THE HUDSON FORMULA:

DEATH BY FOOTNOTE?

The first prize winning entry in the Hudson

essay competition 2020 presented to the Society of
Construction Law in London on 7th September 2021

Ronan Champion

September 2021

230

www.scl.org.uk
 THE HUDSON FORMULA:
DEATH BY FOOTNOTE?

Ronan Champion

Introduction
Just over a half-century ago the 10th edition of Hudson1 included a formula
that provided a means of calculating an amount representing a contractor’s lost
contribution to head-office overheads and profit as a result of delays to
completion of a construction project. The 14th edition of Hudson (‘H14’),
published in early 2020, faithfully reproduced that Hudson formula, as it had
come to be known.2

However, H14 added a footnote that stated that the percentages for overheads
and profit (on which the formula relied)
‘were originally those deducible from the Contractor’s tender. A more
modern assumption is to use the head office and profit contribution from
the contractor’s annual accounts’.3

After 50 years of usage and understanding that the Hudson Formula used
percentages derived from the contractor’s tender, this footnote introduced a
significant change.

One view is that the footnoted change to the Hudson formula in H14 is simply
part of an ongoing evolution in the calculation of loss of contribution claims in
construction delay cases. The change made, some might say, was a long time
coming and is hardly either controversial or surprising.

Another view, explored in this essay, is that the change is profound because
the ‘original’ Hudson Formula with its reliance on percentages derived from
tenders rather than company accounts is so well-known by construction
lawyers and professionals across the common law jurisdictions. If, as it
appears, the H14 Hudson formula is indistinguishable from Emden’s formula,
is the Hudson formula now redundant?

The H14 change is significant because selection of an appropriate percentage

for off-site overheads is often contentious. This arises because contractors
often price overheads at low levels (say 2 to 4%), but accounts may show
‘administrative expenses’ at 9%, 17%, or higher.4 Scrutiny of accounts is
1
Alfred Hudson and IN Duncan Wallace, Hudson’s Building and Engineering Contracts
(10th edition, Sweet & Maxwell 1970) page 498.
2
Robert Clay and Nicholas Dennys, Hudson’s Building and Engineering Contracts (14th
edition, Sweet & Maxwell 2020) page 792, para 6-071.
3
Hudson (2020), note 2, page 792 footnote 494.
4
See for example Walter Lilly v Mackay [2012] EWHC 1773 (TCC), [2012] BLR 503,
143 Con LR 79 where Lilly’s Contract Price showed a 4.5% additional for overheads and

1
rarely available unless the matter is to be heard before a court. Is it satisfactory
for adjudicators, dispute boards and tribunals to be charged with assessment of
large claims based on a few lines from an unidentified auditor?

This paper seeks to address two questions: First, does the H14 footnote lead to
the death of the Hudson formula? Second, might parties be better served by
contractual provisions aimed at providing a basis for calculation of
compensation that is simple and predictable – much in the way that liquidated
delay damages saves parties from the ravages of assessing an employer’s
actual delay-related losses – and is any such solution available?

What is the original Hudson Formula?

The formula as first published5 was:

Head office overhead and profit % x Contract Sum x Period of delay (weeks)
Contract period
(e.g. in weeks)

Put simply, this formula calculated the contribution to head office overheads
and profit that the project in delay was expected to earn, per week. It then
relied on the fiction that if the project was delayed, the start of any future
project would be delayed and that project would generate the same level of
contribution as the delayed project i.e. there was a direct correlation between
the project in delay and the notional future project such that for each week of
delay, the opportunity to earn a contribution on the next project was lost.

The Emden formula is essentially identical save that the head office overhead
and profit percentage was to be derived from the contractor’s accounts. The
Eichleay formula is convoluted. For the purposes of this paper, it is only
necessary to note that amounts for overheads to be used in that formula were
to be derived from the contractor’s accounts.6

A short word on terminology

Statutory accounts in the UK distinguish between direct costs and
administrative expenses. The former are costs incurred in performing work on
site, meaning they have been allocated to a specific project. The latter captures
indirect expenses, or overheads, that (for whatever reason) are not allocated to
a project within accounts. These are also termed head office overheads.

profit but the amount recovered, derived from annual accounts, was 9.6%: at paras [550]
and [553]. See also Norwest Holst Construction Ltd v Co-Operative Wholesale Society
Ltd [1998] EWHC Technology 339 at para 340 referring to Group company overheads of
a M&E subcontractor at 17.56%.
5
See note 1.
6
For the Emden Formula, see Alfred E Emden, S Bickford-Smith and Evelyn Freeth,
Emden’s Building Contracts and Practice, (8th edition, Volume 2, Butterworths, 1980)
page N/46, now Crown Office Chambers, Emden’s Construction Law (Looseleaf, Lexis
Nexis) from para 13.63; for the Eichleay Formula, see David Chappell, Building
Contract Claims (3rd edition, Powell Smith and Sims, Blackwells, 1997) page 133.

