This Scottish decision is one of the few outside the United States that addresses the issue of a contractor’s loss of head office overhead and profit caused by delay on a construction project, and the appropriate formula for calculating the damages.

Scottish court calculates contractor’s damages for loss of overhead and profit

by Paul Sandori

Beechwood Development Company (Scotland) Ltd. v. Stuart Mitchell

Construction delayed as “burn” or small stream found not to be in the place shown on the survey • delay of ten weeks in obtaining building warrant was a reasonable estimate of delay attributable to surveyor’s fault • developer claimed for damages for direct site costs as well as reduction in the contribution to head office overhead and profit • loss of gross profit calculated using “Hudson Formula” • accountancy evidence not required

This Scottish decision is one of the few outside the United States that addresses the issue of a contractor’s loss of head office overhead and profit caused by delay on a construction project, and the appropriate formula for calculating the damages.

Westpoint Homes Ltd., a residential developer, and Beechwood Development Company (Scotland) Limited, a builder, had common management, and, since the early 1990s, Beechwood’s sole business was to perform construction contracts for Westpoint.

In general, Beechwood carried out only one contract at a time. The aim of both companies was for Beechwood to move its workforce to a new contract as soon as the prior contract had been substantially completed.

In 1994, Westpoint made an offer to purchase a building site in Scotland subject to the obtaining of suitable planning permission. At the same time, Beechwood engaged a land surveyor, Stuart Mitchell, to provide a survey of the property.

On the basis of Mitchell’s survey, Westpoint had plans prepared for a housing development and applied for planning permission. It was granted on March 23, 1995, and Westpoint then applied to the local authority for a “warrant” to build two apartment buildings. This timetable was in accordance with Westpoint’s practice to apply for the warrant only when, but as soon as, planning permission for the development had been granted.

In January 1995, a price for the construction works was fixed between Westpoint and Beechwood. Pre-contract progress meetings took place in May and early June attended by Maxwell Design Consultants (the architects) and Walton Garden & Partners (the engineers).

Just before work was to start, it was noticed that a “burn” — i.e., a small stream — was not in the place shown on the survey. A new survey by Mitchell showed that it was impossible to construct one of the apartment buildings in the position shown on the plans.

Westpoint tried to buy some adjacent land that would allow it to divert the burn and preserve the original site plan, but failed. Several weeks were spent in pursuing this ultimately unsuccessful course.

An alternative proposal was then pursued. This involved moving the footprint of the second building. The planning official supported this move. A new planning application was submitted on August 18, 1995. Planning permission was granted on September 26, 1995 and the building warrant on November 26. Beechwood was then finally in a position to build.

Mitchell accepted that his erroneous survey involved a breach of contract and a breach of his duty of care. The central issues before the court were whether Beechwood had sustained any loss by reason of the surveyor’s error and, if so, the measure of that loss.

The parties agreed that the appropriate approach was to determine whether and, if so, for how long, the building warrant had been delayed by the erroneous survey. That exercise involved:

(a) an analysis of what actually happened between the date of the application for warrant (March 23) and the date when that application was ultimately granted (November 26), and

(b) an assessment of what would have happened if the problem with the burn had not occurred.

It was not disputed that, if the burn had been accurately plotted by Mitchell in October 1994, the planning application lodged shortly thereafter would have shown the proposed development with a layout in the form as ultimately approved in September 1995 and that the requisite planning permission for such a development would have been granted by March 1995.

The application for a building warrant presented on March 23 was accompanied by architectural drawings. About 14 days later the engineering drawings were also submitted. Beechwood’s application was lodged on April 11, 1995 and joined a queue to await detailed consideration in chronological turn. It seemed likely that it was June before the application reached, in any meaningful sense, “the front of the queue.”

The emergence of the burn problem necessarily diverted the attention of Westpoint/Beechwood and their advisers away from the obtaining of the building warrant to other matters. The uncertainty as to whether land could be acquired to allow the second block to be built in the original location and, later, whether planning permission could be obtained to build that block in a different location, rendered the building warrant for the meantime superfluous. It was nonetheless important that the application should not lose its place near or at the front of the queue.

There was evidence that a deliberate decision was taken by Westpoint and implemented by the architects to “take the foot off the pedal” in relation to the application, providing only such information to the building officials as would keep the application in place until the other problems had been resolved.

