Loss of profit is one of the most frequently claimed and most frequently contested heads of damages in construction disputes. The contractor may claim loss of profit in respect of work that was anticipated but never carried out, in respect of head office contribution lost during a period of delay, in respect of alternative work that the contractor was unable to take on, or in respect of profit that would have been earned on a project that was wrongfully terminated. Each of these claims is governed by different principles and requires different evidence.
The starting point is the contractual or legal basis of the claim. Loss of profit may be claimed under the contract — for example, where FIDIC clauses entitle the contractor to 'Cost plus reasonable profit' in defined circumstances — or as damages for breach of contract. The basis of the claim affects both the principles governing recoverability and the methodology for quantification.
Where loss of profit is claimed as damages for breach of contract, the principles of remoteness, causation and mitigation apply. The claimant must show that the loss was within the reasonable contemplation of the parties at the time the contract was made (the rule in Hadley v Baxendale, recognised in modified form in many civil law systems), that the loss was caused by the breach, and that the claimant took reasonable steps to mitigate the loss. Each of these issues is fertile ground for dispute.
The quantification of loss of profit on uncompleted work typically proceeds by reference to the profit margin that would have been earned on the uncompleted scope. The profit margin may be evidenced by the contractor's tender (which may show the planned profit margin on the project), by the contractor's audited accounts (which may show the historic profit margin earned on similar projects) or by industry data (which may show the typical profit margin in the relevant market). The choice of methodology depends on the evidence available and the nature of the claim.
Loss of profit on alternative work (sometimes called 'opportunity cost') is more difficult to quantify. The contractor must show not only that alternative work would have been available, but that it would have taken on that alternative work but for the deployment of resources on the prolonged or terminated project. The evidence typically includes records of opportunities considered and declined during the relevant period, evidence of the contractor's bidding success rate, and evidence of the typical profit margin that would have been earned.
Tribunals are generally cautious about loss of profit claims because of the speculative element inherent in any forecast of what might have happened. The contractor who claims loss of profit must present the case with rigour and transparency, acknowledge the limits of the evidence, and provide the tribunal with the materials needed to make an informed judgement. Overstated or poorly evidenced loss of profit claims can damage the credibility of the entire claim.
Our quantum experts at Construction Expert Witness have addressed loss of profit claims on disputes ranging from small subcontract terminations to major termination of EPC contracts. We apply the appropriate methodology for the case, draw on the available evidence, and present the analysis with the rigour that tribunals expect.