Jacob Austin 00:00:00 Hi all. Jacob Austin here from QS.Zone. And welcome to episode 129 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode continues our mini series on JCT subcontracts and it focuses in on loss and expense under those subcontracts. When you're entitled to it, when the relevant matters kick in, and what they actually mean in practice, and how to build a claim that sticks. So let's dig in. Loss and expense is one of those areas that subcontractors rarely do well, and many subcontractors rarely do at all. But if you're regularly walking away from projects without the margin that you've priced into it, you're suffering delays and not getting reimbursed for them, then lost an expense could be the answer. It's a process that builds on what we spoke about last week, where we covered valid extensions of time, and this is the cost component under JCT contracts that sits alongside the time component, which is the extension of time. And as I mentioned, if you're regularly walking away from jobs where you've been delayed and it's hitting your pocket, you get to the final account and you're quietly swallowing the cost of extra weeks on site and all the costs of disruption that might be affecting your ongoing activities.
Jacob Austin 00:01:43 And you're also suffering the cash flow burden of continuing to pay your team, with limited amounts of chargeable work coming in through the door. That's you living this simple commercial truth. If you don't claim loss and expense properly, then you're funding the job for free. The cost of the delay and disruption doesn't wait until the end of the project. You suffer it from as soon as that delay starts happening. Extra labor hours, additional supervision, more plant time wasted. Deliveries may be demobilised and re mobilising re sequencing to try and make things work with tighter and tighter timescales. Sometimes these kind of productivity losses, which are very real, are hard to see in the actual moment that they're happening. And if you don't capture it and present it properly, it becomes unprovable, not evidenced or the old favorite. That's just part of doing construction. Maybe it is if construction is being done badly. So today's episode is about loss and expense under JCT 2024 design and build and standard subcontracts. I'm not going to run you through a legal word for word lecture, but give you a practical breakdown of what triggers loss and expense.
Jacob Austin 00:03:00 What relevant matters really are the notices you need and why timing matters. How to structure a claim so that it lands properly. Because the difference between being right and being paid is almost certainly evidence and structure to what you're doing. Let's start with the entitlement framework. This is a place where you can easily get caught out under the act. Loss and expense isn't a vague compensation bucket, but it's a defined contractual mechanism that lets a contractor recover certain loss or expense if it's caused by matters that the contract recognizes. And that's where the phrase relevant matters comes in. In jet language, there's a critical distinction between relevant events, which are about time and sit behind extensions of time and relevant matters which are about money, which align with loss and expense. Some things can be both and some things will be time only. Those are things that are usually nobody's fault, such as bad weather strikes and terrorism. And these are things where because nobody's really caused them, the contract says, well, it's unfair for you to penalize the employer or the contractor for them going wrong, but at the same time, it's unfair for them to penalize you for them going wrong.
Jacob Austin 00:04:19 So they give you relief from damages, which is what your extension of time is for. But things where you're likely to be paid for an extension of time are where the employer or the contractor administrator, if there is one, issues instructions that change the work or the timing of the work. The provision of late information that you are entitled to rely upon. Delays caused by other trades or access restrictions where these weren't known about in advance, and discrepancies in the employer's information that trigger changes and also suspension or postponement if that's followed the subcontract procedure. Also, if you're working on a measurement contract and there's significant increases in particular quantities of work, then you'd be entitled to additional cost for management of that work. Now, when it comes to asking for an expense, you're rarely claiming it directly against the employer. You're often as a subcontractor. One step removed from that. And loss and expense clauses are a place where the contractor will often look to amend them. So you'll need to read your contract and specifically the amendments to see exactly what you're able to claim.
Jacob Austin 00:05:30 What should happen is that the subcontract allows you to claim from the main contractor for certain matters, regardless of whether they can pass that upstream themselves. But what quite often is the case is that it's amended so that you can only recover loss and expense when the main contractor can recover it from their employer, and many subcontracts, even if they don't explicitly say that, we'll have some kind of amendments that make that the case. And that means commercially, your claim must do two things at once. It needs to prove your entitlement under your subcontract, and it needs to be capable of being passed upstream under the main contractor's claim so that they can recover it themselves. And there's a fairly simple five step recipe to doing that first off. A relevant matter needs to occur. Secondly, it needs to cause an effect on your work. Thirdly, that effect needs to cause you to incur more cost or loss, an expense as the technical term for that. Fourthly, is that the loss and expense is properly evidenced and it's not included elsewhere in your application for payment.
