A J Lucas Drilling Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd
[2008] VSC 275
•1 August 2008
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
BUILDING CASES LIST
No. 4466 of 2007
| AJ LUCAS DRILLING PTY LTD (ACN 087 777 455) | Plaintiff |
| v | |
| McCONNELL DOWELL CONSTRUCTORS (AUST) PTY LTD (ACN 002 929 017) | Defendant |
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JUDGE: | BYRNE J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 30 June, 1, 2, 3, 4 July 2008 | |
DATE OF JUDGMENT: | 1 August 2008 | |
CASE MAY BE CITED AS: | Lucas Drilling v McConnell Dowell Constructors (No. 2) | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 275 | |
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Building Contracts – quantification of claims – assessment of pro-rata completion of contract works – assessment of extra work as a consequence of variation.
Practice and Procedure – preliminary trial of questions – fidelity to litigation process – amendment of pleading – amendment to raise issue which might have been dealt with at preliminary trial – amendment refused.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr EN Magee QC, Mr Michael Whitten and Mr Bernard Carr | Corrs Chambers Westgarth |
| For the Defendant | Mr David Levin QC, and Mr JR Gurr | Deacons |
HIS HONOUR:
The parties agreed to structure this proceeding in two trials. The first trial, dealing with all questions other than those as to quantum, was conducted over 16 days in October and November 2007 and I published my judgment in December.[1] The parties have presented further evidence and submissions on the deferred questions and this is my judgment on those questions. In this judgment I adopt the terminology and conclusions of the first judgment.
[1][2007] VSC 500.
Procedural matters
I have expressed criticisms of the pleadings in this case.[2] The deficiencies return to plague this second trial. The claim of Lucas Drilling, as pleaded, included claims for four variations: a variation affecting the drilling work[3]; a variation affecting the diving and associated marine work[4]; the provision of thinsulators to the product line[5]; and additional hydrostatic testing[6]. The last two items, which were for modest sums, were not in issue. There were also claims for delays in paragraph 36 and following but these were deleted, leaving, however, in Schedule D detail of 168.5 days of delay. But these claims for delay were never pursued. Indeed, given that the claim of Lucas Drilling for payment under clause 24 of the sub-contract, was for the value on a cost-plus basis of all its work on the project up to the suspension and termination of its sub‑contract in September 2003, it is difficult to see why or how it made claims for variations at all. Its abandoned claims for delay were not translated into money claims.
[2][2007] VSC 500 at [14], [55].
[3]Statement of Claim paras 22 ff.
[4]Statement of Claim paras 42 ff.
[5]Statement of Claim paras 50 ff.
[6]Statement of Claim paras 55ff.
I return to the two disputed variations. The first arose from the change in the diameter of the casing for the first line from 10 inches to 12 inches to accommodate a larger umbilical bundle that was to be inserted in it. This, it was said, meant that Lucas Drilling was obliged to abandon its intended drill and leave method in favour of a two pass method which was more difficult and more risky to achieve. The second variation, the diving and marine works variation, was said to be the consequence of the insistence of the proprietor, BHPB, that the more stringent requirements of the Commonwealth regime for these works be observed. I accepted the first variation and rejected the second.
This meant that what was left after the first trial was the quantification of the value of the completed portion the original contract workscope for which the parties had agreed that Lucas Drilling was to be paid $5M; and the value of the extra-over costs, if any, incurred by reason of the drilling variation. Other components of the claim were certain agreed variations, Lucas Drilling’s loss of profit on the works remaining after termination, GST and interest. By a document entitled Amended Particulars of Claim filed on 28 April 2008 Lucas Drilling set out the work which it now sought to be valued and the claims which it now makes.
When the second trial commenced, each of the parties complained that the other sought to raise issues which were outside the deferred questions. Counsel for Lucas Drilling sought to claim the delay costs which had previously been abandoned. I declined to permit this since the subject-matter of the first trial was all questions other than quantum. If Lucas Drilling had wished to pursue this claim otherwise than as part of its total cost-plus claim, it might then have done so.
Lucas Drilling also sought to include in the extra-over work occasioned by the drilling variation the work which had at the first trial been the subject of its unsuccessful diving and associated works variation claim. It was now said that this work and its cost was caused by the dimensional change. I permitted this because the second trial includes, not only the quantification of the variation costs, but also the identification of the work consequent upon the variation which is the work to be costed. While this aspect of the variation claim represented a dramatic shift in the way the Lucas Drilling claim for the diving and associated work was put, it was an amendment which ought properly to have been made.
McDow responded to these amended particulars of claim by a document called its response filed on 3 June 2008. It fell into two parts. The first part was directed to resisting the amendment to the Lucas Drilling’s particulars including, but not limited to the insertion of the delay claim, and the diving and associated marine work claim. All sorts of matters were raised in the 30 pages of this part of the response, but they came to nought. Part 2 of the response, which, including annexures, occupied almost 60 pages, addressed the questions to be dealt with at this trial.
In this document McDow sought to have the contract sum adjusted downward consequent upon the fact that most of the diving and offshore work was in fact deleted from the Lucas Drilling sub-contract. Accordingly, it was said, the pro-rata value of the workscope performed should be assessed as a proportion of a sum somewhat less than the $5 million which was the original contract sum. I refused to permit this allegation to go forward. The underlying facts with respect to the diving work were not in dispute. In February 2003 Lucas Drilling stated that it would not perform this work and by May or June of that year this was accepted by McDow to be the case. The contractual procedures to adjust the contract sum, however, were never put in train. Lucas Drilling incurred establishment and standby costs for this part of the work but it did not carry out much of the work for which divers and vessels were required. This matter might have been raised at the first trial. It is not open to the parties to raise it now. To this there is one important qualification. In so far as the diving and offshore work was not carried out by Lucas Drilling, it should not receive payment for it as part of its pro-rata claim.
