A recent case in the TCC found that a contractor’s percentage assessment of the overheads on a project could not then be applied to their damages claim and recovered as an additional loss. The contractor needed to show constraint – that it had been prevented from earning a contribution to its overheads; otherwise the overheads would have been incurred in any event.
The recent case of Fluor v ZPMC concerned a contractor’s entitlement to claim overhead costs following its sub-contractor’s breach of contract. The contractor was Fluor, which had been engaged by Greater Gabbard Offshore Winds Limited (“GGOWL”) to design and construct the foundations and infrastructure to support 140 wind turbine generators to be installed in the North Sea. Each foundation consisted of a monopile (“MP”), which was to be driven approximately 32m into the seabed. At the top of each MP sat the transition piece (“TP”). The TP provided the connection between the MP and the structure above.
Fluor engaged ZPMC, a steel fabricator based in Shanghai, to fabricate the MPs and the TPs. Cracks were found in the welds and GGOWL ordered the steel contained in all three shipments to be tested and any repairs carried out. Fluor alleged that it suffered approximately $400M loss as a result of the defective welding caused by ZPMC.
Claim for overheads
In separate hearings, the court considered that ZPMC was in breach of contract due to the cracking in the welding and found it liable to pay substantial damages to Fluor. One matter which was held over was Fluor’s claim for overheads costs. Fluor was unable to claim overheads as a consequence of the delay caused by ZPMC’s breach of contract, as there was an agreement in place that no delay claim would be advanced. Therefore, in taking a different approach, Fluor claimed an additional 4% of the damages awarded by the court as overhead costs, which it calculated as:
- Total overall cost of the project - £374.735M. This was 57% of Fluor’s overall turnover for the year.
- Total overheads for the year - £22M, 57% of which is £12.645M.
- Fluor assessment of the overheads was therefore 4% (£12.645M, as a percentage of £374.735M).
Fluor’s justification for its claim was that direct costs are not incurred in a vacuum at no cost to itself, overhead costs are also incurred. Fluor considered that applying 4% of its direct costs was reflective of its overheads, based on the above calculation.
ZPMC submitted that Fluor’s assessment was not competent as it had failed to show that, had it not been for the breach of contract, its resources would have been otherwise profitably employed on other work and making a contribution to Fluor’s overheads. Otherwise, the overheads would have been incurred in any event.
The Court’s decision
The court agreed with ZPMC and found that this form of assessment provided no basis for a claim in respect of overheads. The figure of 4% failed to set out the extent to which overheads were incurred due to ZPMC’s breach of contract. The court also considered a further situation where a contractor could claim a contribution to overheads, which is where its overheads have ‘thickened’ or increased due to a breach of contract. This could be where senior members of management may be diverted to deal with the consequences of the breach and new employees brought in to cover their workload.
- This case reiterates the difficulty that contractors face in claiming overheads and the evidential burden with such claims.
- If intending to claim for overheads, it is important for contractors to be able to demonstrate and prove the losses suffered. This would include such things as vouching of the losses; evidence that overall turnover decreased; that work was turned away; that there was no increase in turnover; that resources are fully stretched so that work could not be taken on; and no change in market.