2
The terminology used by construction professionals is different using a three-
way split between direct costs on site, site overheads and head-office
overheads & profit. In a Bill of Quantities, the site overheads might be termed
Preliminaries7, a quantity surveying term derived from standard methods of
measurement of works. The contractor’s pricing might show the allowance for
head office overheads as a separate item. Equally, other parts of the
contractor’s pricing might include some allowances for overheads.

Some background
It is useful to review the context in which Hudson-type claims are made and
how context potentially influences how claims might be evaluated. Three
different circumstances are set out below.

First, take the example of a tunnelling contractor that owns one Tunnel Boring
Machine (TBM). This contractor can only work on one project at a time.
Every day the machine is working, and generating income, this provides a
contribution to the head office overheads. It is not difficult to see, in this
example, that a delay to a contract means the TBM will not be free to start on
the next project. In a stable market, a loss of opportunity to recovery
overheads for the period of delay can be assumed. An economist would say
the TBM is a scarce resource. If the scarce resource is held on project 1, it
cannot move to project 2. A critic might say that a second TBM could be hired
at short notice to overcome the delay issues. But on a closer view, TBMs
cannot be hired at short notice, and they need a team of engineers to direct
them, maintain them, etc. So the analysis of loss in the case of the TBM holds.

Second, consider the carpentry subcontractor. A delay on project 1 presents

little difficulty because additional carpenters are easily hired for short periods.
The scarce resource is probably the managing director and the limited number
of jobs he can oversee at any one time. So crucially, where the subcontractor is
free to move resources from job to job at short notice, it is likely to be difficult
to show there was a crucial scarce resource held at project 1 to the detriment
of the planned project 2. When lawyers talk of proving the facts of the delay,
this sort of detail becomes relevant.

Third, consider a civils contractor engaged to build a new port jetty overseas.
The work is to be done in a joint venture with a local contractor. If this project
is delayed, one view is that the civils contractor has no future contracts in that
country so no loss arises. Or that there is no scarce resource involved – the
scarce resource might be a head-office based design director or project
manager. It may be difficult to show that the relevant manager or team was so
dedicated that they could not pick up a future contract.

From the above a number of propositions follow. First, if there was no scarce
resource (like the TBM) held on project 1, then the likelihood of loss might
not arise at all, in that no opportunity to gain further work is lost. Second,

7
In the US, the term General Items is used. In some countries, the term ‘Preliminaries and
General items’ or ‘Ps & Gs’ is used.

3
there may be a large number of businesses for whom the simple example of
the scarce resource does not easily apply.

Troubled from the start

In 1970 the Court of Appeal handed down its decision in Peak v McKinney.8
Peak was the main contractor and claimed damages against its subcontractor
McKinney including £11,619 for loss of profit arising from a 58-week delay to
the Works alleged to be attributable to McKinney. Although not immediately
obvious from the judgment, the amount was claimed by calculating 9% of
Peak’s contract sum, dividing by the number of contract weeks to calculate an
overheads contribution per week.9 From the obiter remarks of Salmon and
Edmund Davies LJJ, their Lordships were not impressed by the formulation of
the loss of profit claim, remitting it back to the Official Referees along with
other matters for a retrial. Edmund Davies LJ harboured substantial doubts
that a claim should be formulated on this basis at all:
‘It was sketchily dealt with before the official referee, and I content
myself with saying merely that the plaintiffs will need to do some hard
thinking on how they should proceed to establish this item of damage’.10

Salmon LJ remarked that it might assist the future court seized of the matter to
have more than the evidence of an auditor; adding that an analysis of annual
turnover over several years might assist in forming an assessment of lost profit
which might have earned given Peak’s assertion that it was unable to take on
other work in that 58-week period.11