The McDow response then went on to make further claims against Lucas Drilling for which, it was said, the amount payable should be reduced. This was because Lucas was in breach of its sub‑contract for not providing water for its drilling operation[7] and for not proceeding with the work with diligence and due expedition in order to complete it by 30 March 2003[8]. The final McDow claim was that it should recover its costs under clause 3.4(b) of the sub-contract by reason of the failure of Lucas Drilling to proceed with due expedition. These claims, too, I refused to entertain: they might have been raised at the first trial.
[7]Response paras 118-123.
[8]Response paras 129-132.
I have written elsewhere about what I have called fidelity to the litigation process. Where the Court determines or the parties agree to conduct litigation in a particular way it is not for parties or their lawyers to seek to undermine that decision. In this case, the Court, with the agreement of the parties, agreed to divide the trial into two parts. Had this not been done, the parties, having heard judgment after the single trial, would not have been able to argue questions which they had decided not to put at trial or which they had overlooked. Why, then, should they be in a better position because the trial was a divided one? In the present case I was, in the course of argument on these procedural matters, very critical of counsel’s attempts to avoid the consequence of an adverse result achieved at the first trial. I remain critical. If counsel are not prepared to support the Court in its endeavour to resolve their clients’ disputes in an efficient and cost-conscious way, the Court will fail in its aim of providing an appropriate forum for the resolution of complex construction disputes. In my estimate, one half of the first day was occupied in this futile endeavour. I will hear counsel in due course as to whether the costs of that half day and any other associated costs should not be included in any costs order which I might make for this trial.
Value of completed workscope
A difficulty which here confronts me is a product of the degree of informality which attended the definition of the contract workscope at the outset and throughout this contract. I express no view as to why this was so, for it was never fully explored. I have in the first judgment concluded that the original contractual workscope for which Lucas Drilling was to be paid $5M is that set out in Appendix A to the sub‑contract[9]. This is there expressed, rather unhelpfully, in inclusive terms:
The subcontract works include the design, installation by horizontal directional drilling, subsea stabilisation to the offshore termination point (350 metres from the offshore exit point as defined in the flowline function specification document No. 00 MN-S28-6003 Rev 2), cleaning, gauging and hydrostatic testing of the Minerva Field Flowline, two chemical injection lines and control umbilical.
In particular the Sub-Contractor workscope includes: …
Then followed 19 activities which are set out in paragraph [68] of the first judgment. The workscope included the drilling of a 16 inch bore hole for the umbilical crossing using a 10 inch welded casing by a drill and leave method[10]. The 19 activities, and the workscope, also included diving and associated marine work to be performed at the seaward end of the two crossings.
[9][2007] VSC 500 at [63].
[10][2007] VSC 500 at 70.
The evidence showed that each of these two areas of activity changed. In the case of the drilling of the umbilical crossing the dimension of the casing was enlarged to 12 inches and the drill and leave method was abandoned. The marine work was removed from the workscope. Whether a formal variation instruction for these changes was ever given may be a matter of uncertainty. The contract sum was never adjusted. Accordingly, I am required to value the pro-rata completion of the workscope which had in two important respects changed. In each case, I assume that the change was not made. In the case of the dimensional change, I make the necessary adjustment by valuing the extra-over costs of the variation; in the case of the diving work I simply treat the deleted work as not having been performed.
The sub-contract in Appendix B provides four milestones upon the achievement of which Lucas Drilling is entitled to receive stipulated payments totalling $5M. They are the following:
1.
Completion and approval of HDD Engineering
$500,000
2.
Successful completion and approval of first HDD shore crossing including installation of casing
$1,500,000
3.
Successful completion and approval of second HDD shore crossing including installation of flowline and installation of umbilical and chemical injection lines bundle into final HDD cased hole
$2,250,000
4.
Certificate of Practical Completion issued following successful completion and approval of flowline, chemical injection lines/flowline bundle including on bottom stabilisation, gauging, hydrostatic testing and coating integrity testing
$750,000
SUB-CONTRACT SUM
$5,000,000
Also in evidence is a tender breakdown dated 26 June 2002 prepared by Lucas Drilling. This document has no contractual status and was not issued to McDow. I assume that it was prepared for use by Lucas Drilling in valuing the progress of the work and assessing and predicting its profitability. The quantity surveyor, Colin Walker Fox, said that it seemed to him to be a reasonable allocation of the contract sum between the various component activities and that he found it useful as a basis for his analysis. I accept his opinion as to this and have also found the tender breakdown to be a useful document for the purpose of valuing the completed original workscope. It has limitations because it is directed more to the activities which produce the outcomes for which Lucas Drilling was to be paid rather than to the outcomes themselves. Nevertheless, it provides a helpful yardstick for my purposes. I have attached to this judgment, to form part of it, a schedule which includes the information contained in this tender breakdown. I refer to this as “the Schedule”.
It should be noted that this tender breakdown is built upon the estimated cost of the various activities which were expected to be performed in order to achieve the contractual outcome, the completion of the contract workscope. The breakdown then adds to most of the these activity costs a margin to produce the contract value of that activity. In this judgment I refer to cost and to value. By cost I mean the cost or expected cost of performing work without any margin; by value I mean the cost plus margin. The total cost, as appears in the tender breakdown is $3,558,498 and total contract value is $5,001,566.[11]
[11]Since the contract price was $5m, it is necessary to make a minor adjustment to the total contract value.
I should add, too, that there was in the sub-contract no bill of quantities or schedule of rates which might have been helpful to value the completed contract work.
