NRSWA

NRSWA

COSTS + OVERHEADS

HAUC working parties
S75 inspections, S84 diversionary work code, S96 recovery of
costs

Richard Kemball-Cook FCA.
Consultancy handbook

Contact:
E: [email protected]
W: www.nrswacosts.co.uk
T: +44 (0)786 0346776
+44 (0)1227 780488

COPYRIGHT 2009-2010 RICHARD KEMBALL-COOK

NRSWA WWW.NRSWACOSTS.CO.UK

COSTS + OVERHEADS

Services:
Provides expert evidence in connection with quantum of loss arising from:
• Damage due to negligence
• Damage and diversions under the New Roads and Street Works Act 1991
Achieving a right result depends on a comprehensive understanding of the case law as well as Statute
law. In the case of NRSWA I was involved with drafting the Act and closely involved with bringing
several Statutory Instruments into law.

2n
 d
 
 tier
 


 


 


 

Suppo
  rt
 activities
 
 

 planntiniegr,

   controls,
 

schedulers,
 etc.
 

Overhead
 base,
 
 
direct
 labour,
 less
 non-­‐productive
 time
 or
 

materials,
 contract,
 etc.
 
but
 
 


 

2nd tier: managerial, training, HR, H&S,etc.

Costs & Overheads on the following:

• Damage through negligence

•NRSWA: damage under S82 and S96

• NRSWA Diversionary Works under S84: major works and S96

• NRSWA Diversionary Works under S83 and S 96:
other works not qualifying for Cost-share or free preliminary planning at C3 and C4 stages

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COSTS + OVERHEADS

overheads
  overheads
 
at
 70%
  at
 120%
 


 

  same
 price!
 


 

What are the cost elements?
Overheads:
There are many misconceptions on overheads:
Big companies have high overhead rates
True, they do have large amounts of overheads but often they have lower overhead rates as these are
expressed as a percentage on prime costs (i.e. labour, contracts and materials) and they can achieve
efficiencies through size.
Overhead rates can vary enormously between companies doing the same activity
A company needs to invest time and effort in producing accurate rates. Some companies use
internal management accounting rates which are calculated for other purposes. Frankly the rate is
unimportant as it depends wholly on what the overhead is applied to.
Prime costs:
Alongside the overhead calculation is the identification of prime cost values. These are the base
on which overheads are expressed. There are usually three types: labour, contract costs and own
materials. The overhead costs are usually easy to identify but the direct labour cost is often complex
with many pitfalls.
Direct labour comprises the hourly rate as applied to the productive hours: the hours charged to a
particular ‘job’ should coincide with the overall total of productive hours. What about the diversions
of direct labour, i.e. the non-productive time of direct workers? The hourly rate should include full
pension costs, pay rises, etc.
Specific guidance from statutes
Primary legislation

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Section 96 of NRSWA gives specific guidance on how prime cost and overheads will be constructed
S96 (1) provides that:
“Any provision of this part enabling an authority, body or person to recover the costs or expenses of
taking any action shall be taken to include the relevant administrative expenses of that authority,
body or person including an appropriate sum in respect of general staff costs and overheads.”
Secondary legislation
Regulation 4 of The Street Works (Recovery of Costs) (England) Regulations 2002 - Statutory
Instrument 2002 No. 2091 (“SI 2002 No. 2091”) sets out that direct costs and overheads can be
recovered to the extent that they are relevant to the chargeable job and calculated in accordance with
the claimant’s financial policies.
The Regulation goes on to define Direct Costs and Overheads:

Direct costs are defined in the Regulation 5 as:
“(a) the cost of staff (whether salaried or non-salaried) employed directly by the claimant
calculated in accordance with regulation 7.
(b) the costs payable to a contractor engaged by the claimant;
(c) the cost of materials;
(d) the cost of hiring equipment, plant and vehicles or, where the equipment or plant is, or vehicles
are, leased to the claimant, the equivalent cost based on relevant market rates; and
(e) other costs which are relevant and specifically attributable to a chargeable job.”
Overheads are defined in Regulation 6:
“(1) Overheads shall comprise an appropriate percentage of the direct costs referred to in Regulation
5, calculated and applied separately for each category of those costs.
(2) An appropriate percentage for the purpose of this regulation means the percentage calculated by
the application of the formula:
(b ÷ a × 100) plus
(c ÷ a × 100) plus
(d ÷ a × 100)
where:
a = the total direct costs of all chargeable jobs, and jobs other than chargeable jobs, charged to the
cost centre or centres responsible for the chargeable job during the most recent period for which
published accounts are available;
b = the cost in that period of support services provided within the cost centre or centres responsible
for the chargeable job;
c = the cost in that period of support services provided to the cost centre or centres responsible for
the chargeable job by other cost centres within the claimant’s organisation; and