The 10th edition of Hudson (‘H10’) was published in the same year as the CA
judgment in Peak – 1970. Ian Duncan Wallace was the editor. He was also
junior counsel for Peak. H10 was the first edition of Hudson to include a
formula claim. It adopted the same formulation as used by the plaintiffs in
Peak that had been the subject of criticism in the Court of Appeal. Whilst
Duncan Wallace suggested in H10 that a suitable percentage for overheads
and profit might be between 3% and 7% (a far cry from the 9% gross profit
allowed in the original action), H10 made no reference to the use of
contractor’s accounts or evidence of an auditor which had been recommended
by the Court of Appeal in Peak. Rather, the explanation presented in H10 was
that contractors compile tenders by collating their prime costs and then add a
percentage to cover head office overheads and profit. It was that percentage
which was to be used in the Hudson formula, rather than the evidence of
auditors or accountants.

The resulting Hudson formula as published in H10 had two commendable

characteristics:

8
Peak v McKinney (1970) 69 LGR 1, 1 BLR 111.
9
With a contract period of 2 years that equates to c£200 per week and hence, for 58
weeks, the £11,619.
10
Peak v McKinney 1 BLR 111, page 126.
11
Peak v McKinney, note 10, page 122.

4
1. It was simple to use. One simply identified the overhead and profit
percentage addition from the contract documents and calculated the
amount based on the period of delay; and
2. It was price-based. It appeared to provide an approximation of the
amount that a contractor might reasonably be expected to lose by a
delayed start on its next project because it adopted an implicit
assumption that the overheads and profit percentage in the current
contract (as part of the contract sum) would be similar to those the next
one.

As noted above, the Emden formula is similar to Hudson save that Emden
utilises head office overhead and profit percentage derived from the
contractor’s accounts. The basis of the Emden calculation was therefore cost-
based, irrespective of contract pricing.

The question as to the source of the overhead percentage has bedevilled the
Hudson formula since its inception. Duncan Wallace’s view in H10 was that
the percentage was to be derived from contract pricing.

That view evolved.

Writing in 1986 he noted it was the ‘return obtainable elsewhere’ that was
being calculated, but this ‘leaves unclear the particular percentage return to be
used’. But his summary view was that
‘the object of all these formulae is to reach a fair estimate of a particular
contract organisation’s profit and fixed overhead potential earning
capacity at the beginning of the period of delay’12.

That reference to ‘potential earning capacity’ was an unmistakable nod to use

of percentages evident from tender submissions, not from accounts.

This approach was echoed in the 11th edition of Hudson (1995) as

‘the sort of profit and fixed overhead recovery combined which a
delayed contract organisation … might be expected to earn in the market
had it been free to demobilise and leave the project on time’.13

The reference to ‘in the market’ might be read as referring to amounts derived
from tender submissions. But Duncan Wallace conceded that contract pricing
contained a ‘possibly relatively arbitrary percentage’ adding
‘There seems little doubt that where full accounts are available over a
period of, say, two or three years during and prior to the delayed
contract, reasonable precision might be expected in determining both the
extent of the fixed overheads themselves and the average margins of
both profit and overhead recovery actually obtained by the contractor’s
enterprise as a whole over the period.’

12
IN Duncan Wallace, Construction Contracts: Principles and Policies in Tort and
Contract (Sweet & Maxwell, 1986) page 132, para 8-36.
13
IN Duncan Wallace, Hudson’s Building and Engineering Contracts (11th edition, Sweet
& Maxwell, 1995) page 1076, para 8.182.

5
Despite this position, no formal change to the Hudson formula was made in its
11th, 12th or 13th edition.

Against that background, it is useful to consider the footnote in H14. It notes

of the Hudson formula that:
‘percentages were originally those deducible from the Contractor’s
tender. A more modern assumption is to use the head office and profit
contribution from the contractor’s annual accounts, sometimes referred
to as a fair annual average.’14

No source or explanation for this wholesale change in emphasis is supplied.

Nor is one obvious from caselaw, changes to contract forms, or textbooks. The
consequence is twofold: first the Hudson formula is rendered indistinguishable
from Emden’s formula. That means that whichever formula is adopted –
Hudson, Emden (or Eichleay) – overhead percentages need to be derived from
the contractor’s accounts. Duncan Wallace had been careful to maintain a
qualification of use of the accounts. He envisaged they may be of use where
full accounts are available. It appears that qualification is now lost. Second, if
the contractor provides any accounts – even just a one-page summary – it
appears the burden rests with the employer to persuade a tribunal that the
accounts do not provide a ‘fair annual average’ and that a better alternative is
available. That may be difficult if the only available evidence is the
contractor’s contract sum analysis.