I formed the view, generally, that Mr Fox was a well qualified and independent witness and that I could rely upon his evidence. Indeed, his credit was not challenged and no evidence was called to qualify or contradict his opinions although the factual basis for them, which he received from Mr Robertson and Mr Loneragan, was challenged.
A point of difference with respect to his evidence, however, arose from the fact that he prepared and presented two reports. In the first report, prepared for the trial last year, Mr Fox was asked to value the completed contract workscope on a pro-rata basis. He did so by reference to the four milestones and concluded that the value was $2,952,146.30. McDow was content, subject to some minor adjustments, to accept that figure. In his second report, Mr Fox appeared to undertake the same task but he arrived at a pro-rata value of $4,226,946. This is the figure adopted by Lucas Drilling.
Mr Fox said that there was no inconsistency between these conclusions. He said that the difference was due to the way margin and risk were treated and also to the ways in which he dealt with variations.
The witness also spoke of the fact that, in his first report he was required to evaluate the percentage completion by reference to the payment milestones, whereas in the second, he performed the task by reference to the items in the tender breakdown. He said that he was not happy with the first approach but that he followed it because he was instructed to do so. His concern was based upon his reluctance to accept the values attributed to the work in each milestone. The milestone figures in Appendix B of the sub-contract represent the agreed cash flow for the project. When Lucas Drilling and McDow agreed these figures it may well be that considerations other than the value of the work performed had a role to play. I agree that, for this reason, the milestone values ought not be adopted for my purpose where a better yardstick is available. This said, however, I must confess that I have some difficulty in understanding how this would affect the total percentage completion and the value of the completed work. If the totality of the work the subject of each of the Fox reports was the same and it represented a percentage of the same contract price of $5M, the same result should be achieved. In fairness to the witness, however, Mr Fox relied principally, by way of explanation, upon the different treatment of the variations in each of his reports.
He explained the difference in this way. Normally, when he values work done he draws no distinction between original contract work and variations; they are inextricably intertwined, and the value of the variations is incorporated in the total adjusted contract price which is the basis for the pro-rata assessment. In each of his reports, however, he was required not to do this: he was to value the percentage completion of the original workscope and of the variations separately. In his first assessment many parts of the total work performed by Lucas Drilling fell within its variation claims. These, then, were not valued by him as part of the original contract workscope. Following my rejection of most of the variation claims, it became necessary to consider whether it was possible to move this work from variations to original contract workscope. This he did. It had the consequence of increasing the amount of the original contract work completed and correspondingly reducing the amount of variation work which had to be valued. He referred, by way of example, to the re‑engineering work carried out in April and May 2003. When the variation claim for this failed, this work was relocated as part of the original workscope: he treated the re-engineering as value engineering work which progressed the project and its inclusion in the workscope meant that a greater percentage of the original workscope had been completed. Counsel for McDow challenged this, contending that moving work from one basket to another should not affect the total value of the completed workscope. This is, of course, correct. What it does not take into account is that work which had in the first report been removed from the workscope because it was dealt with as a variation valued on a cost-plus basis was now moved back into the workscope to be valued on a pro-rata basis.
I accept the explanation of Mr Fox about the suggested discrepancy and will approach the task of pro-rata assessment of the original workscope generally using the methodology of his second report. This involves an assessment of the percentage completion of the categories of work contained in the tender breakdown rather than those in the payment milestones. I emphasise that I adopt the general methodology of the second Fox report. In so far as it is applied to a factual basis which I find not to have been made out, I must apply it to the facts as I find them; in so far as I am persuaded that the methodology does not otherwise produce a result which is fair to the parties I will depart from it. Furthermore, my task is to determine the value of the work completed in terms of the contractual outcomes rather than by reference to the actual activities which were to produce those outcomes. This means that I must bring some flexibility to bear in assessing the percentage completion of the various activities described in the tender breakdown.
The second Fox report methodology starts with the tender breakdown dated 26 June 2002 which appears in columns A, B, C, D, and E of the Schedule. The various activities are set out in column A; the expected cost attributed to each of those activities in column B; the margin for risk, overheads and profit in columns C and D; and the portion of the agreed price attributable to that activity in column E.
The margin is a uniform 46.1% of cost except for those six activities for which a nil margin is attributed. The percentage completion and the pro-rata cost for each activity has been assessed by Mr Robertson and appears in Annexure C to his statement filed in this trial which is then taken into Mr Fox’s second report as Appendix 3A. In his Annexure C, Mr Robertson applies this percentage to the cost.[12] This produces a total cost of the completed workscope of $2,643,931 which represents 74.3% of the total cost of $3,558,498 in the tender breakdown. The figures for pro-rata completion and for pro-rata cost are set out in columns F and G of the Schedule. In column J there is set out the pro-rata contract value of the various activities based on the evidence of Mr Robertson and Mr Fox.
[12]Column B of the Schedule.
Mr Robertson’s assessment of the percentage completion was in certain respects subjected to criticism. His analysis was directed to the actual cost of each of the completed or partially completed activities and he gave Lucas Drilling credit where an activity was rendered less expensive or was eliminated as a consequence of the re‑engineering work done in May and June 2003. To my mind this is beside the point and the criticism is well-founded. The consequence of the re‑engineering in these circumstances is just that the work to be performed by Lucas Drilling and for which it was to receive $5 million would have been more profitable. My task is to determine the percentage completion of this work. The tender breakdown is an aid to that task not a substitute for it. And so, if a particular activity was no longer required as a consequence of value engineering by Lucas Drilling, this does not of itself enable Lucas Drilling to recover payment for that activity as if it had been completed. The question is always to assess the percentage of the particular outcome to which the deleted activity was directed.
