depending on market conditions and the contractor’s credit rating) is justifiable.

3. Calculation Methodology — Simple and Compound Interest

Finance charges should be calculated on a compound basis — reflecting the actual compounding of interest on borrowed funds. Simple interest (interest on the principal only, not on accumulated interest) understates the cost and should not be used.

The formula for compound interest is: A = P(1 + r/n)^(nt), where P is the principal, r is the annual rate, n is the compounding frequency (typically 12 for monthly), and t is the time period in years.

In practice, for construction claims, financing charges are typically calculated on a monthly basis, compounding monthly. Example: AED 1 million incurred in Month 1 on a project delayed by 12 months, at 5% annual interest compounded monthly:

4. Documentation and Evidence

Finance charges should be documented from project inception. The contractor should maintain:

• Bank facility letters or overdraft agreements setting out the interest rate and terms
• Monthly bank statements showing interest charges
• A calculation schedule showing financing charges accruing from the date each cost was incurred, monthly compounding
• Documentation of the cost base (prolongation costs, cost of variations, additional preliminaries)

This documentation should be prepared contemporaneously — not reconstructed after the project ends. Monthly tracking of financing charges is the standard practice and is strongly preferred by arbitration tribunals.

5. Rate Justification

The rate applied should be defensible. If actual borrowing cost is used, the bank statements provide direct evidence. If opportunity cost is used, the contractor should justify the rate by reference to:

• Published benchmark rates (Central Bank rate, SOFR, or equivalent) at the time the cost was incurred
• The contractor’s own cost of capital (obtained from financial advisers or the contractor’s audited accounts)
• Industry practice for rates applied in comparable claims

A rate that is grossly excessive (e.g., 20% when market rates are 5%) will be challenged. A rate that is defensibly supportable (5–7% in most environments) is unlikely to be significantly disputed.

6. Recovery in Arbitration

Finance charges are routinely recovered in FIDIC arbitration, particularly where the contractor presents clear evidence of actual borrowing cost or a justified opportunity cost rate. The fact that the contractor did not explicitly claim financing charges in its tender is irrelevant — it is part of the direct loss entitlement under Clause 20.2, not a separate contractual entitlement.

In settlement discussions, finance charges are often resolved by agreement — the parties agree a rate and a cost base, and the calculation follows mechanically. The cost of negotiating a dispute over financing charges (which is typically smaller than other claim elements) is rarely justified by either party, and agreement is common.

Calculating Finance Charges on Your FIDIC Claim

We advise on the calculation, documentation, and rate justification for financing charges. Applied properly, finance charges can significantly increase your claim value.

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