Contractors Head Office Overheads Entitlement for Delays – Hudson’s Formula

Hudson’s Formula

The Hudson’s Formula was very popular but now the Emden Formula appears to be gaining more favour in calculated a Contractors entitlement to Head Office Overhead entitlement in the case of delay due to events for which the Employer is responsible under the Conditions of Contract.

A)  The Basic Formula

The basic Hudson’s formula calculation by its nature can be applied to calculate Contractors entitlement to Head Office overheads at the anytime during the project and the calculation does not depend on any post contract information other than the determination of the delay period. The following two-step calculation is used to determine the Contractors entitlement in respect of Head Office Overheads due to a delay.

1. Daily Allocated Overhead. The Contractor determines a daily rate for the allocation of Head Office Overhead.

Planned Head Office Overheads (as a percentage)

x

Original Contract Sum

=

Allocated Overheads Per Day

Original Contract Period

2. Head Office Overhead Entitlement. This is simply a matter of multiplying the number of delay days for which the Employer is obligated to compensate the Contractor for under the Contract by the daily allocated overhead rate calculated above.

Allocated Overheads Per Day

x

Period of Employer Delay

=

Entitlement to Head Office Overheads

 B)  Sample Calculation

For this example we shall assume that the original Contract Amount is RM 3,000,000.00. The original Contract Period was to be 315 days. The Contractor has suffered compensatable delays amounting to 50 calendar days. The Contractor’s planned Head Office Overhead was 5%. Then the sample calculation of Contractors entitlement to Head Office Overhead recovery due to the delay would be as follows:

1. Daily allocated Overhead.

0.05

x

3,000,000.00

=

476.20

315

2. Head Office Overhead Entitlement.

476.20

x

50

=

23,810.00

Thus, in this simple example, the Contractor’s entitlement is calculated at RM 23,810.00 in respect Head Office Overhead costs as a result of the delays.

C)  Potential Problems Associated with Adopting the Hudson’s Formula

The Hudson’s formula is considered an estimate or an approximation based on what was planned and takes no account of the actual situation which may be far from what was initially planned.

It is reasonable when questioning the applicability of the Hudson’s formula to demand that the Contractor prove that his planned percentage allowance for Head Office Overheads reflects the actual situation or alternatively by way of previous years audited accounts is a fair representation of past levels of Overheads subject to the Contractor executing similar volumes of work.

As a result of the above Courts may where they consider the amounts to be excessive or unrealistic seek the Contractor to prove his actual Head Office Overheads together with billings for the actual period there by basically discounting the formula method altogether. In these circumstances the Contractor would have to prove his actual entitlement.