The marine and offshore work provides an illustration of this. According to the tender breakdown, the diving operations, activity 6A.1, were costed at $468,000 and represented $683,748 or about 13.7% of the contract price. Although some costs under this head were incurred, very little progress was actually achieved. Mr Robertson said that what was done was that the location of the exit point of the umbilical borehole was determined by a small boat and that the Bhagwan K lowered by crane some dead weights to act as anchor points for vessels to be deployed at a later stage. According to his Annexure C, Mr Robertson asserts that work with a cost value of $96,000 was completed under this activity. This represents 20.5% of all of Activity 6A.1 although, it would seem, little if any diving work was actually performed. According to the tender breakdown, the work here was directed to the recovery of the bottom hole assemblies after the punching out of both of the boreholes, for which recovery eight diving days was estimated at $12,000 cost per day. This produces a cost of $96,000 which, after margin, becomes $140,256.
The true position appears from Mr Robertson’s witness statement filed in this trial. In paragraph 62 he says that the recovery of the bottom hole assembly for the umbilical line was not required. Three diving days and $36,000 cost, that is, $52,596 contract value, was thereby saved. In comparison, the result was achieved in one day “at a value of approximately $25,000”. It is not at all clear what this means, what was done or how this sum is calculated or brought into account. Nothing is said about the recovery of the bottom hole assembly for the product line for which another three diving days is estimated and little about the recovery of the same assembly after the punch out of the 2⅞ inch line. In paragraph 76(b), he says that this was no longer required as a consequence of the re-engineering and produced a saving of $24,000. In the circumstances, I am unable to conclude that work to a cost value of $96,000 was achieved in respect of diving work.
This approach of Mr Robertson, which is also applied to other items, tends to confuse the true nature of his task. This is to undertake an assessment of the percentage of work completed. As I have mentioned, this must be directed to the various outcomes which Lucas Drilling was required to achieve. The tender breakdown is useful because it provides in a familiar way a list of the various activities which go to produce the outcomes. If a hole is drilled this will represent part of the work completed. Whether it is performed at a cost which is greater or less than the tender breakdown predicts is entirely beside the point. Likewise, if an expected activity is deleted by a value engineering exercise or modified, Lucas Drilling is not entitled to payment for this activity except insofar as it would have been performed as part of the achievement of the particular outcome.
I return to the completed marine and associated activity component of the original workscope. These activities were directed principally to two areas of work: the insertion of the umbilical bundle in the first cased borehole and the insertion of the casing in the product line. Neither of those insertions had been performed when the sub-contract was terminated. There was evidence, too, that Lucas Drilling incurred standby costs for the vessels which it had chartered for the offshore work. No claim is made for these as part of the workscope claim and I agree that this is appropriate: this did not progress the contract work. The work which Mr Robertson described as having been completed was certainly work which had to be done preparatory to the insertions and Lucas Drilling should be paid for this. The survey work was carried out on 20 February 2003 using the Orca III before the first borehole had achieved break‑out. Mr Fox assessed the costs of this survey at $7,565. The cost of laying the anchors was not given in evidence. I will assume one day for the Bhagwan K and will allow $12,000, being the tender cost allowance for one day’s diving. To the total of $19,565 I add the margin and arrive at $28,614.00.
The next area of criticism was to Mr Fox’s assessment that activity 1.1, engineering work, was 100% complete so that $66,477 cost was included in his Appendix 3A as the tender breakdown cost of this work. After margin is added this becomes $97,123.[13]
[13]Schedule columns B, C, D and E.
The point taken here was that it was not correct to say that the engineering work was completed. I agree. There remained a good deal of engineering work to be done with respect to the two insertions which had not yet taken place and with respect to the stabilisation of the inserted materials. A number of as-built drawings also had to be provided. For example, Mr Chai spoke of the requirement for drawings showing satisfactory completion of the umbilical crossing. It was a feature of this sub-contract that Lucas Drilling assumed the obligation of providing all manner of paperwork to McDow and to BHPB. These concerned proposed construction and protection procedures to be undertaken, the sufficiency of the Lucas Drilling designs and, after the work was done, documentation as to that work. The evidence showed that this was a considerable burden as BHPB was not easily satisfied. It may be expected that the documentation for the work uncompleted and engineering input which it required would have been considerable.
This said, an examination of the detail of activity 1.1 suggests that the allowance made in the tender for this engineering work did not include these miscellaneous documentary obligations. It may be that they were built into the cost of the activities which they documented. The activities described as included in activity 1.1 appear to be the preparatory engineering work done before the drilling was put in hand. This being the case, the activity was fully performed and the engineering completed. On that basis I accept that activity 1.1 was properly assessed as 100% complete. I will bring into account in my assessment of the subsequent activities the fact that they carried their own engineering component.
The next challenge was directed to the claim for drill site restoration in activity 9.1. Counsel for McDow would reduce the Lucas Drilling claim by $14,184 for this work which had not in fact been performed. I will not make the deduction sought. An examination of Mr Robertson’s Annexure C which became Mr Fox’s Appendix 3A shows that no claim is made for this activity.
Finally, it is said that there should be some deduction for the fact that Lucas Drilling did not carry out post-installation hydrostatic testing of the flowline and the umbilical bundle.[14] It is clear that this work was not done prior to termination. It was put on behalf of McDow that there was no item for this activity in the Lucas Drilling tender breakdown. Mr Fox disagreed: he said that there was an item but that it had a nil value. The point made here was that since no part of the $5 million tender was referrable to this activity and it was not performed, there should be some deduction from the pro-rata valuation of the work completed. No figure was suggested; it was just put that Lucas Drilling had not proved its quantum. I am not persuaded that any adjustment should be allowed for this unperformed work. The testing in question will be part of the costs associated with the installation for which no sum was claimed.
