Clawing Back Those Management Costs

In any dispute you will usually want to claw back some or all of the costs involved in resolving it. Melissa Horrocks spells out three golden rules to make sure you recover entitlement

Contractors are often faced with a situation where delays occur on site due to an action or inaction by the employer or the employer’s consultants, such as late information or a denial of access to the site (which amounts to a breach of contract). These costs may include the cost of disruption to the business caused by management being diverted from their usual duties to deal with the claim.

Recent case law has looked at the issue of management costs, and the decisions in those cases can usefully be applied to construction. In essence there are three golden rules you should follow which will significantly increase your chances of recovering costs.

1. Provide the evidence
It is really important that you have adequate evidence to justify the claim. The judgment in Aerospace Publishing Ltd & Anor v Thames Water Utilities Ltd [2007] decided that for a claim to succeed you must prove that the breach of contract caused the staff to be diverted from their normal activities and that this significantly disrupted the business. On the basis of such evidence, the court can then infer that the disruption to staff would be at least equal to the cost of employing them during that time.

You also need to keep detailed records (through timesheets or diaries) and include the following information:

• Who were the diverted employees and why were they chosen?

• What was the effect on the business by diverting those employees?

• What activities did they carry out?

• How much time was spent carrying out those activities?

Remember to prepare witness evidence and explain the reasons why you are claiming management costs. In Bridge Ltd v Abbey Pynford Plc [2007] a witness statement was produced to show the effect of the breach, and evidence was provided to show the significant increase in the company’s turnover in the years following remedial works. The judge accepted that a retrospective assessment is valid. However your calculation of time spent on a breach still might not be approved by the judge and may be discounted due to the uncertainty of its accuracy.

2. Use justifiable staff rates
The standard rates included in your claim must not be exaggerated. A recent case, Azzurri Communications Ltd v International Telecommunications Equipment Ltd (t/a SOS Communications) [2013] EWPCC 17 highlighted the implications of uplifting the staff rates. Azzurri had to employ external resources to undertake the activities which Azzurri’s staff would have carried out if the breach had not occurred. Azzurri claimed £88,807.84 for diversion costs, but the company was only awarded £24,550.91, because its own evidence showed the cost of the external resource was only half of their charge-out rate.

A method approved by the courts in the Bridge case to calculate an hourly rate was to use the audited accounts of the business, using the annual income of the manager and then dividing it by the number of hours worked in a year.

3. Don’t include claim preparation costs
A claim for management costs must not include the time spent preparing witness statements or any other claim preparation, as this is part of the litigation costs. The claim preparation costs should be an entirely separate claim that can be clearly identified.

In the Aerospace case the claim for management costs included the freelance worker who had inspected the damage and prepared a witness statement. The court held that it was for Aerospace to prove that the rest of the freelance workers time was not related to claim preparation. They were unable to prove this to the court so this part of the claim failed.

Melissa Horrocks is a consultant with Knowles – a Hill International company.

Last Updated on April 11, 2021
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