Introduction

In 2010 I ventured a general article on construction contractors’ overheads claims (“FM1”) ^[1]Mastrandrea, F, The Evaluation of Contractors’ Overheads Claims in Construction, [2010] The International Construction Law Review, 299.

This article^[2]For a more comprehensive review of this topic, see Mastrandrea, F, Does the Hudson formula have a future? , to be published in (2024) Const. L.J. Issue 3. briefly revisits a limited area covered in FM1, namely one of the appraisal methods for overheads claims which appears first to have been formally set down in Hudson, Building and Engineering Contracts, Sweet & Maxwell, 10^th Edition, 1970, at page 599, whose editor Mr. Duncan Wallace described it as the formula ‘usually used’ by contractors for the purposes of assessing the loss due to delay in completion, thenceforth labelled “the Hudson formula”^[3]The formula is: HO % in Contract Sum/100 x Contract Sum/Contract Period x Period of (Compensable) Delay.

As claimants using the Hudson formula often pursue overheads and profit together (sometimes termed ‘gross profit’) as part of a composite claim, the narrative here can equally apply to the profits component of claims advanced in that way.

A review of the caselaw and literature since 2010 suggests that the debate in this area has not much developed or been the subject of any significant comment.^[4]For an exception see The Society of Construction Law Paper 230, September 2021 by Ronan Champion, entitled The Hudson formula: Death by a Footnote?, which sought to identify whether the current … Continue reading

The Hudson formula: origins

As noted in FM1, the Hudson formula was at the time of the 10^th Edition the common ex-ante form of claim. It relied on the allowance for overheads and profit said to have been made by the contractor in its pricing of the particular project which was the subject of the claim; the claim sought to use that allowance as the basis from which to mimic the damage/ loss due to delay for which the other contracting party^[5]The method is not restricted to claims by contractors against employers, but can equally be deployed in analogous circumstances in sub-contract and other claims, whether for or against the relevant … Continue reading was allegedly responsible (based, essentially, on the fiction of the contractor being deprived of the opportunity of securing a contract of equivalent price as the original from which to earn a contribution to its overheads costs during the delay period).

Later developments in the formula

I suggested that the formula advanced at the time of the 10th Edition was not in any sense original. It was nevertheless surprising given further developments in the interim for Mr. Duncan Wallace in his subsequent Construction Contracts: Principles and Policies in Tort and Contract, Sweet & Maxwell, 1986, paragraph 8-29 to have asserted that no challenge had ever been made to the Hudson formula.^[6]By that date State of South Australia v. Fricker Carrington Holdings Pty Ltd [1985] SASC 8661, for example, had been decided in which, absent proof of agreement between the parties that it should be … Continue reading

The editors of Hudson did however move to the position to be found in the 14^th Edition, in 2020, as follows:

‘The head office overheads and profit percentage applied to the Hudson formula were originally those deducible from the Contractor’s tender. A more modern assumption is to use the head office and profit contribution deducible from the Contractor’s annual accounts sometime referred to as “a fair annual average”’^[7]Hudson, Building and Engineering Contracts, Sweet & Maxwell, 14^th Edition, 2020, paragraph 6-071, footnote 494..

In that form, it has a close resemblance to Emden’s formula.^[8]The most common Emden formulation is as follows: h ÷ 100 × c ÷ cp × pdWhere h = the head-office percentage (normally arrived at by dividing the actual total overhead costs of the organisation as … Continue reading

Is Hudson now dead?

It should be noted first of all, that the original Hudson formula had garnered some, albeit limited, judicial support, particularly at first instance.^[9]Most notably by O’Leary J in the Supreme Court of Ontario in Ellis-Don Ltd. v. The Parking Authority of Toronto (1978) 28 BLR 98. Furthermore, there has been no outright rejection of the Hudson formula in other jurisdictions.^[10]See, for example, in India the Supreme Court decision in McDermott International Inc. v. Burn Standard Co. Ltd. and others [2006] 11 SCC 181, in which it was held that there was nothing in Indian law … Continue reading

There is no doubt that a claim that relies upon an allegation that an allowance was made as a component of the original price prompts the following obvious questions (see FM1):

• was any such allowance in fact made? and, even if it was;
• was the price capable of sustaining such an allowance?