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d = the cost in that period of capital and of depreciation of assets used in connection with direct costs
incurred by the cost centre or centres responsible for the chargeable job, or directly or indirectly in
providing support services to such cost centre or centres.”
Regulation 2 defines cost of capital as:
“the cost of capital calculated by reference to the rate of return which is prescribed either by
legislation, or by the relevant regulator in respect of the claimant’s regulated activities (whether or
not the chargeable job is such an activity) or, if no such rate is prescribed, by reference to a rate which
is two per cent above the Public Sector Discount Rate as set by the Treasury from time to time”.
In order to comply with this SI it is therefore necessary to apply the rate prescribed by a relevant
regulatory authority, (as an example in 2003 the Oftel rate was 13.5%) to the capital used in
connection with NRSWA Damage Repair Works.

Damage through negligence
Claims based on fully absorbed cost principles.
These apply to repairs carried out by companies whose normal work is the repair and maintenance of
the plant or apparatus that is damaged. The main example is statutory undertakers who have plant or
apparatus underground where it can be damaged.
They have fully equipped crews engaged on planned maintenance tasks to keep their network
working at a required standard. Faults or leaks may occur for many reasons, age of apparatus, earlier
repairs needing to be reworked, etc. 0r the crews could be providing service to new customers or
upgrading apparatus.
Companies often have many crews based in regional locations so they are available locally and are
available at short notice. A utility is seldom informed by the damager: they only become aware of
many faults in one location in the case of telecoms, or phone calls from the public in the case of gas
and water. The nearest available crew can be switched quickly by a central control unit to investigate
the fault and make a temporary repair; if faults are due to damage then details can be gathered. To
make a repair scheduled works are postponed, sometimes rescheduled in overtime periods so as
the crews can restore supplies to customers as soon as possible by means of a temporary repair. A
permanent repair can be scheduled for a later time.

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Basis of damage cost recovery
Recovery of damage costs is on the basis of restoring a party back into the condition they were in
before the damage. Costs tend to be on the basis of the extra costs of the damage repair. This places
utilities in a difficult position as their extra cost can be hard to identify: they have the engineers on
long term contracts, they already have the vans, etc. So costs are hard to prove.
What are alternatives?
Claims would be very much higher if:
•Utilities had fully re sourced damage repair teams waiting in depots around the country,
ready to race over to make a repair. Their costs could be fully self-contained and the causal link
between costs and the repair would be strong.
• Always use external contractors to make repairs.

Both these alternatives would be very much more expensive: the fully dedicated team
would be idle most of the time and probably take too long to reach the repair site. Indeed
delays to repair can sometimes lead to addition damage. The contractor would charge prices
with high profit elements as they would also have to reschedule planned works in order to make
the repair quickly.
Use of own maintenance crews
This is the cheapest alternative. However there is a massive support system required to get the crew
in the right place, at the right time, with the correct equipment, with the right training, with the
correct repair kit and tools, able to work with safety to themselves and others. The crew must be
paid, rostered, managed, pensioned, etc.; the managers and planners must be housed in offices. They
must have team meetings, ensure all health and safety training as well as technical training has been
completed.
The list is endless but there is case law and statutes that define exactly how the computation is done
and how much of the costs will be included.
Case law guidance from the High Court case: BT v Geraghty & Miller International Inc.
The judgment considered the main elements of the uplift claimed and held to be recoverable:-
a) the relevant pay costs of the planning departments which identify when and where
damage occurs, organise and support the engineers doing the repair and take the steps
necessary
b) that a company’s existing accounting system can be used: special system set up just for
damage cost recording would be too expensive. The relevant proportion of the amounts

