Consider a scenario where a construction project experiences unforeseen delays due Hindered Access / Non-availability to Construction site, Unprecedented Weather Conditions, changes in Law / regulations, delay in getting permission from other department or any circumstance which has delayed the Construction work and are reasonably beyond the Control of Contractor. In such cases, the contractor may seek compensation from it’s Client for the additional costs incurred as a result of the delay. Now we are talking about the compensation of the additional costs incurred by Contractor for staying at site beyond the Original Contract Period.
Now the Question arises, how to ascertain such additional costs? Here is one of the way to calculate the Contractor’s losses due to Cost over run – “Hudson Formula”.
With nearly two decades of industry experience, I’ve witnessed firsthand the power and practicality of this formula in resolving disputes and ensuring equitable outcomes.
By applying the Hudson Formula, both Contractor and Client can arrive at a agreeable figure that compensates the contractor for their extended efforts and resources incurred during cost over-run / Extended Stay Period.
Let’s delve into the concept and practical use of the Hudson Formula, exploring its calculation method, widespread acceptance, use cases, and even a landmark Indian judgment that favours its application.
Understanding the Hudson Formula:
The Hudson Formula is a method used for calculating the compensation due to contractors for prolongation costs resulting from delays in construction projects. It takes into account the overheads, profit margins, incurred during extended duration of the project and determines a fair and reasonable amount of compensation which is widely accepted in Industry.
Calculation Method:
The formula itself is relatively straightforward:
P=(O+P)×(E/100)
Where:
- P = Prolongation costs
- O = Overheads (typically calculated as a percentage of the contract sum)
- P = Profit margin (also calculated as a percentage of the contract sum)
- E = Extended duration of the project (in percentage which can be arrived at by dividing period of delay with Contract Period)
By incorporating in the values for overheads, profit margin, and the extended duration, we can arrive at a figure that represents the additional costs incurred due to project delays / Project Prolongation.
Why it is widely accepted:
The Hudson Formula has gained widespread acceptance for several reasons. Firstly, it provides a transparent and systematic approach to calculating prolongation costs, ensuring fairness and consistency in contract negotiations. Additionally, it takes into account both the direct costs (overheads and profit margin) and the indirect costs (extended duration) associated with project delays, offering a comprehensive assessment of the impact on contractors.
Moreover, there have always been a question in the fraternity as how to assess such cost and Hudson Formula, among others had emerged as proven and widely accepted method for calculating loss of additional overhead and profit due to prolongation of Contract.
Indian Judgment favouring Hudson Formula:
In the landmark case of Hudson Formula is McDermott International Inc. v. Burn Standard Co. Ltd. (1987) 1 SCC 597, where the Supreme Court of India reaffirmed the use of the formula for determining compensation in construction contracts. The court emphasized the need for fair and equitable compensation for delays and endorsed the Hudson Formula as a suitable method for achieving this objective.
The Hudson Formula serves as a valuable tool in to assess fair compensation in construction contracts in the event of Prolongation of the Project. Its systematic approach and widespread acceptance make it a preferred method for calculating prolongation costs in projects worldwide.
About the Author:
Gautam Sharma is a Techno-legal Expert and CEO at Proclep Consulting, bringing over 19 years of industry experience as a Project Manager, Contract Manager, and Planning Engineer into Infrastructure sector working with Prominent Companies and Consulting Firms. With a track record of successfully running three businesses for the past six years, Gautam specializes in providing strategic guidance and practical solutions in the realms of construction, contracts, and project management. Connect with Gautam on LinkedIn for more insights and expertise in the field.
