It is common for construction plant of all types to be retained on site for extended periods of time when construction activities suffer delay. During any such extended period plant may be operational executing the original and unchanged, albeit prolonged, scope of work, the plant may be undertaking additional work for some of the delay period, alternatively the plant may stand idle and be incapable or prevented from earning turnover on other contracts. In the foregoing circumstances it is arguable that the contractor may incur loss and/or expense for which recovery will be sought.

The ascertainment of loss and/or expense arising from the prolonged retention of plant on site has recently been considered by Judge Lloyd QC in the case of Alfred McAlpine Homes V Property and Land Contractors. McAlpine entered in to a contract with Property and Land (PLC) dated 14th April 1989 for the construction of an estate of twenty two houses. The contract incorporated the standard ICT Form of Building Contract, 1980 edition. On 16th June 1989 McAlpine gave an instruction to postpone the works. This led to PLC submitting a claim under Clause 26 of the Contract, part of which addressed the recovery of loss and/or expense arising in respect of its own plant which was retained on site. Central to Clause 26 is that loss and/or expense is to be ascertained. In this instance PLC had determined its loss and expense by using hire rates for similar plant items.

In giving his judgement Judge Lloyd QC first gave consideration to what was meant in Clause 26 by the word "ascertain". He said:-
'… … "to ascertain" means to find out for certain and it does not therefore connote as much use of judgement or the formation of an opinion had "assess" or "evaluate" been used. It thus appears to preclude making general assessments ……'

Judge Lloyd QC then went on to consider the method by which PLC had determined its loss and expense. He said:-
' … … in ascertaining direct loss and expense under CIause 26 of the JCT conditions in respect of plant owned by the Contractor (which would not have been hired or which was not able to be hired) the actual loss or expense incurred by the contractor must be ascertained and not any hypothetical loss and expense that might have been incurred whether by way of assumed or typical hire charges or otherwise'.

The judgement also gives an insight as to the manner by which such loss and expense should be ascertained. Judge Lloyd QC said:-
'An ascertainment needs to take account of the substantiated cost of capital and depreciation … … '

This is not an inclusive definition of the types of loss and expense that need to be considered when owned plant is retained on site for prolonged periods. It is suggested that when loss and/or expense is being ascertained for owned plant it is convenient to consider it in terms of ownership costs and operational costs.

Ownership costs continue for as long as the plant item is in the contractors ownership, whereas operational costs are only incurred when the plant is put to work. Operational costs would typically include fuel and maintenance costs. The cost of capital and depreciation are both associated with ownership.

The cost of capital should be reasonably straight forward to ascertain from a contractors financial records. The same cannot, however, be said for the cost of depreciation. Depreciation is influenced by any number of factors including the following:-
• Age of plant/number of users - new plant will depreciate quicker than second hand and older items of plant;
• Usage - an excavator used predominately to break out concrete ground beams on a demolition site will depreciate quicker than the same type of excavator working predominantly in soft soils.
• Model availability and improvement - certain models of plant are in higher demand than others and maintain high residual values. Conversely product development can accelerate obsolescence and depreciation.

Two approaches commonly applied to the calculation of depreciation, the reducing balance and straight line methods are not ideally suited to the ascertainment of loss and/or expense. Reducing balance depreciation involves annually reducing the value of plant by 25% of the previous years reduced value. The purpose of this calculation is to calculate an annual depreciation which is used as a tax allowance. The value written down by this method will be subject to later adjustment when the plant item is actually disposed of so as to provide for the actual cost of depreciation. The annual depreciation does not therefore equate to the depreciation incurred. Also, with the reducing balance method plant always has some value even though it may be obsolete and worthless.
Straight line depreciation involves taking the plant item purchase price, deducting the expected residual value and dividing by the number of hours, months or years of expected use. The problems with this approach are the accuracy with which future residual values can be determined and that depreciation is spread evenly across the planned period of ownership.

Clearly the actual depreciation of an item of plant will vary from situation to situation. Given that there is no formula or standard calculation which provides for the ascertainment of the cost of the depreciation, it may be prudent for a contractor which owns plant that suffers depreciation, to consider having the plant independently valued at the start of the delay and again at the end so as to determine the actual depreciation incurred. The practical problem of course, is in recognising when such a delay situation is starting. Additionally the contractor must establish causation, ie that the cost of depreciation would not have been incurred or would have been recovered elsewhere but for the delay.

It should be noted that the McAlpine Judgement does not preclude the use of hire rates in ascertaining loss and expense in appropriate circumstances. Such circumstances would include situations where the contractor has lost the opportunity to hire out its own plant because of the delay; where the plant retained on site is itself hired; or where the contractor has had to hire plant for another contract to take the place of plant retained on the delayed site. In all these situations normal contractor records should readily identify the loss or expense.

The judgement of Judge Lloyd QC will be welcomed as useful authority by those defending claims. It will not be similarly viewed by those pursuing claims that lack substantiated and sustainable quantum. It again comes down to records and the management of information. A contractor that is experiencing delay and that has its own plant suffering depreciation retained on site would be well advised to ensure that records of its actual depreciation are maintained.