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attributed by a company’s system in respect of costs (such as the costs of accommodation or
management) to the cost centre which includes damage repair work:
c) there must be a causal link between the repair work and the costs claimed. BT made the case
was that there was a causal link if a particular cost would reduce if all negligent damage were
to cease
Damage in the Street
i.e on public roads, pavements, etc.
When damage to a statutory undertaker’s plant or apparatus occurs in the street, the provisions of
NRSWA Section 82 apply, with the definition of the costs being contained in S96
Statute: primary
S82 (1) provides that:
“An Undertaker shall compensate –
(a) the street authority or any other relevant authority in respect of any damage or loss suffered by
the authority in their capacity as such, and
(b) any other person having apparatus in the street in respect of any expense reasonably incurred in
making good damage to that apparatus,
as a result of the execution by the undertaker of street works…..”
S96 (1) provides that:
“Any provision of this part enabling an authority, body or person to recover the costs or expenses of
taking any action shall be taken to include the relevant administrative expenses of that authority,
body or person including an appropriate sum in respect of general staff costs and overheads.”
This Section covers costs arising throughout the whole of Part III of the Act
Statute: secondary
Regulation 4 of The Street Works (Recovery of Costs) (England) Regulations 2002 - Statutory
Instrument 2002 No. 2091 (“SI 2002 No. 2091”) sets out that direct costs and overheads can be
recovered to the extent that they are relevant to the chargeable job and calculated in accordance with
the claimant’s financial policies.
The Regulation goes on to define Direct Costs and Overheads:
Case law:
• 2000 BT v Bell Cablemedia (Leeds) Ltd, was undertaken as a test case that considered what
Damage Repair costs could be recovered under NRSWA.
• 2003 BT v Cable & Wireless UK Services Ltd. This case also considered what costs could be
recovered in Damage Repair works carried out under NRSWA

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Richard Kemball-Cook, FCA
I am a Chartered Accountant who qualified in 1972 after serving Articles with Robson, Rhodes in the
City. I went on to be audit manager of a small firm, Bourner Bullock, in the West End.
I always had an interest in engineering and I joined the Procurement Executive of the Ministry of
Defence. This was fascinating work as the Cold War was in full swing with each side racing to achieve
technological breakthroughs. Huge amounts were spent on R&D and product development and I
specialised in calculating overheads for fixed price and cost plus non-competitive contracts.
I was selected to join the Royal Ordnance Factories to help with their privatisation and created
Balance Sheets out of the existing Vote Accounting systems. With that experience, in 1985 I was
asked to join British Telecom plc and deal with financial relations back to HM Government. I served
on the Review Board for Government Contracts for a number of years, chairing the contractors side.
In the late 1980s I was asked by BT to be involved as the NRSWAct was progressing through
Parliament. I joined the HAUC working parties on S75 Inspections and S84 Diversionary Works. Later
I chaired the committee that drafted the Statutory Instrument under S 96 on the Recovery of Costs.
In the meantime I was the BT expert witness on costs charged for Negligent Damage, NRSWA
Damage and Alteration Works. Prior to the three major High Court cases I won the only County
Court case that allowed the inclusion of full overheads in cases of negligent damage based on civil
wrong or Tort.
I was head of the support team to the three major High Court trials in recent years that have
considered the recovery of overhead costs:-
• 2000 BT v Bell Cablemedia (Leeds) Ltd, was undertaken as a test case that considered what
Damage Repair costs could be recovered under NRSWA.

•2003 BT v Cable & Wireless UK Services Ltd. This case also considered what costs could be
recovered in Damage Repair works carried out under NRSWA.

• 2002-4 BT v Geraghty & Miller International. This case considered what costs could be
recovered in Damage Repair works not carried out under NRSWA.
I left BT in 2002 and since then have been a consultant on NRSWA matters to a number of those
companies who have apparatus in the street. I have lectured to both statutory undertakers as well
as local authorities. Many of the ‘new’ telcos who laid networks in the late 1980’s and 90’s are now
being asked to divert apparatus as major transport works are commenced for the Olympics. This is my
current work.
Contact:
E: [email protected]
W: www.nrswacosts.co.uk
T: +44 (0)786 0346776
+44 (0)1227 780488

COPYRIGHT RICHARD KEMBALL-COOK, 2009-2010. CONTACT: [email protected]