Price vs cost based approaches

Use of published accounts as a source for contractor’s overhead and profit
amounts ought in principle to reflect costs in fact incurred. As with any
assessment based on costs, identification of relevant costs is fraught with
difficulty. Reliance on accounts can result in claims at apparently extravagant
levels.

Take for example Kier, the well-known UK construction group. In 1988 Kier
Construction’s accounts showed overheads and profit at 2.5% of turnover.
That was typical at the time: accounts for 1984 and 1985 showed 3%. In 2018,
the accounts for the Kier Southern were at around 11%. Kier Group plc’s 2019
accounts show a gross profit of about 10%. For contractors with complex
design or financing arrangements, as can occur in process engineering firms,
overheads at 20% might be expected. For specialist contractors that have a
central manufacturing division, complex design and low-cost construction the
percentage may be higher. In Euro Pools plc v RSA, overheads for a specialist
pool firm were running at over 40%.15 The reasons why contractors might
price work with overheads at 2% despite their accounts showing 10% or more
should not be interpreted as low-cost pricing but has more to do with
approaches to pricing. In practice the costs of some staff based in head office
may be allocated to projects, as can occur particularly with design managers,
temporary works engineering, in-house lawyers and more.

14
Hudson (2020), note 2, page 792, footnote 494.
15
Euro Pools plc v Royal and Sun Alliance Insurance plc [2018] EWHC 46 (Comm), paras
220 to 225.

6
When a contractor’s contract documents show an addition of 4.5% for
overheads and profit within the contract prices, but its annual accounts show
overheads and profit at 9% of turnover, the contractor’s selection of 9% (and
hence the Emden formula, as occurred in Walter Lilly16) to calculate a lost
contribution amount should not be a surprise. Discrepancies of this nature are
commonplace.17 Given the 2020 change to the Hudson formula pointing to
reliance on contractor’s accounts, the question arises whether contractor’s
published accounts are a reliable source to inform a tribunal of the overhead
percentage in its assessment of a lost opportunity claim.

The information that can properly be derived from published accounts raises a
number of issues:
1. What evidence is available? Statutory accounts typically show
overheads (administrative expenses) at summary level. At one extreme,
the only evidence available may be an accounts summary page and/or a
statement of an auditor18 confirming amounts are correct. Summary
pages are of little assistance in relation to one specific location or
business where the accounts are at Group level19 covering multiple
subsidiaries across multiple countries.
2. Is there an opportunity for review of underlying account details? A
contractor’s accounts may be available for inspection so that one can
assess the categories of expense included in overheads. That may be
significant where the entity has diverse operations and large exceptional
items arising from litigation, settlements, amalgamations and the like.20
3. Are accounts available for the relevant construction company? Where
work is carried out by a local subsidiary, the provision of group accounts
that covers a collection of business divisions and business interests
across several countries is unlikely to provide a reliable guide to the
level of overheads relevant to the subsidiary.
4. Do the overheads (administrative expenses) in statutory accounts include
items of cost that were allocated to projects and hence also recovered as
prolongation costs?
5. Are amounts in accounts reliable as a guide to costs incurred for the
project in question? Where a substantial difference is evident between an
overhead allowance in contract prices and those evident from accounts,
16
Walter Lilly v Mackay, note 4.
17
For a good example of this, see Walter Lilly v Mackay, note 4, paras 550 and 553.
18
For an early example of this, see Peak v McKinney, note 10, page 122 (Salmon LJ).
19
See for example Norwest Holst Construction Ltd v Co-Operative Wholesale Society Ltd,
note 4, a case concerning appeals from two awards of an arbitrator, referring to valuation
of work carried out by a M&E subcontractor. The judgment notes the arbitrator’s
findings which included: ‘I refer to the evidence from Mr. David Hampson, [CWS's]
Accountant, which I accept. I am aware that [CWS's] Company is part of a larger Group
of Companies and I appreciate that it is not possible to separate the Overhead costs of the
mechanical and electrical sections from the rest of the Group. I ... accept [Mr. Hampson's
evidence] that the Group Overheads … was … 17.56%’ at para 340.
20
In Fluor v Shanghai Zhenhua Heavy Industry Co Ltd [2018] EWHC 490 (TCC), there
was sufficient evidence available seemingly for one expert to attempt an allocation of
head office overhead costs to the particular project in contention, making some large-
scale adjustments.

