Claiming overheads is never as easy as it seems. Senior Associate, Will Cursham looks at what a claimant needs to make a successful overheads claim.

Overheads are one of those types of loss, like loss of profit and interest, that are added on to the end of a financial claim (particularly claims relating to delays), as a bit of an after-thought.

Housebuilders usually claim overheads as a percentage of the main losses claimed, based on their ‘standard’ overheads percentage. Since these are viewed as standard, there is very rarely an explanation of how the standard percentage rate is arrived at.

A recent Technology and Construction Court decision[1], however, serves as a reminder that a claim for overheads is far from straightforward, and needs as much thought as any other type of loss. In particular, simply giving a standard overheads percentage will not be enough.

What are overheads?

To start with, the Court clarified exactly what overheads are: the costs of running an operation as a whole, most notably head office costs, such as rent of buildings, general support staff costs and other office costs such as IT, phone lines etc.

Critically, however, it is not enough to simply show that the claimant had overheads during the period of the delay. It must also show that its staff would have been otherwise profitably employed on other projects.

It is this ‘lost opportunity’ element that is often hard to prove. The claimant has to show convincingly that a delay on one of its projects has affected its ability to take up other opportunities. Whilst some contractors have difficulties showing this, housebuilders, who often have a number of projects either in progress or in the pipeline at any one time, will probably find it more straightforward. However, they must be able to show exactly what the alternative projects are and that they would be profitable.

Calculation is key

If a claimant can show that it was incurring overheads during the period of delay and that it could have employed those resources profitably elsewhere during that time had it not been for the project overrun, then the next challenge is to show how it calculated its overheads. It will not be sufficient to simply say “this is our standard overhead rate”.

A detailed breakdown of the overhead costs must be provided, with an explanation of what they are. For example, the Court will not be prepared to accept items described generally as “administrative expenses”[2].

Conclusion

A claim for overheads is one of those items that will always be contested by the defendant, and challenged by the Court. To make a successful recovery for overheads, a claimant must be able to show exactly what its overhead costs are, and what projects its staff could otherwise have been employed on had it not been for the delay on the current project. Gathering the information for an overheads claim therefore requires a good deal of work, but that work will pay off if done properly.

As an aside, the judge in this case also explained that a claimant can make a claim where its overheads have been “thickened” during the period of overrun. He gave the example of a contractor who, because of a subcontractor’s breach of contract, has to increase its senior accountant’s workload to cope with the extra work. As a result, it has to bring a junior accountant onto the team. That junior accountant is not assigned to the “problem” project but, nevertheless, the contractor may be able to recover the costs of employing him, because it is a direct consequence of the subcontractor’s breaches.

In fact, such a claim for the costs of employing that junior accountant may be more of a “management time” claim than an “overheads” claim. Nevertheless, it is interesting that the TCC is indicating that such costs can be claimed, even though the employee was not directly involved in the work caused by the breaches of contract.

[1] Fluor v Shanghai Zhenhua Heavy Industry Co. Limited [2018] EWHC 490 (TCC).

[2] Paragraph 31 of Fluor v Shanghai Zhenhua Heavy Industry Co. Limited [2018] EWHC 490 (TCC).

This post was edited by William Cursham.