[14]Response Annexure C, para 10(g).
Mr Robertson in his Annexure C also assessed the cost saving for the project achieved by reason of the re-engineering. This saving, he said, totalled $178,053 and the explanation for it appears in paragraph 76 of his witness statement in this trial. All of these savings were for the offshore and diving activities. There was some dispute about two of these savings, totalling about $44,000, which depended upon BHPB and McDow agreeing that the product pipe might be thrust through the casing from the shore rather than pulled from the sea. This was not approved at the time of termination and it may never have been approved. Leaving this to one side, however, I do not consider that these savings should be added to the cost value of the completed work. The outcomes to which they were directed were not completed. Moreover, the offshore work was to be done by others. If Lucas Drilling elected not to perform part of its workscope, it cannot claim payment for the outcome which it did not achieve in part or in whole.
I return to Mr Robertson’s assessment of the works completed in his Annexure C. I accept his assessments, subject to one adjustment to his value of the cost of work completed. This is for activity 6A.1. I reject his claim for savings due to re‑engineering. This has the consequence of reducing his total assessment of cost from $2,643,931 to $2,567,496.[15] This is an adjustment to the cost of work completed without regard to the margin.
[15]$2,643,931 − $96,000 + $19,565 = $2,567,496.
It is to the margin which I now turn. The figures which I have inserted from the tender breakdown in column C to the Schedule are simply described in the tender breakdown as “Margin % - 46.1%”. This represents an amalgam of allowances for risk, overheads and profit. There was contest before me as to how this margin should be approached for the purposes of the pro-rata assessment of the workscope completed.
The first question arose from the identification of the three components of the margin which totals $1,442,616 in the tender breakdown[16] and which represents 40.55% of the total cost. The tender breakdown itself provides no breakdown of this figure.
[16]See column D in the Schedule.
Mr Fox, in his second report, approached the problem by subtracting from the margin a figure representing overhead and profit and concluding that what remained must be risk. He took as the figure for overhead and profit 5% which is the contractual margin for overheads and profit to be added to the actual prime cost of services for variation work.[17] He noted that Mr Summergreene identified the indirect costs of Lucas Drilling at the relevant time as 3.5% of total direct cost and he adopted that figure. The balance of the 5% represented profit. The balance of the margin, then, represented risk.
[17]Clause 14.5(d) and Schedule item 10.
This would produce the following:
%
$
Overheads/Indirect Costs
3.5%
124,513
Profit
1.5%
53,363
Risk
1,264,740
Margin
1,442,616
The figure of $1,264,740 for risk represents 35.56% of the tender cost so that the total of the percentages is 40.55% of cost, as appears in the tender breakdown. In fact the figures would differ a little from this because the percentages would be applied cumulatively. Mr Fox’s calculation, however, produced a figure of only $1,204,521 for risk since he calculated the overheads and profits by applying the percentages to the contract price rather than to the cost.
The next step taken by Mr Fox was to include all of his figure of $1,204,521 for risk in the cost of the completed work. In order to understand this, it is necessary follow his reasoning. He accepted Mr Robertson’s assessments of the cost of the activities completed which produced a total of $2,643,931[18]. He accepted, too, Mr Robertson’s figure of $178,053 for the savings of cost achieved or to be achieved as a consequence of the re-engineering work[19]. These figures, when added, give a value of the cost of works completed of $2,821,984 which was adjusted to $2,821,100 to allow for the small difference between the total contract value in the tender breakdown and the contract price. To that figure he added his figure for risk of $1,204,521 to provide a total of $4,025,621. He then added $201,325 for overhead and profit[20] producing his figure for pro-rata completion of $4,226,946 which is 84.54% of the contract price.
[18]Schedule column G.
[19]See para [35] above.
[20]5% of $4,025,621.
His conclusion was criticised on a number of grounds. First, there was a challenge to Mr Robertson’s assessments of the pro-rata cost of the work completed which I have already dealt with.[21] Second, his decision to include all of the risk allowances was challenged. It was said that there was risk in the work that remained to be done. I accept that this is correct. The offshore and diving work remained as well as the insertions. The evidence showed that there was a considerable risk in these activities. Indeed, in the tender breakdown, the usual 46.1% margin was applied to all of them. Nor can it be said that this risk had been eliminated by the re-engineering. I do not agree that, for the purposes of a pro-rata assessment of work done, it is appropriate to arrive at a dollar figure for risk generally and to treat this as if it were a contingency sum. Risk is the prospect that things will not turn out as planned. This is a feature of every aspect of a construction project. To my mind, the proper approach is to apply the tender margins to each of the activities, complete and incomplete, as was done in the breakdown. It is for this reason that I have included in the Schedule column J my valuation of the completed work activities including the tender margin. This also removes the need to put a figure on the risk component of that margin.
[21]See paras [25]-[36] above.
Third, Mr Fox’s treatment of the re-engineering was criticised. I agree with the criticisms for the reasons already given.[22]
[22]See paras [35]-[36] above.
This leads to the conclusion that the proper pro-rata value of the completed workscope is $3,563,296, as appears in column J to the Schedule and when adjusted for the true contract price it becomes $3,562,180. This represents 71.25% of the contract price.
The Dimensional Variation
For reasons set out in my first judgment,[23] I approach with some caution the Lucas Drilling claims about the consequences of the variation and their quantification. I have rejected the evidence of Mr Loneragan that he raised with Mr Chai the cost implications of the change soon after 30 July 2002.[24] I have found that Lucas Drilling accepted the geological risks of the drilling operation including those dependent upon the increased dimension of the casing to the umbilical borehole.[25]
[23][2007] VSC 500 at [72]-[73].