Estimates (including those that go into pricing tenders for construction work) are bound, to varying degrees, to be subjective.

Further, it is important to recognise that the Emden formula has its own unique issue. Whilst the unadulterated Hudson is internally consistent,^[11]In that all the component parts are equivalent: thus in Hudson all the variables are forward-looking; in Emden by contrast they are in part forward-looking and in part backward-looking. Emden is not. An equivalent issue would arise with a reconfigured Hudson. A further question would emerge where the actual percentage for overhead and profit was different from the percentage allowed in the original contract sum, namely whether the original contract sum could any longer be the appropriate basis for the formula claim.

Finally, there is a consideration, neither clearly articulated nor sufficiently explored to date, which may anyway justify the continued separate existence of an unadulterated Hudson formula, and in respect of which use of the organisation’s average actual overheads (and, in the case of composite claims, profit) would be inapposite because such an average would either materially overstate or understate the likely loss arising from delay. This would be so, for example, where – at one end of the spectrum – the contract in question is, for the particular contractor, of an unusual type (and could, for example, be serviced only by use of the particular resources and skills deployed to it), or one with an untypically high risk profile, or – at the other end of the spectrum – a contract which is for the particular contractor untypically mundane, or low risk.

Conclusion

Given that overhead and profit claims continue regularly to appear, and often form one of the largest heads of contractors’ claims for construction projects in distress, their appropriate evaluation remains a topic of significant importance.

The Hudson formula is and remains the single, widely recognised, ex-ante measure of overhead and profit damages or loss due to delay in completion.

Introducing a backward-looking component into a reconfigured Hudson formula generates material inconsistencies in that – as with Emden – this would be to seek in the same breath to use components of a claim which are forward-looking with another component which is backward-looking. It additionally raises the question whether the original contract sum can in such circumstances then appropriately be used in the formula. Such a hybrid cannot properly be regarded a Hudson formula claim, which as conceived was wholly forward-looking. It may also fail to take account of the peculiarities of the contract which is the subject of the claim which, as noted, may be especially unusual, risky, or mundane and which may on any such score justify retention of the Hudson formula in its unadulterated form.

Boiled down to essentials the Hudson formula has two serious drawbacks:

1. in common with its siblings Emden and Eichleay, it purports to make compensable project time the paramount operative component^[12]See FM1, from page 313. in the measure of damages/loss, when experience shows that overheads for particular projects are not typically priced in that way, and construction organisations’ actual overheads are not recorded or allocated by them in that way.
2. uniquely, it seeks to measure damages/loss through contract pricing of overheads. Adopting that approach exposes such claims to two further challenges, namely that:
   (a)the overheads allowance contended for as part of the contract sum cannot without more be shown in fact to have been made (resolved by way, most persuasively, of pre-contractual disclosure); and
   (b)the contract price was viable in the sense that it would have been able successfully to carry that level of overhead (resolved by way, most persuasively, of the contractor showing that its contract price was capable of sustaining such an allowance).

The real issue with the use of the Hudson formula approach is whether, if such a claim is to be entertained at all, and, leaving to one side the abiding shortcoming that it is premised on the basis of project duration (and other matters raised in FM1), overheads damages/loss can properly be measured by reference exclusively to

(a) a forward-looking pre-contractual estimate, alternatively
(b) a cannibalised version of the formula which has regard to actualities, but which introduces its own further shortcomings.

These are matters for courts and tribunals. Until the advantages and shortcomings of the formula are comprehensively considered, and these sorts of issues are definitively resolved, an unadulterated Hudson formula may still retain some vitality.

---

About the Author

Franco Mastrandrea is a Chartered Quantity Surveyor and Chartered Arbitrator with over 40 years of experience in the construction industry. He has acted as expert on more than 50 international project management, delay and quantum-related disputes.

HKA Services

HKA is a leading global consultancy in risk mitigation, dispute resolution, expert witness and litigation support services.

We collaborate with various stakeholders including owners, operators, contractors, subcontractors, law firms and government agencies, tailoring our services to meet their individual requirements.

Contact us to enquire about our market-leading expert services.