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Compensation for Idling Owned Plant

Compensation for Idling Owned Plant

How to claim compensation for idling owned plant – depreciation costs or rental value?

In order for a delay cost claim to be compensated, the costs should be justified, reasonable and provable. Idling power-driven mechanical plant (“Plant”) is one of the categories of cost that most often appears in construction delay claims.

Author: Jungguk Lee, Country Director - Korea

'Plant' as used by the builder or contractor in construction work may be divided into two classes: 1. Small and nonmechanical plant and tools 2. Power-driven mechanical plant, which consists of such plants as lorries, backhoe loaders, concrete mixers, compressors, cranes, excavators, dumpers, tractors, rollers, etc.

The costs of idling plant owned by a contractor (“Idling Owned-Plant”) are generally assessed based on the costs of ownership. As such, most claims for Idling Owned-Plant are likely to be limited to interest, maintenance and depreciation associated with that plant. Depreciation is often the largest portion of such costs and is an annual accounting cost, which is calculated based on purchase value, anticipated life-span and salvage/re-sale value of the Plant.

The concept of separate standby rates in a schedule of plant rates is normally based on the premise that during periods when the plant is not able to work, the contractor incurs reduced costs because of the reduced wear and tear and cost of operation. It also reflects that a large part of the ‘actual’ depreciation (as opposed to any ‘fiscal’ depreciation rules) of items of major plant and equipment directly owned by the contractor arise from the consumption of hours of the ‘working life’ of the plant and equipment. Challenges frequently arise with respect to the quantification of claims for such costs, when the Plant has already reached the end its anticipated life-span such that the cost of depreciation no longer exists. In such situations, contractors often try claiming the hire value of such Plant to eliminate the limitations of claiming depreciation costs in the case of older Idling Owned-Plant.

This article explores:

  1. Claims under Contract;
  2. Claims for Damages; and
  3. How to advance hire value claims for plant in the event of delay.

Claims under contract 

The compensation to which a contractor is entitled, arising from delays for which the Employer is responsible, may be prescribed by the terms of the underlying contract. For example, FIDIC contains provisions that allow a contractor to be compensated for additional costs incurred due to delay or disruption and the word “Cost” is defined (FIDIC Sub-Cl. as being “…all expenditure reasonably incurred (or to be incurred) by the Contractor, whether on- or off-site, including overhead and similar charges, but does not include profit…”. Julian Bailey states (Bailey, Julian. Construction Law 11.131) that such entitlement does not usually extend to permit a contractor to recover loss or damage (“Damages”) that do not represent costs directly incurred, for example loss of profit opportunity (“Lost Profit”).

The specific contractual provisions regarding Idling Owned-Plant are illustrated in the leading case of Alfred McAlpine Homes (Alfred McAlpine Homes North Ltd v Property & Land Contractors Ltd (1995) 76 BLR 59). It was held that a contractor’s entitlement under the JCT standard form (1980 Edition, clause 26) of contract to recover direct loss and/or expense (“Direct Loss/Expense”) for delay did not entitle it to recover a notional hire value in respect of Idling Owned-Plant.

The contractual compensation under a contract is generally the actual cost incurred by the contractor for Idling Owned-Plant, where that cost is often measured as the depreciation in the value of the plant. This is because construction contracts such as the JCT standard form often have clauses excluding liability for consequential loss.

Claims for damages

Where a contractor suffers 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.

Loss of profit seldom qualifies as an additional cost item. However, take for example, a situation where a particular item of Plant is kept on a particular site longer than anticipated and this results in the need to hire an equivalent item of plant on another contract to which the Idling Plant was originally planned to be moved to.

For Owned Idling-Plant Costs, it could be argued that delays due to an Employer’s breach, which has the effect of the Owned-Plant being required on site longer than originally planned, may result in loss of profit or loss of opportunity costs. However, without clear evidence of lost profit or opportunity, any claim for Idling Owned-Plant is likely to be limited to interest, maintenance and depreciation. This is because lost profit often depends on whether there is strong demand for hire in the construction market for the particular plant at that time.

How to advance hire value claims for a plant in the event of delay

In the case of Sunley (Sunley & Co Ltd v Cunard White Star Ltd [1940] 1 K.B. 740), it was held that the costs recoverable in the event of a prolongation claim being successfully pursued were limited to the depreciation costs of the Idling Owned-Plant. There was no clear evidence as to disturbance of the contract or loss of profit. It was held that in the absence of evidence of loss of profit, the damage claimable was limited to depreciation, interest and maintenance. In the Converse (Converse et al. v. U.S) case however, 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 Idling Owned-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 Cotton (Cotton et al. v. U.S.) case, the plaintiff successfully proved that it had other work available in connection with which the claimed Plant would have been used but-for the delay.

In the Bahen Wright (Bahen & Wright, Inc. v. United States, 94 C. Cls. 356, 360, 361, 365) case, the claimed hire value of the certain Plant was denied on the grounds that the Plaintiff had submitted inadequate evidence of availability of other use, and no material evidence of the availability of a hire market for the Plant in question.

In Laburnum (Laburnum Construction Corporation (1964) 163 Ct. Cl. 339), it was held that the fair hire value of Idling Owned-Plant was a proper basis for Claims for Damages but also that the hire value should be multiplied by a percentage (50 per cent) to account for the lack of wear and tear on the Idling Owned-Plant. 

It should also be noted that a contractor has a duty to mitigate its damages and hence find alternative uses for Idling Plant where available. In the Phoenix Bridge (Phoenix Bridge Co. v. United States, 86 C. Cls. 603, 631) case it was highlighted that if a contractor can hire or use Idling Plant during a delay period and elects not to do so, it would then be difficult to recover damages based on a hire value.

There are popular equipment rate manuals available for reference such as the RICS Schedule and AGC (The Associated General Contractors of American Contractors) Equipment Cost Guide. Anyone using such manuals should thoroughly read and understand the manuals when using them to assist in calculating the components relating to Plant ownership rate and/or a hire rate and determining Plant operating costs. However, the application of published guides is limited to a pricing exercise and is not always appropriate for a damages assessment for costs of delay.

In order to succeed with a claim for Idling Owned-Plant based on hire value, a contractor will need to be able to:

  1. Prove that the Idling Owned-Plant could have been hired out, or that it would have been used on other work but for delay; and
  2. Show that a reasonable hire rate has been demonstrated.

It is not usually appropriate to simply use commercial pricing sources as proof of loss. It is necessary to demonstrate the actual loss which, more often than not, will comprise actual recorded items such as depreciation and finance related costs.

This article was originally written and released as part of issue 21 of the Driver Trett Digest.
To view the publication, please visit: driver-group.com/digest-issue-21


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