[24][2007] VSC 500 at [77].
[25][2007] VSC 500 at [81].
The claim for the variation is set out in paragraphs 4 and 5 of the amended particulars of claim. It comprises seven items which are costed at a total of $1,796,551. To this is added a 5% margin for overhead and profit. This produces a total of $1,886,380. The seven items are the following:
Item
Description
Days
Total (including 5% for overhead and profit)
(i)
Grouting and re-drill
12
$350,581
(ii)
Hard rock layer
17
$442,269
(iii)
Wait for instruction
7
$152,277
(iv)
Remove drill string from umbilical borehole
1
$26,095
(v)
Clean borehole in preparation for casing (HDPE) installation
2
$56,530
(vi)
Install HDPE casing
6
$173,038
(vii)
Standby of dive spread
N/A
$685,590
Total
$1,886,380
I will consider each of these items in turn.
(i) Grouting and redrill $350,581
(ii) Hardrock Layer $442,269
My task in respect of these items is to determine to what extent the costs were incurred otherwise than as a consequence of the ordinary geological risks for which Lucas Drilling assumed responsibility. In the first judgment I concluded that the difficulties which were encountered on 6 February 2003 and their consequences were part of the geological risks for which Lucas Drilling was responsible.[26]
[26][2007] VSC 500 at [79]-[81].
Lucas Drilling, however, says that the requirement that it undertake the drilling of this borehole by a two pass method, which I have found to be a consequence of the dimensional variation,[27] so increased its exposure to geological risks that its costs of overcoming these risks should be allowed. The change meant, too, that the drilling lacked the support of the drill string casing and that the unsupported umbilical borehole had to be sufficiently clean to permit the later insertion of the casing.
[27][2007] VSC 500 at [75].
Lucas Drilling says, too, that the difficulties posed by the hard rock encountered on 23 February 2003 close to the exit of the same borehole would not have been significant had a stiffer 10 inch drill casing been used, as would have been the case with the drill and leave method.
All of this concerns only the first borehole because the product borehole had always to be drilled using the two pass method. The drilling of the first borehole was completed on 11 March 2003.
The evidence in support of this claim was that given by Mr Robertson. He explained at the first trial the circumstances attending the loss of returns encountered on 6 February 2003, the grouting of the hole by 14 February 2003 and the second loss of returns on 15 February 2003. Although his witness statement shows that these difficulties were at the time relied upon in support of a claim for unforeseeable subsurface conditions, he said in evidence that, if the drill and leave method had been pursued, the loss of returns would not have caused a problem. The fact remains that the loss was not attributed to the dimensional variation and the consequent change in drilling methodology until a very long time after the event. In its present form it really amounts to little more than mere assertion.
Given the history of the drilling claims, I am not prepared to accept Mr Robertson’s evidence that the costs involved in overcoming these two difficulties were other than those involved in coping with the geological uncertainties of the site. I reject the first two items; they are not extra costs caused by the dimensional variation.
(iii) Wait for Instruction - $152,277
This item concerns the period from 18 March 2003 when drilling in the second borehole had been stopped to 25 March when Lucas Drilling demobilised. What is said is that BHPB failed until 25 March to approve Lucas Drilling’s proposed procedure for pulling the 12 inch casing into the first borehole. The costs flowing from this are explained in general terms by Mr Fox in paragraphs 229 to 243 of his second report. Reference is made to Appendix 6 of this report in which he provides a total figure of $152,277. It seems that he has claimed all of the on‑site costs and overheads for the period of the claim.
I am not prepared to accept this item. It is clear that the work that was stopped at this time was the work on the second borehole. This was a consequence of the geological problems for which Lucas Drilling was responsible. In any event, the generality of the detail provided is such that I do not feel able to act upon it.
(iv) Remove string from umbilical borehole - $26,095
(v) Clean umbilical borehole - $56,530
Item (iv) represents the cost incurred for one day’s work removing the drill string on 7 July 2003. Item (v) was performed over two days on 21 and 22 July 2003. It was said by Mr Robertson that, if the drill and leave method had been adopted, the drill string would have been left in situ as the casing for the umbilical bundle and there would have been no need for cleaning out the hole. On behalf of McDow counsel argued that these items were part of the re-engineering works and are therefore not claimable. I do not agree. They are activities which were required to be performed as a consequence of the variation and which thereafter would have had to be done had there been no re-engineering.
The only concern I have is as to whether they are truly extra-over costs. With some hesitation I accept that they are. The sums claimed include 5% for profit and overheads. I will allow them both.
(vi) Install HDPE casing - $173,038
This procedure was adopted for both the boreholes following the difficulties encountered with the drilling. This claim concerns only the first borehole. Mr Robertson argued that this is a consequence of the abandonment of the drill and leave method. I do not agree. A good deal of evidence was led as to the reason for this new procedure and the circumstances in which it was decided upon. It is clear that it was the consequence of the poor geological conditions which had been encountered, especially in the second borehole when drilling was ordered to be stopped. It had advantages inasmuch as it provided protection for the holes and facilitated the insertion of the umbilical bundle and the product line. I do not accept that it was a consequence of the dimensional change. I reject this item.
(vii) Standby of dive spread - $685,590
The periods of standby are 24 February to 6 March 2003 and 11 March to 17 March 2003. The standby in the first of these periods was due to the problems encountered in the first borehole which are referred to in items (i) and (ii). The claim for the standby must fail for the same reasons as those claims failed. The second period is that from the breakthrough of the first borehole up to the date of cessation of drilling in the second borehole. It is not altogether clear what Mr Robertson gave as the reason for this standby. The Bhagwan K was demobilised on 6 March. In these circumstances it may be that he intended to assert that the standby was during the period that instruction was awaited to commence the insertion of the umbilical bundle. If this be the case this item is associated with item (iii) and will fail for the same reason. I reject this item.