7
 why does that difference arise. A higher percentage in accounts may
indicate large scale design, manufacturing, process engineering and
licencing functions within a group head office not relevant to simple
construction works of a subsidiary.
6. What is the relevance, if any, of contract pricing? If overheads are
shown at 2% in a contract sum analysis but 12% in statutory accounts,
does this signal a level of recovery that was beyond the parties’
expectations when the contract was formed. This point can arise in a
significant way with joint venture contracting groups undertaking single
projects outside its usual home markets.

These points arise because contractors treat overheads in various ways. For
building projects, one might reasonably expect preliminaries at 12.5% of a
contract sum and head office overheads and profit at 2.5%. That points to
overheads overall at about 15% but only the latter 2.5% is relevant to a
Hudson-type calculation.21 Further, contractors often show tender price build-
ups with an addition for head office overheads and profit at 2 to 3%. Equally,
RICS cost analyses of actual projects repeatedly show percentages at about
these levels.

The main difficulty with reliance on contractor’s accounts is that different

contractors account for overheads in different ways. On a large engineering
project, the entirety of the group’s design and manufacturing costs may be
allocated to a project. A very small company may take the opposite approach,
holding all costs for these functions centrally. This helps explain why on a
north-sea wind turbine project the head office overheads were expected to be
only 2%,22 but a small specialist contractor that designed, manufactured and
installed movable floors in swimming pools had overheads at 44%.23 The
second, and related difficulty with contractor’s accounts is that interpreting
what part is relatable to the project may be very contentious, particularly when
no disclosure of underlying account transactions is available. When a tribunal
is left to grapple with competing views of experts as to how accounts should
be interpreted, there is a risk that the finding will be substantially lower than
the claimant ever expected. In Norwest Holst the arbitrator reduced the
overhead amount in accounts, awarding only one fifth of the amount. As one
TCC judge put it: ‘I am not prepared to pluck a figure out of the air.’24

Today, under either Hudson or Emden’s formula, the Employer’s potential

liability as regards loss of overhead and profit relies on interpretation of
contractor’s accounts. Reliance on contractor’s accounts in this regard is
scarcely satisfactory for any party other than a contractor given the issues
raised above. Reliance on accounts can result in percentages that exceed

21
See for example AECOM, Spon’s Architects’ and Builders’ Price Book 2016 (CRC
Press, 2018) page xxxi.
22
See Fluor v Shanghai Zhenhua Heavy Industry Co Ltd [2018] EWHC 1 (TCC), 178 Con
LR 210, para 452.
23
Euro Pools v Royal and Sun Alliance Insurance, note 15, paras 220 to 225.
24
Per Edwards-Stuart J in Fluor v Shanghai Zhenhua Heavy Industry Co Ltd, note 20 (16
March 2018), para [32].

8
contract pricing by a large margin.25 A reluctance to disclose accounts is
apparently one reason why use of the Emden in UAE is not as prevalent as
elsewhere.26 Some contractors apparently preferred the Hudson Formula in its
original form, based on prices, not costs derived from accounts. And where
parties do have access to accounts, are they now driven to a forensic review,
making adjustments of the detailed nature seen in Fluor?

If parties are left to rely on contractor’s accounts to determine the level of

overheads, one significant question remains: does the measure of damage fall
to be adjusted by whatever percentage may be evident from the contractor’s
tender? No discussion of the point appears in recent judgments. Nor, it seems,
has there been any debate as to the merits of price versus cost in determining
the amount of the loss via a formula. The point has been raised in outline in
three ways.

First, under the SCL Protocol the use of the Hudson formula is not supported
‘because it is dependent on the adequacy or otherwise of the tender in
question’.27 Quite why adequacy should be determinative is not explained. It
should not matter that a contractor consistently tenders with overheads at 2%
or 20%. The underlying tension may be one of concern that the tendered
amount does not mirror the level of overheads likely to be incurred in fact as
evident from accounts. An alternative view, however, is that if a contractor
consistently tenders with overheads shown as being 2%, is this not good
evidence of the amount likely to be lost if the successor contract is not
secured?

