Overheads and profit: Wraight v PH&T Holdings

The recovery of overheads and profit in the event of a contract dispute. By David Goodman, Brewer Consulting.

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Summing up

The case: Wraight Ltd v PH&T (Holdings) Ltd 13 BLR 26.

The issue: Recovery of overheads and profit.

The implication: The basis upon which overheads and profit are recovered will vary according to the nature of the event giving rise to such a claim.

Claims for the recovery of overheads and profit are not uncommon when a building project has been delayed or where a contract has been breached.

Such claims are usually either for direct loss and/or expense arising from delay or disruption, or overheads and profit which would have been earned on work that a contractor was not permitted to carry out.

The first and most commonly encountered type of overhead and profit claim arises in connection with project delay. In such circumstances, it is claimed that the contract has not made the expected contribution to overheads and profit owing to a reduction in income without a corresponding reduction in expenditure, and that the workforce lost the opportunity of working on another contract that would have contributed to the overheads and profit during the period of delay.

This is a valid head of claim and when making such a claim a contractor may have to consider whether its resources could have been profitably employed elsewhere and thus contributed to its overheads and profit during the period of delay. The contractor may have to consider whether other work was available that it could have secured (possibly by producing tender invitations that were declined owing to a delay), or alternatively that it suffered a drop in turnover.

Additional considerations potentially affecting the outcome of such claims are the size of the contractor (for example, a large contractor may not be deterred from tendering for other work during periods of delay), or periods of recession which could equally be the cause of any reduction in a contractor¹s turnover and profitability. These considerations are not fixed rules and, in each case, entitlement to loss of contribution to overheads will turn upon its own particular circumstances.

The second, but much less commonly encountered type of claim, arises where a contract is brought to a premature end, preventing a contractor from completing the contract work. This type of claim is likely to increase in the current economic climate, in which employers are suspending projects for substantial periods of time beyond those allowed by a contract.

Case study

This matter arose in the case of Wraight Ltd -v- PH&T (Holdings) Ltd. The contractor [Wraight] agreed, on JCT 63 terms, to carry out building works in Kent for the employer [PH&T].

Shortly after work commenced, unsuitable soil conditions were encountered, and the architect properly directed a suspension of the works. With the suspension having continued for more than the period stated in the appendix to the contract, Wraight validly determined its employment under clause 26 (1) (c) (iv) of the contract (now JCT 05, clause 8.9.2).

Under clause 26 (2)(b) (vi) of the contract (now JCT 05, clause 8.12.3.5), Wraight claimed for the profit it would have earned had the contract been completed (although the claim was stated as being for the recovery of gross profit, including overheads and profit).

The sum claimed by Wraight was based upon certain percentage additions it had allowed in its tender for overheads and profit. PH&T disputed that claim.

The claim for overheads and profit was held to be a valid claim. The judge stated that had the contract not been determined, Wraight would have completed its work and obtained its full contractual remuneration at the end of the contract and that, owing to the determination, Wraight lost the right to receive that contractual remuneration.

Accordingly, Wraight was entitled to recover as loss and/or expense the overhead and profit it would have earned had it been able to complete the contract work. In the event, Wraight was allowed recovery of its overheads and profit on the basis of the percentage allowances included within its tender.

Overhead and profit claims arising from a valid termination should be distinguished from normal claims for loss and/or expense arising from delay and disruption. Claims in consequence of termination are for those overheads and profit that would have been earned on work a contractor was not permitted to undertake, rather than the lost opportunity to have earned overheads elsewhere.

Termination claims are therefore likely to succeed as there is no requirement to demonstrate loss of opportunity, which can be difficult and is not always entirely successful.