Jacob Austin 00:06:36 And finally, you need to comply with any notice and substantiation requirements. If you miss any of these five steps, your claim becomes vulnerable. So let's talk about some ways that loss and expense claims go wrong. Having sat in the main contractor's chair. I've seen quite a few of this first on, which is essentially more of a grumble than an actual claim, and it's often looked like as little as inserting a line in the subcontract account, saying we were delayed and disrupted with tens of thousands of pounds worth of prelim costs priced against it. That's not a claim. That's just a complaint with a price tag. A proper loss and expense claim needs to be built out like a case showing cause effect and the resultant cost. Another common failing is using the wrong or sometimes a non-existent loss and expense trigger. A simple example would be claiming extra cost for a weather delay or having genuine disruption, but it's not linked to a contractual matter upstream that can leave you with a claim that might be factually true, but it's effectively contractually homeless.
Jacob Austin 00:07:43 Another key failing is submitting notices late or not at all, even when the contract doesn't use words like condition, precedent. Timing still really matters because delay notifications does real damage. It stops conversations from happening about mitigating the problems, which allows the main contractor to say that they weren't given a fair chance to manage it. It will also leave you fishing around the records retrospectively, meaning that information is likely to be thin and you're relying on statements and people's memories for vague snippets of information rather than cold, hard facts that you can collate at the time. Another common issue is double counting and mixing up your cost buckets. This happens by pricing in certain elements of delay into a variation, which is all good and well if you have the knowledge at the time and you can price it properly. But it often happens that an extension of time is issued, mopping up variations and then duplicating the cost that you've already asked for. That pours cold water on your credibility straight away. Now, don't get me wrong. If you've got a large variation and it's going to delay you and you know that, and you can realistically negotiate prelims into the change with your contractor, that is probably the best way to do it.
Jacob Austin 00:09:05 Just don't double bubble it into a lesson. Expense claim and a final downfall. Trying to claim what you can't prove. Some costs might well be real, but they can be hard to evidence like productivity loss. You can claim disruption, but only if your methodology and your records make it credible. And that needs to look like a realistic measurement of a good section of undisputed work compared to a measurement of disrupted work. That kind of comparison is comparing what they call the measured mile, taking the cost of your productive work from your non-productive or disrupted work, so that you can work out precisely how much a particular delay is costing you. Now let's run through a case study type. Example. Let's say you're a subcontractor and you've got some off site fabrication work on site. Your work is dependent on areas being handed over to your on time preceding trades being out of the way and the design being frozen firstly so that you can fabricate to it and then of course install it on site without any rework. So you're readying for visit one and there's a late design change, but you've actually fabricated already two old details because nobody's told you anything about the design change.
Jacob Austin 00:10:23 And to make matters worse, you get to site, you install it, and then you're told to rip out and redo it. There's a bit of an argument with the main contractor about, you should have been working to the latest drawing and blah blah, but you eventually are able to show them that you weren't issued it, much less received an instruction to actually change your works in accordance with it. So the main contractor tells you to provide your variation. So you've won the argument. On one front. You take your kit away, you modify it to suit the new design, and you start modifying the second and third units as well. Ready for another visit? The second attempt at getting it right. So now you head back to site with kits one, two and three all ready to install. And you actually think this might have worked out well because I'll be able to get more productivity with more work being completed on one visit. So you're thinking that price variation that you've submitted is on for a winner, but then the reality of the situation dawns on you, and actually labor productivity goes down because now what's happened is you've re mobilized the site, but you're working around other trades because the program has moved on whilst you weren't on site, you actually think you need an extra supervisor because the site is that chaotic.