Second, the SCL Protocol suggests that the result of the use of one formula is
checked against others in order to avoid an anomalous result.28 The subtle
implication drawn is that the anomalous result should not be accepted. That in
turn suggests some equivocation; perhaps the result of Hudson is to be
preferred after all, as might occur where say a contract has overheads priced at
2% but the percentage evident from accounts is considerably higher. In fact,
what the Protocol hints at is that a result based on price (per Hudson) might
limit or be better evidence than a result derived from accounts (per Emden).

Third, in a passage cited in Norwest Holst, Duncan Wallace explained the

Hudson and Eichleay formulae as offering a reasoned calculation of the
damages envisaged by Asquith LJ as being recoverable under the first branch
of the Hadley v Baxendale rule in the Victoria Laundry case.29 That raises an
interesting point: if the overheads evident at tender stage fall under the first
limb, might damages claimed at a much higher level and based on accounts be
too remote?

25
Walter Lilly v Mackay: note 4. See for example [2012] EWHC 1773 (TCC) where Lilly’s
Contract Price showed a 4.5% additional for overheads and profit but the amount
recovered, derived from annual accounts, was 9.6%: at paras 550 and 553.
26
C Gibson, ‘Damages and Delays: What Contractors are Due when Partnerships Sour’,
(2015) ME Construction News (28 December 2015): meconstructionnews.com.
27
SCL Delay and Disruption Protocol, (2nd edition, Society of Construction Law, 2017)
para 2.10.
28
SCL Delay and Disruption Protocol, note 27, para 2.12.
29
Hudson, 11th edition, note 13, page 1074, para 8.179.

9
One might conclude from the above that a conservative approach to assessing
loss via formulae might be to take the lower of the results from the original
Hudson and Emden formulae. The rationale for taking the higher result has not
been articulated.

Some alternatives to Hudson

Given the uncertainties involved with accessing or interpreting contractors’
accounts, it is instructive to review some contractual provisions for payment of
additional amounts in respect of off-site overheads. Both examples below,
from the NEC forms and from Ireland’s PSC form,30 rely on percentage uplifts
to other delay-related amounts. In both cases, the percentage is provided by
the contractor as part of its tender submission.

First, a percentage for head office overheads might be priced by contractors at

tender stage for inclusion within the agreement as an agreed percentage. Under
NEC3 and NEC4 the effect of Compensation Events (which included delay
events) is assessed on the basis of additional site-based costs incurred within
or relating to the working areas (as defined) plus a Fee.31 The Fee is a
percentage provided by the contractor as part of the tender submission.32 The
result is that claims for head office overheads and profit do not need to be
made and are not subject to argument. Some care is required to avoid
contractors designating large parts of its head office as a ‘working area’.

Second, the parties could agree the percentage to be used for overheads and
profit, possibly with a default capped amount. The recently published PSC
standard forms in Ireland provide for compensation to contractors of delay-
related costs in either of two ways: a pre-agreed all-in rate covering site and
off-site overheads and profit; or a provision for payment of additional
expenses unavoidably incurred by the contractor, plus
‘The Contractor will in addition be entitled to 10% of the expenses to
compensate it fully for all entitlements by way of profit, loss of profit
and contribution to off-site overheads’.33

Although similar to the NEC provision, this form stipulates the off-site
overhead percentage as being 10%. That percentage appears to be low, the
equivalent of about 1% of the contract sum on a typical building contract.

Under the NEC forms, the addition of the Fee applies to any Compensation
Event, whether additional work, variation or delay-related matter. Under the
Irish PWC form, the 10% addition is specifically delay-related. In either case,

30
Engineers Ireland, Society of Chartered Surveyors Ireland and the Construction Industry
Federation, Private Sector Contract (PSC): Conditions of Contract for Private Sector
Building and Engineering Works Designed by the Employer (2020).
31
NEC3 or NEC4, clause 63.1, Defined Cost plus Fee.
32
In NEC3, Contract Data, Part two the contractor provides the direct fee percentage and
the subcontracted fee percentage which together are components of the Fee: clause 11.2
(8). Under NEC4, Clause 11.2 (10) the Fee comprises a single fee percentage provided
by the contractor.
33
Conditions of Contract for Private Sector Building and Engineering Works Designed by
the Employer – Private Sector Contract (PSC) Clause 10.7.1.

