Acceptance of Using the Hudson Formula for Prolongation Cost Claims in FIDIC Contracts

Estimating prolongation costs is one of the most debated areas in construction claims. Many contractors try to justify additional costs by using formulas such as the hudson formula, especially when proving exact incurred cost is difficult. However, its acceptance under FIDIC contracts depends on how well the claim aligns with contractual requirements and evidential standards.

FIDIC’s posıtıon on cost compensatıon

Under the FIDIC forms, the contractor is entitled to EOT and cost for excusable and compensable delays. The key provision is Sub-Clause 20.1 (Claims) in FIDIC 1999, which requires the contractor to demonstrate actual cost incurred because of the delay event. FIDIC’s approach is clear: cost recovery must be based on real, demonstrable expenditure, not theoretical or formula-based calculations.

This is where the conflict arises. The hudson formula generates overhead and prolongation costs by applying a percentage uplift based on tendered overheads and project duration. It gives an estimate, not a record-based calculation. As a result, many engineers, employers, and tribunals view it as a last-resort method, not a preferred or primary approach.

arbıtral and judicial criticism of the hudson formula

Several arbitral tribunals and courts have rejected claims relying solely on the formula because it does not demonstrate real financial losses. In Walter Lilly & Co. v. Mackay [2012] EWHC 1773 (TCC), the court emphasised that formula-based calculations must reflect actual evidence and warned against accepting tender-based percentages without records. Similarly, in the ICC arbitration case reported in ICC Award No. 2478, the tribunal dismissed the contractor’s claim because the Hudson-derived overheads did not correspond to accounting records. In SCL v. Minister of Public Works (South Africa, 1996), the court found that the Hudson method overstated losses and failed to show incurred cost, reinforcing the need for factual proof rather than theoretical allocations. These decisions show a clear trend: tribunals are reluctant to accept artificial calculations unless supported by robust financial documentation.

why the hudson formula ıs controversıal

The main controversy is simple:
The formula does not prove the actual incurred cost, which FIDIC requires for compensation.

The formula assumes:

The contractor’s head office overhead percentage is constant.
The business would have earned that overhead elsewhere if not delayed.
Loss of opportunity automatically translates to recoverable cost.

In practice, these assumptions rarely reflect the contractor’s real financial position. Contract administrators often argue that the hudson formula may inflate costs because it is based on tender allowances rather than actual loss. Without timesheets, ledgers, payroll data, equipment records, or real overhead allocation, a claim risks being rejected.

when ıs the formula more lıkely to be accepted?

Although controversial, the formula is not entirely dismissed across the industry. It may be cautiously accepted when:

Detailed actual cost records are unavailable, despite reasonable efforts.
The employer’s actions caused the delay, and fairness dictates compensation.
The contractor provides supporting narrative, showing the link between delay and potential overhead loss.
The engineer or tribunal acknowledges the practical difficulty of proving unabsorbed overheads.

Even in these cases, decision-makers usually prefer alternatives such as the Eichleay or Emden formulas, or a cost-based analysis supported by accounting evidence.

best practıce for contractors

To improve acceptance, contractors should:

Keep strong financial records throughout the project.
Separate site overheads from head office overheads.
Demonstrate causation between the delay event and the overhead loss.
Use formula-based calculations only as supporting evidence, not as the primary basis of the claim.

While the Hudson Formula provides a simple method to calculate potential overhead losses, its acceptance under FIDIC is limited. FIDIC requires contractors to show actual incurred cost, and this contractual requirement often conflicts with formula-based methods. Therefore, the formula should be used carefully, supported by real financial evidence whenever possible, and only when no better alternative exists.