Claims for overhead and profit: #Fluor Ltd v Shanghai #Zhenhua Heavy Industry Co, Ltd
This judgement is part of an ongoing dispute about the quality of steel monopiles at an offshore wind farm. See, for example Dispatch 212. Here, Mr Justice Edwards-Stuart, amongst other quantum issues, had to consider Fluor’s claims for overhead and profit. Fluor claimed a percentage for overheads at the rate of 4%. Fluor said that (i) whenever a company incurs a direct cost, it does not do so in a vacuum, at no cost to itself: it generally incurs head office costs or overheads – in doing so; (ii) that overhead cost is just as much a cost of the relevant event as the direct costs; and (iii) it is a cost which should be directly recoverable.
SZH’s position, relying on Emden’s Construction Law, was that whilst overheads can be claimed as a matter of principle, Fluor could not do so here. A contractor must show that, had it not been for the breach of contract, its labour force would otherwise have been profitably employed on other work, thereby making a contribution to the contractor’s fixed overheads (such as head office costs). Further, the loss of the opportunity to recover that contribution to its overheads can be a legitimate head of claim.
A contractor must also show that he would have been able to undertake other work, or that his staff would have been otherwise profitably employed. In other words, the costs would not have been incurred in any event. With hired-plant, a contractor can recover the increased hire costs, which are recoverable. With contractor-owned plant, a contractor may be able to recover losses suffered because they could not use it elsewhere or hire it out. If not, then the claim may be limited to “any depreciation in value of the plant which has resulted from the intensified or prolonged use”. This meant that if the effect of the employer’s breach of contract was to delay completion, so that the contractor remains on site for, say, an additional three months, the contractor may have a claim for a contribution to its fixed costs for the extended period if it can show that it would have been able to redeploy its labour force on other profitable work during the period of delay. This was because the contractor would have been deprived of the opportunity to earn not only profit, but also a contribution to its fixed costs during that period. SZH said this was not how Fluor had put their claim.
The Judge made it clear that he did not disagree with the authors of #Emden. However, he did consider that there was at least one other situation in which a contractor could legitimately claim a contribution towards its overheads. This is where its head office overheads have been “thickened” during the period of the contract. He gave the following example: assume a contractor employed six accountants, whose activities concerned the administration of the business generally and were not project related
“As a result of the substantial extra administration required to deal with problems caused by a sub-contractor’s breach of contract, such as those with Shipment No 1..., the company’s most experienced accountant, Mr Cruncher, is required to spend half his time dealing with those problems. However, fortunately his five colleagues are not overworked and are able to deal with the balance of Mr Cruncher’s work in their ordinary working time. But when further problems arise – such as those with Shipment No 2 – the contractor decides that Mr Cruncher will be required to spend all his time dealing with those problems. Now his colleagues are no longer able to cope with the balance of his work and so a new accountant, Mr Bean-Counter, is taken on. Being inexperienced, Mr Bean-Counter is assigned relatively menial tasks, none of which has anything to do with the breaches of contract. In those circumstances, in spite of the fact that Mr Bean-Counter was not involved with the problems caused by the breaches, it seems to me that the cost of employing him would have been a direct consequence of those breaches and would therefore be recoverable as damages... It represents a ‘thickening’ of the head office costs.”
Fluor did not advance a case on this basis. The figure of 4% was a calculation. For 2009 the project cost was £374.735m (57% of Fluor’s overall activity for the year). Fluor’s total overheads for the year were about £22m, 57% or £12.645m was allocated to this contract. To this figure £1.3m was added for certain infrastructure project-specific overheads, producing a total of £14m of overheads allocated to the project. This was about 4% of the project cost of £374.735m. The Judge was reluctant to accept this. The figure of 4% was simply a ratio of one set of costs against another: it said nothing about the extent to which the former was increased as a result of breaches of contract by SZH. Whilst the Judge suspected that Fluor may well have incurred increased overhead costs as a result of the breaches of contract by SZH, he was not prepared “to pluck a figure out of the air”. The claim failed.