Delays are common in construction contracts and unfortunately projects are often finished after the agreed completion date. This may reflect the fact that contract durations tend to be optimistic, especially if a tender process is involved. When a delay occurs, a contract will generally provide for liquidated damages to be paid by the contractor to the principal. However if the delay is attributable to the principal and the contractor is entitled to an Extension of Time (EOT), liquidated damages will not be available for that period and the contractor may make a claim for prolongation costs against the principal.
'Prolongation' refers to a claim for damages by a contractor for the additional costs it has incurred as a result of delay, such as hire of plant, additional labour costs, off-site overheads and loss of profits. Claims for loss of off-site overheads and loss of profits are not claims for actual loss, but rather for loss of opportunity to undertake new work because the contractor is engaged for a longer time than initially contracted for. Claims for lost profits are often rejected on the basis that they are too remote. There is no single formula by which the courts quantify the loss associated with prolongation claims, as they are dependent on the facts of each case.
There is however a general obligation on the contractor to mitigate its loss, where possible. In Taylor Woodrow International Limited v Minister of Health (1978) 19 SASR 1, the South Australian Supreme Court held that where a delay occurs, a contractor has an obligation to act reasonably and "do everything he can to minimise the potential loss or expense"; for example, discharging workmen if it is viable.
For a prolongation claim to be successful, the delay must have been caused by an act or omission of the principal or a third party for whom the principal is responsible. Delays for which the principal is responsible could include failure to give possession of the site within the agreed timeframe, late issuing of instructions, failure to obtain the necessary permits within the necessary timeframe, or the ordering of extra works.
In the case of delays caused by the principal and the contractor (concurrent delay), the New Zealand courts have not yet determined the approach to be taken in assessing such delays. One approach would be for the contractor to separately identify the costs caused by the principal's delay as opposed to costs associated with its own delays. In City Inn Limited v Shepherd Construction Limited [2010] CSIH 68; 2011 SC 127 (a Scottish case) it was held that where the cause of delay is the concurrent fault of the principal and contractor, prolongation costs should be apportioned and reduced in relation to delays caused by the contractor.
Ordinarily, prolongation costs will only accrue from additional expenses incurred after the agreed completion date, meaning such a claim is dependent on the completion date being delayed from that which was agreed to in the contract. Most written construction contracts, including NZS 3910:2013, require the parties to expressly specify a time for completion.