Cost saving
As a matter of fairness, Lucas Drilling must bring to credit any reduction in cost caused by the variation, for it is only entitled to its extra-over cost. McDow contended that there was a saving because under the sub-contract it was obliged to weld and test each section of the drill pipe casing as it was inserted in the first borehole and to break the welds and re-weld when it tripped the casing out of the hole.
Mr Robertson agreed that the welding would have occupied 5.4 working days. He was unable to express any view as to the time involved in the testing of the weld. It was put, on the basis that there was one trip out at about the half-way point, that the saving for the first borehole was at least 8.1 days.
If this is correct, it is indeed remarkable that no one mentioned this at the time that the drill and leave was abandoned. Perhaps the explanation lies in the fact that the estimated time for drilling of the first borehole was 21 days with threaded casing. This was also the estimate in February 2002. Sometime after 26 June McDow advised that it would weld the casing. If Mr Robertson’s 6 June estimate is right, this would have had the consequence of increasing the drilling time by nearly 40% to 29.1 days. No protest or request for further payment was heard. Then the method of drilling was changed so that 8.1 days was no longer required. Evidence of the circumstances of this was not before me. In the event, however, the suggested saving was a saving of the time required for the performance of the work required under the sub-contract.
Nevertheless, I do not allow the credit. It is, to my mind, unreal to take one activity and to treat it in this way. The implications of the change in drilling methodology were far-reaching and are difficult to quantify, as this case demonstrates. Likewise, the savings. I should need to be satisfied that this was a credit which was not off-set by some other expense before I would be prepared to bring it into the balance. Moreover, I have no basis for quantifying the suggested saving. I will not allow it.
I therefore allow to Lucas Drilling the sum of $82,625, representing the cost of the work including profit as expenses for which it is entitled to be paid as a consequence of the dimensional variation.
The Agreed Extras
As I have mentioned, the parties were agreed that Lucas Drilling should receive as extra payment the following sums:
(i) Pre-installation hydrostatic testing 12,145.70 (ii) Supply of thinsulators 3,318.75 (iii) HDPE casing left on site 10,816.00 26,280.45 (iv) Margin 7% 1,839.63 $28,120.08 GST
It was agreed that sums payable under the sub-contract should be adjusted to include GST.
(i) Pro-rata Value 3,562,180 (ii) Dimensional Variation 82,625 (iii) Agreed Extras 28,120 3,672,925 (iv) GST 10% 367,293 $4,040,218 Interest
It follows from my first judgment[28] that interest on this sum will run pursuant to the Supreme Court Act s 58 from the date of demand on 23 September 2003 at the penalty interest rates from time to time.
[28][2007] VSC 500 at [146].
In its response McDow raises the question whether interest should run on the GST component This was said to turn upon whether Lucas Drilling had actually paid the tax. This was not addressed by Lucas Drilling at the trial and I will permit counsel to submit a note of its attitude to this question.
I will hear counsel as to the terms of the judgment to be given as a consequence of my conclusions and as to costs.
---
Schedule
| A | B | C | D | E | F | G | H | I | J | |
| Breakdown Activity | Tender Cost | Margin % | Margin | Total | Robertson% | Robertson | Robertson | Court | Court | |
| Allowance | Rounded | Complete | Contract Cost | Contract Value | Assessment % | Assessment | ||||
| Complete | Complete | Value | ||||||||
| 1 | Engineering | |||||||||
| 1.1 | Engineering | $66,477 | 46% | $30,646 | $97,123 | 100.00% | $66,477 | $97,123 | 100.00% | $97,123 |
| $0 | $0 | $0 | ||||||||
| 2 | Materials Incorporated in Works | $0 | $0 | $0 | ||||||
| $0 | $0 | $0 | ||||||||
| 2.3 | Surface casing | $13,042 | 46% | $6,012 | $19,054 | 100.00% | $13,042 | $19,054 | 100.00% | $19,054 |
| $0 | $0 | $0 | ||||||||
| 3 | Tooling and Equipment | $0 | $0 | $0 | ||||||
| 3.1 | Drill Pipes | $98,819 | 46% | $45,556 | $144,375 | 100.00% | $98,819 | $144,375 | 100.00% | $144,375 |
