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Can Prolongation Costs Apply With a Property Damage Claim?

We are often asked to look at prolongation costs so I’d like to shed some light on this issue.

We have been appointed on several property damage issues lately where we have been asked to quantify the losses suffered following the occurrence of a specified peril, such as a flood. Typically this occurs where mechanical or plumbing work is carried out negligently, the system is filled with water, put under pressure and then the system fails causing flooding to the already completed construction work.

So let’s assume that the employer and/or contractor are entitled to recover the direct costs incurred in reinstating the work to its original condition, what of the prolongation costs? Clearly the reinstatement work takes additional time to do, so they should be entitled to project completion related prolongation costs?

All good? Well not quite.

Whilst it clearly takes time to strip out and reinstate the works, it does not automatically mean that this has caused a delay to completion of the entire project. Very often we are presented with property damage claims including prolongation costs, that simply use the duration of the strip out and reinstatement works as a multiplier for the prolongation costs.

If only life was this simple.

When assessing the delay caused by a property damage event, this should be treated as any other delay event would be. A delay analysis should be presented that demonstrates that the property damage event caused an actual delay to completion. This should be considered with the other work ongoing on the project and the actual progress of the works, just prior to the property damage event occurring. In summary the delay analysis should consider:

  1. Delays suffered prior to the property damage event occurring.
  2. Forecast completion date at the date of loss.
  3. Time required to complete the outstanding contract work.
  4. Time required to complete the reinstatement work.
  5. Other concurrent or parallel delays.
  6. The critical path of the work.

To be able to recover its project related prolongation costs the claimant needs to demonstrate that the property damage event is a critical cause of delay i.e. that it falls on the critical path and delays completion of the entire project. By following this approach the duration that the property damage event falls upon the critical path can be ascertained. Then this is the period for which prolongation costs can be claimed.

That’s it then?

Well no, to calculate the prolongation costs the existence of any truly concurrent delay events should be considered. A concurrent event is an event that falls upon the critical path at the same time as our property damage event. If it is not on the critical path, it is parallel and not concurrent, and therefore is not relevant when assessing costs.

When concurrent events have been identified, the simple answer is that the recovery of prolongation costs will not be recovered for this period, on the basis that the contractor would have been on the project during this period in any event.

But take care.

It may be that some costs incurred are specifically due to property damage event. If a section of work is affected by the property damage event, then it follows that all section related prolongation costs should be recovered, irrespective of concurrent events to other areas of the project. So as always, the answer is not simple but rather complex and as ever, a detailed review is required to accurately assess the claimants entitlement.

Please do contact us for more information.