The drawings for Building 1, completed in July, were ultimately delivered to the plan examiner by the architects on August 8. The drawings for Building 2 were delivered some time before September. Matters proceeded in a regular manner to the grant of warrant on October 26.

In the meantime, matters had advanced on the planning front. By September 19, Westpoint was sufficiently confident of a successful outcome to the new planning application to instruct the architects to progress the building warrant as expeditiously as was practicable. The application for building warrant was ultimately granted on October 26, a little more than seven months later. This was an unusually long time for such an application.

The court was satisfied that delay in obtaining the building warrant was to some extent caused by the fault of Mitchell. The issue then was the extent of that delay. The court concluded that, if it had been possible in June to usefully advance the application, then Westpoint would have done so. The plan examiner would have been able to issue his schedule about July 4, some ten weeks prior to the date when he did actually issue it (on September 12). Matters would then have proceeded at about the same pace as in fact was maintained after September 12 and would have resulted in the grant of warrant on approximately August 17.

“That delay of about 10 weeks is, in my view, a reasonable estimate of the delay attributable to Mitchell’s fault,” decided Lord Hamilton.

Beechwood’s claim for damages consisted of two main items, namely (a) direct site costs, and (b) a reduction in the contribution to head office overhead and profit.

The claim for direct site costs was comparatively simple, and comparatively small. Beechwood had unproductively paid for men and services during the period when it had possession of the site but was unable to carry out work for which a building warrant was required. The total direct site costs amounted to about £5,900.

Overhead and profit were a much more difficult issue. Beechwood testified that the delay resulted in a reduction of its turnover which otherwise would have been earned in the financial year ending on March 31, 1996. It did not generate turnover from the resources devoted to the contract in the period of the delay. That turnover would have contributed to recovery of Beechwood’s head office overhead (which was incurred in any event) and to the generation of its profit in that financial year.

In the delay period, those resources would otherwise have been able to generate turnover from other activities, namely work at another site which was delayed as a result of that overrun.

Lord Hamilton decided that there was no practicable means of assessing this loss other than by the application of a formula utilizing the percentage of Beechwood’s turnover represented by overheads and profit.

The claim under this head was essentially one for reimbursement to Beechwood of “gross profit” which would have been made had Beechwood not, as a result of Mitchell’s fault, lost ten weeks of effective working. Under gross profit Beechwood meant loss of contribution to overheads and net profit, gross profit going first to meet the overhead expense and the balance representing net profit.

Beechwood’s accounts ending on March 31, 1996 showed a dramatic reduction in gross profit as between that financial year (£9,542) and the preceding year (£200,607) which was attributed to loss of revenue in the later year. This convinced the court that Beechwood did sustain a loss by reason of its inability for a period in 1995 to generate income.

Lord Hamilton felt that he did not require expert accountancy evidence:

Provided the pattern of ordinary trading is established, together with relative information as to the finances of the company, the court may be in a position to make an evaluation.

The approach proposed by Beechwood and accepted by the court was the so-called “Hudson Formula” (which first appeared in the 10th edition of Hudson’s Building and Engineering Contracts). A slightly simplified explanation of the calculation follows.

Beechwood’s accounts for the years 1994 and 1995 showed respectively turnover of £1,176,723 and £1,707,483, with gross profit of £207,643 and £200,607. This translated into a gross profit percentage of 17.65 per cent and 11.75 per cent. The results for 1993 showed a turnover of £289,760 and gross profit of £29,492 or 10.18 per cent.

The contract sum for the delayed project was £1,383,988. An average taken over the previous three years (1993 to 1995) produced a gross profit of 13.19 per cent. The court then used this percentage to deduct the built-in overhead and profit from the contract sum: 1,383,988/1.1319 gave a net contract sum of £1,222,712.

This net contract sum was multiplied first by the average percentage of 13.19 per cent to obtain the gross profit of £161,275. This could be considered the gross profit Beechwood could have obtained from the delayed project. Dividing this figure by 52, the number of weeks of contract time, the court obtained the weekly rate of gross profit contribution of approximately £3,101.

Mitchell caused a delay of ten weeks during which Beechwood could have made a gross profit of ten times £3,101 or £31,010.

The total amount awarded to Beechwood for direct costs and gross profit, as well as other damages not discussed in this summary, was £60,215 plus interest.

Outer House, Court of Session (Scotland)

Lord Hamilton

February 12, 2001