Noticias

– Depreciation costs or rental value?

To help increase the chances of being recompensed delay costs, when preparing and submitting a claim for these costs, the claim should, where possible, be fair, reasonable, provable, justified, and substantiated. While there are a variety of different costs in such claims, costs for idle power-driven mechanical plant¹ ("Plant”) is one of the cost categories that often appears in construction delay claims.

Author, Jung-guk Lee, Country Director - Korea

Where applicable in this article, it is assumed that:

1. an excusable and compensable event / circumstance has occurred;
2. it is not possible for the contractor to mitigate the effects of the event / circumstance e.g., re-sequencing of the works;
3. the contactor’s resources at site are idle;
4. the contractor has a rightful contractual entitlement; and
5. the contractor has satisfied the condition(s) precedent to additional time and costs.

The cost of idle Plant owned by a contractor (“Contractor’s Plant”), is generally assessed based on the costs of ownership. As such, most cost claims for Contractor’s Plant are likely to be limited to interest on financing charges, maintenance charges, depreciation associated with that Plant, and in some instances fuel costs.  Depreciation costs are often considered to be the largest portion of such costs and normally come in the form of an annual accounting cost calculated based on the purchase value, anticipated lifespan and salvage / resale value of the item of Plant.

The concept of separate unit rates in the event of Plant having to be put on standby, is sometimes envisaged in a schedule of rates, and is normally based on the premise that during periods when the item of Plant is not able to work, the contractor incurs reduced costs because of the reduced wear and tear and cost of operations.  It also reflects that a large portion of the ‘actual’ value of depreciation (as opposed to any ‘fiscal’ depreciation rules) of items of Contractor’s Plant arises from the consumption of the hours of the ‘working life’ of said item(s) of Contactor’s Plant.

Challenges frequently arise with respect to the quantification of costs in delay claims, when an item of Contractor’s Plant has, or appears to have, reached the end of its anticipated life span, such that the cost of depreciation no longer exists. This is due to the general rules of compensatory damages, which are: (i) to restore the injured or aggrieved party to the same situation they would have been in if the wrong had not occurred;² and (ii) but not to give them a financial advantage over what they would have gained from the proper performance of the contract.³ In such a situation, some contractors attempt to calculate and pursue their cost claim using a hire value for such items of Plant, eliminating the limitations of depreciation costs especially when using older items of Contractor’s Plant that are nearing the end of their working life and/or the period that they can be written off as a tax-deductible.

This article will explore:

1. Claims under the contract;
2. Claims for damages; and
3. Advancing a claim based on Plant hire values.

Claims under the contract 

The value of costs a contractor is entitled to be recompensed following the occurrence of an excusable and compensable event / circumstance, is normally prescribed by the terms of the underlying contract. Therefore, one benefit of making a claim under the contract, is that the contract will likely prescribe timeframes, which should help the Contractor obtain prompt reimbursement of the costs it has incurred.

For example, the FIDIC⁴ standard form of contract contains provisions prescribing a contractor’s right to be recompensed costs that were reasonably incurred if certain events / circumstances occur, where the term “Cost” is defined as meaning:

“Cost” means all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on or off the site, including overhead and similar charges, but does not include profit.”

Julian Bailey considers⁵ that “where a contractual provision entitles a contractor to be compensated for additional “Cost” incurred by reason of delay or disruption, such entitlement does not usually extend so as to permit the contractor to recover loss or damage (“Damages”) that does not represent costs directly incurred, for example, loss of profit opportunity (“Lost Profit”)”. This is consistent with the observation made by Giles J⁶ that “loss suffered by reason of delay is not the same as extra costs incurred by reason of delay”. Therefore, there is an obvious difference in the claimable amount between Damages and costs, considering claims often include loss. However, it is worth noting that there were relevant arguments on: (a) whether costs could be extended to loss;⁷ and (b) whether costs could include future expected costs.⁸

The specific contractual provisions regarding Contractor’s Plant are illustrated in the leading court case from the UK of Alfred McAlpine Homes,⁹ where it was held that a contractor’s entitlement to recover direct loss and/or expense (“Direct Loss/Expense”) for delay under the JCT standard form of contract¹⁰ did not entitle the Contractor to recover a notional hire value, in respect of the Contractor’s Plant.

A contractor’s right to be recompensed costs per the express terms of a contract, is largely considered to be the actual cost incurred by the contractor for Contractor’s Plant, during the discrete periods of time when the event / circumstance giving rise to cost entitlement occurred (though not always the case in some civil law jurisdictions), and where that cost is often measured as the depreciation in the value of the Contactor’s Plant. One way savvy contractors can circumvent this issue is to have another affiliated company lease such Plant to the project and submit an intercompany invoice for the hire charges every month. This way, when Contractor’s Plant is idling, the contractor can demonstrate that a cost (the intercompany hire charge) continues to be incurred. This is because construction contracts such as the JCT standard form of contact, often have explicit provisions precluding liability for costs such as consequential losses.

