Delays are a common phenomenon in infrastructure projects. Prachi Manekar analyses the rights of contractor when these are attributable to the employer or client.
When a project gets delayed, the contractor is entitled to claim losses and damages incurred on account of it. These losses should arise as a natural result of the delay. In case of excessive delays, the quantum of losses can even exceed the contract value.
Nature of claims
Some of the important losses and damages incurred by the contractor and recoverable from the employer in case of project delays are set out below:
Idling/underutilisation of resources: A contractor mobilises adequate manpower and machinery after receipt of the work order to ensure timely completion of work. If the project gets stalled, manpower and machinery start idling and/or getting underutilised. The costs incurred for retaining machinery, manpower and other resources are recoverable. For instance, if a contractor has taken an excavator on lease which is idling on account of non-availability of land, the contractor can claim the lease rental for the idle period.
Mobilisation and demobilisation expenses: Construction projects undertaken by a contractor are quite often located at distinct and distant places. If a project gets delayed for a prolonged period, the contractor might have to demobilise resources from one project and mobilise it for another project. For instance, workers assigned for a stalled Mumbai project might have to be shifted to a Chhattisgarh project. In this case, the worker, in addition to wages, has to be paid travelling allowance, allowance for temporary accommodation and such other charges. Thus, the cost of shifting the workforce between projects is recoverable from the employer.
Extended bank guarantee costs: In infrastructure projects, the companies furnish advance bank guarantees [against grant of mobilisation advance] and performance bank guarantee. In case of delays, contractors lose interest on margin money retained by bank. Further, additional costs must be incurred for periodic renewal of bank guarantees beyond the contract period.
Extended insurance costs: In project contracts, the contractor is obliged to insure the project by taking a contractor's all risk policy. Additional premium must be paid for insurance cover for the extended time period. Financing charges: Generally, contractors take long term loans, working capital and other facilities from financial institutions to finance projects. The delay in project impacts the costs and ability to service these project related debts.
Extended resources costs: The contractor must retain resources for an extended time period for completion of a delayed project. Additional expenses incurred for the extended period are recoverable from the employer. For instance, if the machinery which was taken on lease for two years was required to be retained for another one year, then charges consequential to such extended use including stamp duty charges should be borne by the employer.
Escalation in prices: With high inflation plaguing the Indian economy, the cost of resources continues to rise. Thus, the cost escalation in case of project delays must be borne by the defaulting party.
Head office overheads: The head office overheads are apportioned to all ongoing projects. While calculating the bid, these expenses are incorporated in the bid amount considering the time period of the project. However, in case of delay, the head office expenses for the delayed period ought to be recovered.
Loss of profits: If the money and resources of a contractor get stuck in a project, he will not be able to take up new project and thus it hampers his profitability. The opportunity cost of the resources that are stuck in the project is a loss to the contractor and is recoverable from the defaulting party in a construction contract. Overheads and profits are calculated by using standard formula like Hudson, Emden, etc. The nature and type of actual claims depends on the nature of the project, nature of contracts, and special conditions inserted in the contract.
The contractors in the past were hesitant in raising claims. However, in the last few years, contractors are becoming aware of their rights and entitlements and are proactively exercising such contractual rights.