10
such an allowance for additional overheads might appear odd because
additional overhead costs will not always be incurred; a contribution to
overheads will not always be lost. Going the other way, it is common practice
(and has been for over 30 years) to value additional work under JCT forms on
the basis of cost plus an allowance (at the contract percentage) for
‘preliminaries’. The effect of adding the Fee under NEC is essentially the
same, albeit under NEC forms it is adding an amount for off-site overheads.

Criticisms of fee-type additions may be missing a bigger point. In the case of

NEC, the provision for a Fee has been in place since the first editions, so for
over 25 years, and amended in NEC3 and NEC4. The Irish PWC form was
published for the first time in 2020, drafted by a cross-industry group
(Engineers Ireland, Society of Chartered Surveyors Ireland and the
Construction Industry Federation) based on a government standard form for
public works that did not include the 10% provision. Inclusion of a fee-type
addition in these forms is consensual; clearly users enjoy contractual
provisions of this nature, even if they the provisions do not always accurately
compensate for losses the contractor will make. The certainty of the provision,
and consequent avoidance on contention later, is itself of value.

Neither can it be said that the provisions noted above are perfect. Pre-pricing
of a fee within a tender submission risks abuse by insertion of high
percentages (and, in the case of NEC3 or NEC4, of staff and plant rates), a
practice encouraged by some claims consultants.34 That risk can be managed
by tendering authorities evaluating tenders where those rates and prices are
weighted within a contract sum or reviewed under an evaluation matrix.
Further, difficulties can arise in distinguishing between costs claimed as site-
based and those under the percentage addition, particularly when part of the
head-office staff are said to be partially site-based or, per NEC, in the
Working Area. The adoption by the Irish PWC form of a flat 10% addition
may reduce contention on that point.

The fee-type addition provides the simple formula for calculation, mirroring
the simplicity that was once available via the Hudson Formula. They provide a
mechanism that can be used without significant disputes. If the JCT and
FIDIC forms can provide in advance the percentage for (say) retention, why
not off-site overheads and profit too, for use as a percentage addition to other
prolongation costs? NEC3 and other forms have shown there is merit in
providing contractual mechanisms to address issues as they arise.

Conclusion
The Hudson formula and Emden formula formerly provided two different
bases for evaluation of lost overhead contributions. Hudson was price based;
abstraction of overheads from a pricing document risked distortion arising

34
See, for example, this ebriefing: ‘This is an opportunity for the contractor to maximise
his gain by inserting robust staff rates (as well as other cost’s mainly for People and
Equipment) in the Contract Data: Part 2. These rates can then be used in quotations for
compensation events without contest from the Project Manager’s team which could
enhance recovery.’: DGA group, Q2 2017: DGA-group.com.

11
from opportunistic pricing. Duncan Wallace concluded 35 years ago this may
be unreliable and abstraction of overhead levels from contractor’s accounts
may be preferable.

The Emden formula was cost based; it relies on abstraction of overhead levels
from accounts. The footnote in H14 means that Hudson is now
indistinguishable from Emden: it appears to be conceded by the authors of
Hudson that the Hudson formula has no place in the modern world.

This means that for any formula based claim the parties have to rely on
contractor’s accounts. But those accounts may be unavailable, in summary
form or compiled at group level and wholly unrelated to where the delayed
project was carried out. It does not provide a reliable basis for establishing the
actual loss that has been suffered.

Drafting committees of standard forms might reflect on whether a contractual

mechanism for recovery of off-site overheads might better serve its users by
providing for certainty. The use of a simple percentage Fee under NEC3 and
NEC4 is instructive, removing the need for a formula-based claim altogether.
The provision of a default or capped percentage, evident within Ireland’s new
PWC form, intuitively points towards a non-contentious solution. Perhaps this
is an Irish solution to a very English problem.

Ronan Champion is a Chartered Surveyor and partner of Champion

Pearce LLP. He is a former chair of the Society of Construction Law.

© Ronan Champion and Society of Construction Law 2021

The views expressed by the author in this paper are theirs alone, and do not
necessarily represent the views of the Society of Construction Law or the editor.
Neither the author, the Society, nor the editor can accept any liability in respect of
any use to which this paper or any information or views expressed in it may be put,
whether arising through negligence or otherwise.

12
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