Jacob Austin 00:11:38 The original change that you priced covered you for the change in scope of works. What it didn't cover was the inefficiency of working space that you've no longer got to. Yourself. Coupled to the inefficiency of working out of sequence. Additional supervision and the extra cost of some overtime so that you could try and meet the contractor's revised deadlines. Now, if you had a crystal ball and you could see that at the time of pricing the change, then all good. But the likelihood is you didn't. Otherwise, you'd probably be playing the lottery with a very high degree of accuracy. And so that costs that you've now incurred. The only means to recover it is via a loss and expense claim and its prime loss and expense territory. The problem is, if you don't identify it early, notify the issue and start documenting it. By the end of the project, it just becomes an issue that you've had to work around, and you might take that one on the chin and just think, well, that's how the job went.
Jacob Austin 00:12:35 But no, it's not just how the job went, it's how your margin disappeared as well. So let's get practical on how you can do something about it. So step one is to start with the trigger, not the cost. This is all about having your eyes open. What's occurring? When did it occur? Who's issued X instruction? Who's got in your way? Who's preventing your access? What's the evidence? Instructions. Emails. Drawing issues. Meeting minutes. Photos. These are all things you can easily collate if you act at the right time. You also need to bear in mind. Does this issue tie up to a relevant matter from the contract? Step two is to issue a clean early notice. And when I say clean I'm saying keep it simple. Tell the contractor this is what's happening, the cause. Tell them that this is an issue that may cause loss and expense. The likely effects are x. If you don't know. If you don't know what the full extent of the effects are, you can say that.
Jacob Austin 00:13:37 Tell them that you'll provide substantiation as records develop, but importantly, tell them that you're going to work with them to try and mitigate it if it's reasonably possible, but that it will have a time and cost impact. This is really important to you because it ties up the responsibility early and forces the main contractor to either deal with it or eventually pay for it. Next, you need to start collating that substantiation that you refer to. This is where you either win or lose. You need records that connect the dots. Labor allocation, plant utilization, stoppages and waiting time. Any abortive work, revised sequences, access restrictions, and the causes of any of these. Daily diaries are your best friend here, as are photos. Marked up programs help delivery notes. Help. Timesheets. Help. Not because you love admin, but you love the money that you would otherwise miss out on. Then, once you're done collating, it's time to submit a claim. A good structure would look something like the following. Start with a short summary.
Jacob Austin 00:14:43 What happened? What you're claiming for what period? Under what trigger? Then describe the contractual entitlement. The relevant matters you've relied upon and why they apply in this instance. Then move on to describe the cause and effect. A simple timeline referencing evidence. You'll want to include that evidence as an appendix so that it can't be argued with. Next, move on to the calculation explaining the basis of the calculation, not just the totals that you're looking for. After that, you need to refer to your calculations and substantiate them with your backup records. Labour, plant supervision, prelim type costs, cost from sub subcontractors and other suppliers, all with records. And finally, you talk about mitigation. What did you try to do to reduce the impact and why residual costs remained? Sometimes that mitigation will cost money itself and that can all be part of the lesson expense claim. If you keep that simple structure, it's repeatable. It's not overly fancy. You go straight to the point with a summary and then you back it up.
Jacob Austin 00:15:51 Now let's talk calculation. Loss and expense will generally fall into two quite broad buckets. And these are usually prolongation type costs i.e. you're on site longer than you plan to be, or disruption and inefficiency costs where you've got less productivity out of your team because of an event for prolongation type costs. The logic is often to identify the extended period and to identify costs that genuinely run longer. Because of that period, prove they weren't already allowed for, or that they were exceeded because of this particular event. For disruption, your calculation needs a credible method. The most credible is the one that we already mentioned the measured mile approach, which is comparing the cost of you typically completing your work whilst you're not disrupted to the cost. Whilst you are disrupted and establishing what the addition is, the most sensible way to go about that is calculating your labor outputs for the two different scenarios and working out the difference. You can then apply that to as much further work as you've got. That's of the same type, assuming that the disruption continues.