Alternatively, in the Shore & Horwitz¹¹ case (Canada), if an item of Plant is hired and sits idle as a result of an employer-risk delay event, then the hire charges incurred in respect of that item of Plant during the idle period may be recovered as costs and/or Damages.

Claims for damages 

Where a contractor suffers and/or incurs damages as a consequence of an employer’s breach of contract, and the recovery of costs is not addressed in the contract, entitlement to Damages might nevertheless exist.¹² Therefore, a contractor can first make a claim under the contract to gain prompt reimbursement and/or wait until completion of the work and join a claim for damages.

That being said, aside from contractual recourse, where a contractor suffers resultant Damages as a consequence of an employer’s breach of contract, Damages could also be established so as to circumvent contractual restrictions on recovery. To do so, general rules should be thoroughly considered, including the principles of causation, remoteness, and mitigation.

Lost Profit seldom qualifies as an additional cost item, but there are exceptions to this. Take, for example, a situation where a 20T excavator is retained at site on Project-A for a period longer than initially anticipated, preventing the contractor from using the same 20T excavator on Project-B, resulting in the need for the contractor to hire an additional 20T excavator to service the needs of Project-B. In such a case, the contractor could make reasoned arguments for the recovery of such costs as a direct and natural consequence of the event / circumstance.

For Contactor’s Plant costs, it could be argued that delays due to an employer’s breach of contract, which has the effect of the Contractor’s Plant being retained on site longer than originally planned, may result in Lost Profit and/or a loss of opportunity costs. However, without clear evidence of Lost Profit and/or lost opportunity, any claim for Contractor’s Plant would likely be limited to interest, maintenance, and/or depreciation. This is because Lost Profit often depends on whether there is a strong demand for hire in the available construction market for the particular item of Plant at that time the event / circumstance occurred.

The question may arise as to whether a contractor is entitled to Damages representing the notional or actual hiring value of Contractor’s Plant as demonstrated in the leading case Alfred McAlpine Homes.¹³ Julian Bailey considers¹⁴ that, if an owner has wrongfully detained the Contractor’s Plant, Damages would be recoverable as a restitutionary measure, representing a hiring value. In principle, the position should be no different even if a contractor is compelled to retain its Plant on site.

Advancing a claim based on plant hire values 

There appear to be authorities in the U.K. and the U.S. for allowing some costs in respect of Contractor’s Plant, taking into account its diminution in value due to use, additional maintenance costs and so on. As highlighted above, it should be noted that in the absence of clear evidence of Lost Profit or opportunity, a claim for Contractor’s Plant would likely be limited to interest, maintenance, and/or depreciation, as Lost Profit or opportunity often depends on the demand for hire in the construction market.

In the Sunley¹⁵ case (UK), it was held that the costs recoverable in a prolongation cost claim being successfully pursued were limited to the depreciation costs of the Contractor’s Plant. It was also held that, in the absence of evidence demonstrating any actual loss of profit, the damage claimable was limited to depreciation, interest, and maintenance costs. To claim for loss of profit, it should be established that Plant could have used the lost turnover profitably. In the Shore & Horwitz¹⁶ case (Canada), it was held that the claimant’s Plant in question should be treated as a non-profit-earning asset as it was an idle plant, not in use on the job and not capable of profitable use until moved to another job. In order to be considered a profit-making asset during the period of the tie-up, it should be established that there was profitable work for the particular item of Plant to do elsewhere.

However, in the Converse¹⁷ case (USA), the contractor was deemed entitled to recover the fair and reasonable hire value of a dredger on the basis of evidence, which was considered sufficient to establish that, but for the delay, the Contractor’s Plant would actually have been used on other work, and that such other work was available and awaiting the use of this Plant. Similarly, in the Cotton¹⁸ case (USA), the plaintiff successfully proved that it had other work available in connection with which the Plant in question would have been used, but-for the occurrence of the event / circumstance which caused delay.

Damages based on Plant hiring value could be questioned without a finding that Contractor’s Plant would have been hired out. The Alfred McAlpine Homes¹⁹ case shows that only with such a finding, the valuation of Damages, or lost opportunity, could be justified. On the other hand, the Brand Investment²⁰ case demonstrates that hiring value might be allowed for in the Contractor’s Plant, even absent any hard evidence.

In the Bahen Wright²¹ case (USA), the claimed hire value of a certain item of Plant was denied, on the grounds that the Plaintiff had submitted inadequate evidence of availability of other uses, and no material evidence of the availability of a hire market for the item of Plant in question.

Other factors below should be taken into account when claiming compensation for Contractor’s Plant.