| 3.2 | Down Hole Tooling | $303,797 | 46% | $140,050 | $443,847 | 100.00% | $303,797 | $443,847 | 100.00% | $443,847 |
| $0 | $0 | $0 | ||||||||
| 3.4 | Steel - Insertion Structures | $13,000 | 46% | $5,993 | $18,993 | 26.90% | $3,500 | $5,109 | 26.90% | $5,109 |
| 3.5 | Rig Mods and Thruster | $150,000 | 0% | $0 | $150,000 | 100.00% | $150,000 | $150,000 | 100.00% | $150,000 |
| 3.6 | Other Tooling Items | $18,450 | 46% | $8,505 | $26,955 | 100.00% | $18,450 | $26,955 | 100.00% | $26,955 |
| $0 | $0 | $0 | ||||||||
| 3A | Internal plant | $0 | $0 | $0 | ||||||
| 3A.1 | Mud Processing Equipment | $67,100 | 0% | $0 | $67,100 | 91.96% | $61,700 | $61,705 | 91.96% | $61,705 |
| 3A.2 | Mud Pump Hire | $102,000 | 0% | $0 | $102,000 | 92.20% | $94,000 | $94,044 | 92.20% | $94,044 |
| 3A.3 | Rig Hire | $76,500 | 0% | $0 | $76,500 | 92.20% | $70,500 | $70,533 | 92.20% | $70,533 |
| 3A.4 | Other Internal Plant | $12,600 | 0% | $0 | $12,600 | 93.60% | $11,800 | $11,794 | 93.60% | $11,794 |
| 3A.5 | Mud pump spares | $20,000 | 0% | $0 | $20,000 | 100.00% | $20,000 | $20,000 | 100.00% | $20,000 |
| $0 | $0 | $0 | ||||||||
| 4 | Mobilisation: | $0 | $0 | $0 | ||||||
| 4.1 | Labour In Sydney | $17,520 | 46% | $8,077 | $25,597 | 100.00% | $17,520 | $25,597 | 100.00% | $25,597 |
| 4.2 | General Maintinance on rig site | $22,680 | 46% | $10,455 | $33,135 | 93.65% | $21,240 | $31,031 | 93.65% | $31,031 |
| 4.3 | Shipping to/from Victoria | $128,400 | 46% | $59,192 | $187,592 | 100.00% | $128,400 | $187,592 | 100.00% | $187,592 |
| $0 | $0 | $0 | ||||||||
| 4.5 | Mobilise men to site | $29,700 | 46% | $13,692 | $43,392 | 93.65% | $27,814 | $40,636 | 93.65% | $40,636 |
| 4.6 | Environmental consultant | $22,500 | 46% | $10,373 | $32,873 | 93.65% | $21,071 | $30,785 | 93.65% | $30,785 |
| 4.7 | Environmental Training | $8,250 | 46% | $3,803 | $12,053 | 100.00% | $8,250 | $12,053 | 100.00% | $12,053 |
| 4.8 | Shipping & Couriers | $12,600 | 46% | $5,809 | $18,409 | 93.65% | $11,800 | $17,240 | 93.65% | $17,240 |
| $0 | $0 | $0 | ||||||||
| 5 | Set Up Drilling Site | $0 | $0 | $0 | ||||||
| 5.1 | Prepare Site | $15,180 | 46% | $6,998 | $22,178 | 100.00% | $15,180 | $22,178 | 100.00% | $22,178 |
| 5.5 | Environmental | $5,000 | 46% | $2,305 | $7,305 | 100.00% | $5,000 | $7,305 | 100.00% | $7,305 |
| $0 | $0 | $0 | ||||||||
| 6 | Drilling | $0 | $0 | $0 | ||||||
| 6.1 | Steering | $137,248 | 46% | $63,271 | $200,519 | 100.00% | $137,248 | $200,519 | 100.00% | $200,519 |
| 6.2 | Motor hire | $117,000 | 46% | $53,937 | $170,937 | 100.00% | $117,000 | $170,937 | 100.00% | $170,937 |
| 6.3 | Labor & Daily Site Running | $813,929 | 46% | $375,221 | $1,189,151 | 93.65% | $762,252 | $1,113,640 | 93.65% | $1,113,640 |
| 6.4 | Install Centralisers | $0 | 46% | $0 | $0 | 100.00% | $0 | $0 | ||
| $0 | $0 | $0 | ||||||||
| 6.6 | Drill Mud | $73,436 | 46% | $33,854 | $107,290 | 100.00% | $73,436 | $107,290 | 100.00% | $107,290 |
| 6.7 | Fuel | $180,000 | 46% | $82,980 | $262,980 | 91.50% | $164,681 | $240,627 | 91.50% | $240,627 |
| $0 | $0 | $0 | ||||||||
| 6A | Marine Operations | $0 | $0 | $0 | ||||||
| 6A1 | Diving Operations | $468,000 | 46% | $215,748 | $683,748 | 20.50% | $96,000 | $140,168 | 4.19% | $28,614 |
| 6A2 | Offshore Towage | $140,000 | 46% | $64,540 | $204,540 | 0.00% | $0 | $0 | ||
| 6A3 | Other Marine works | $80,000 | 46% | $36,880 | $116,880 | 0.00% | $0 | $0 | ||
| $0 | $0 | $0 | ||||||||
| 8 | Grouting | $0 | $0 | $0 | ||||||
| 8.1 | Off Shore Plug | $42,732 | 46% | $19,699 | $62,431 | 0.00% | $0 | $0 | ||
| $0 | $0 | $0 | ||||||||
| 9 | Restoration of Drill Site | $0 | $0 | $0 | ||||||
| 9.1 | Drill Site | $14,184 | 46% | $6,539 | $20,723 | 0.00% | $0 | $0 | ||
| 9.2 | Dispose of cuttings | $46,804 | 46% | $21,576 | $68,380 | 100.00% | $46,804 | $68,380 | $68,380 | |
| $0 | $0 | $0 | ||||||||
| 10 | Other Items | $0 | $0 | $0 | ||||||
| 11.1 | Misc items | $199,500 | 46% | $91,970 | $291,470 | 18.85% | $37,500 | $54,942 | $54,942 | |
| 11.2 | Misc Site costs | $42,050 | 46% | $19,385 | $61,435 | 96.67% | $40,650 | $59,389 | $59,389 | |
| 11.3 | Contingency Item | $0 | $0 | $0 | 100.00% | $0 | $0 | |||
| $0 | $0 | $0 | ||||||||
| $0 | $0 | $0 | ||||||||
| TOTAL: | $3,558,498 | $1,443,068 | $5,001,566 | $2,643,931 | $3,674,850 | $3,563,296 | ||||
| Adjustment | $1,442,616 | $5,000,000 | $3,673,700 | $3,562,180 | ||||||
3
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0