Jacob Austin 00:17:00 There may be some other parts to it as well, which might be labor downtime, as long as you've got evidence of it and out-of-hours working costs. If you're paying for extended shifts or perhaps working on weekends and the likes. There might be other demonstrable resourcing impacts. Let's say the measured mile doesn't show anything, but you've had to use twice the amount of labor to produce the same output in the same time. One of these examples will likely suit your scenario. The quickest way to lose out when calculating disruption is to throw in a vague percentage. Uplifting your rates with little to no basis, even if there is some real cost behind it, you method is going to get attacked and you'll likely end up losing out. The other thing that will happen if you don't use a method mild calculation, is that the main contractor can accuse you of under pricing the job. They'll either accuse you of undercutting your tender so that you won the work with a view to claiming more later. Or at best, they'll say that you got your assumptions wrong and revise your entitlement downwards.
Jacob Austin 00:18:02 Now, loss and expense needs to be claimed on the basis of actual costs incurred. That means showing the contractor invoices, timesheets, payroll records if necessary. All of that builds a picture of the genuine amount that you've lost, with the idea being not that you're making money out of it, but that the scales are setting straight again so that you're not losing for something that wasn't your fault. And remember, if a cost has already been recovered through a valid variation, then don't also claim it as loss and expense. That kind of double counting is easy to identify, and it will give the contractor a really simple get out of jail free card to reject your claim in full if they think it can't be trusted. The worst thing you can do with loss and expense is to leave it all to the end, and submit it as a parting shot, just before you submit your final account. This will leave the contractor nowhere to go to try and recover the cost themselves if they're able to under the main contract, or do anything about mitigating the issue, which they might well be able to do.
Jacob Austin 00:19:06 They might sequence other people's work because they got float in their activities to give you more working time and working space. And that's where the early notice is essential. But once you've done that, you need to follow up on it reasonably regularly. And by that I mean probably something around monthly to six weekly rolling updates. What you don't want to do is have a big pile of cost building up that you ship into the contractor last doors and leave them holding a live grenade because they'll want to retaliate. So keep talking to them. Give them updates. Give them interim substantiation. Keep your claim narrative alive and update the details with further records as they happen. The closer you get to practical completion, the more the main contractor's incentives are going to change. You'll start seeing the site team talking of getting on to the next job. You'll see the SHS dreaming of finalizing the account and getting it off their books, and doing whatever they can to squeeze an extra percent of margin out of the job. So landing a claim at that point never goes down well.
Jacob Austin 00:20:09 So I'm going to wrap up the show by summarizing the key commercial points. Loss and expense is not automatic. It must link to a relevant matter. EOT and loss and expense are separate, so time protection doesn't necessarily equal cost recovery. The claim lives or dies on cause, effect and cost. Not how loudly you argue or how much you feel hard done by. So submit your notice early and build records whilst it's happening. Structure your submission well. Doesn't have to be complicated, but follow the headings you outlined and you'll be able to submit it to the contractor in the confidence. You've covered everything and in a format that they can submit it upstream. Evidence is everything and double counting is a disaster, and final thought is to use this sparingly. This is for that contract where the client is making a mockery of the design approval process, and the program has gone out the window within the first ten weeks. And everybody that seems to go near the job is hemorrhaging money. It helps you to recover costs so that your margin doesn't wash away with the tide.
Jacob Austin 00:21:18 You can get your head around it. It gets you out of the territory of hit and hope, and you don't know whether this is going to land and into a place where you can start running the contract like it's a commercial tool to protect yourself when those nightmare jobs crop up. Hopefully that's been informative for you. I've tried to keep it reasonably user friendly, because this is a subject that we could get bogged down with a lot of terminology. Let me know your thoughts. If you have taken some value away from today's show, then I really need your help to share the show and pass that value on somebody else who'd benefit from hearing it, so I can help as many of the million SME contractors working out there in our industry. And thanks, of course, for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.QS.Zone for more information or we're also on all your favourite socials again at @QS.Zone. And remember, miss the contract detail and the commercial risk falls on you.
Jacob Austin 00:22:15 Thanks all. I've been Jacob Austin and you've been awesome.