Adjustment to Hire Value

In the Laburnum²² case (UK), it was held that the fair hire value of Contractor’s Plant was a proper basis for a claim for Damages, but also that the hire value should be multiplied by a percentage factor of fifty percent (50%), to account for the lack of wear and tear on the item(s) of Contractor’s Plant.

Mitigation

It is customary for a contractor to have an implied or express duty to mitigate the effects of an event / circumstance, which also extends to the extent of its Damages. In this regard, it is not unreasonable to expect a contractor to find alternative uses for items of Contractor’s Plant that may be idling, where possible. This means that a contractor should demonstrate that Contractor’s Plant could not be removed from the site as it was still required for the project despite being idle. In the Phoenix Bridge²³ case (USA), it was highlighted that if a contractor can hire, or use Contractor’s Plant during a delay period, and elects not to do so, it would then be difficult to recover Damages based on a hire value.

Equipment Rate Manuals

Popular equipment rate manuals are available for reference, such as the Royal Institution of Chartered Surveyors (“RICS”) Schedule from the UK, and the Associated General Contractors (“AGC”) Equipment Cost Guide from the USA. Anyone using such manuals should exercise caution and thoroughly read and understand these manuals in advance if they intend to use them for calculating the components relating to Plant ownership rates and/or a hire rate and determining Plant operating costs. However, while the application of published guides will likely be limited to a pricing exercise, it is not always appropriate for a Damages assessment of the cost of an event / circumstance that causes delay.

Conclusion

To increase a contractor’s chances of pursuing a successful cost claim for Contractor’s Plant based on hire value, a contractor should be aware that, as a minimum, it will need to:

1. Prove that the Contactor’s Plant could have been hired out, or that it would have been utilised on other works not related to the contract, but for the occurrence of the event / circumstance that gave rise to the delay; and
2. Show that a fair and reasonable hire rate has been demonstrated.

It is not usually appropriate to simply use commercial pricing sources as proof of a loss. It is necessary to demonstrate the actual loss that has been incurred, which, more often than not, will comprise actual records of the items of Contractor’s Plant, such as depreciation and finance-related costs.

1. Plant as used by the builder or contractor in construction work may be divided into two classes: 1. Small and non-mechanical plant and tools; and, 2. Power-driven mechanical plant, which consists of such plant as lorries, backhoe loaders, concrete mixers, compressors, cranes, excavators, dumpers, tractors, rollers, etc.
2. Livingstone v. Rawyards Coal Co. [1880] 5 App. Cas. 25, 39
3. C.& P. Haulage v Middleton [1983] 1 W.L.R. 1461 at 1467, CA
4. Fédération Internationale Des Ingénieurs-Conseils
5. Bailey, Julian. Construction Law 11.131
6. Thiess Watkins White Construction Ltd v Commonwealth of Australia (1992) 14 BCL 61, 77
7. Not by Costs on a current contract but by Costs on another contract would a loss of profit opportunity seldom qualify as additional Costs.
8. Although the question of whether the provision for Costs to be “expenditure incurred” could be extended to include the recovery of future Costs has recently been denied, “expenditure to be incurred” could be interpreted to include future expected Costs, because of contradictions in the wording of the various entitlement to payment clauses.
9. Alfred McAlpine Homes North Ltd v Property & Land Contractors Ltd (1995) 76 BLR 59.
10. 1980 Edition, clause 26.
11. Shore & Horwitz Construction Co Ltd v Franki of Canada [1964] SCR 58
12. Standard forms of contract (FIDIC, ICE, or JCT), without amendment, do not prevent the parties from relying on the governing law.
13. Alfred McAlpine Homes North Ltd v Property & Land Contractors Ltd (1995) 76 BLR 59.
14. Bailey, Julian. Construction Law 8.158.
15. Sunley & Co Ltd v Cunard White Star Ltd [1940] 1 K.B. 740.
16. Shore & Horwitz Construction Co Ltd v Franki of Canada [1964] SCR 58
17. Converse et al. v. U.S
18. Cotton et al. v. U.S.
19. Alfred McAlpine Homes North Ltd v. Property and Land contractors Ltd (1996) 76 BLR 59.
20. Brand Investment Company v. U.S.
21. Bahen & Wright, Inc. v. United States, 94 C. Cls. 356, 360, 361, 365
22. Laburnum Construction Corporation (1964) 163 Ct. Cl. 339.
23. Phoenix Bridge Co. v. United States, 86 C. Cls. 603, 631

This article is an adaptation of Jung-guk's original article 'Compensation for Idling Owned Plant', which was published in March 2021, in issue 21 of the Driver Trett Digest. The original article has been revised for The Society of Construction Law, and features on their website here: www.scl.org.sg/public-resources/articles-menu/959-how-to-claim-compensation-for-contractor-owned-idle-plant