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ConstructionPro Week, Volume: 2 - Issue: 43 - 10/25/2013

Why Aren’t Contractor Delay Damages Liquidated?

By Bruce Jervis

 

Contracts frequently stipulate, or liquidate, the project owner’s daily damages for late completion by the contractor. This spares owners the difficult task of quantifying and documenting their actual costs. It can be beneficial for contractors, as well, as it caps their liability exposure and makes it known in advance.

 

It is less common for contracts to liquidate the contractor’s daily damages for owner-caused delay. Yet, there is no reason it can’t be done, and it offers the same advantages as liquidated damages for late project completion.

 

An example of liquidated contractor delay damages is found in a recent California case. The City of Los Angeles contract stipulated that the prime contractor would receive $1,200 for each calendar day of owner-caused delay. If the owner-caused delay was concurrent with contractor-caused delay, there would be no recovery. This is a very simple, straightforward contract provision, and it is enforceable.

 

The question is, why aren’t contractor delay damages liquidated more often? It would eliminate the complex task of quantification and reduce litigation. Prospectively, the owner would know its liability exposure and the contractor would know its possible recovery. Is this not done simply because it isn’t traditional? Or, are there drawbacks which are not readily apparent? I invite your comments.

 

COMMENTS

In my experience liqudated damages are very difficult to recover without extensive record keeping and notice of potential delay in "real time". It seems simple enough when contracts are being drawn up especially because everyone is still drawn into the excitement of the new project starting. However, when and if the wheels come off the cart things get much more difficult. Many contracts already include Change Order clauses should the contract time be extended through no fault of the builder.
Posted by: George Berg - Friday, October 25, 2013 11:02 AM


The only drawback is that the solution is too logical.

Imagine all the "suits" that would be "denied" the opportunity to "practice" on these type of cases (smiling)
Posted by: JV - Friday, October 25, 2013 11:13 AM


As the Owner's damages are tied specifically to a delay in the completion of a project, those damages are consistent, no matter where in the project the contractor's delay occurred (e.g. late mobilization, late delivery of equipment, etc.). The contractor's damages, due to an owner cause delay, could occur at any point in the project schedule and the amount of can vary greatly. If the delay occurs early in the project, when the contractor has few resources tied up in the project the damages would be less than if the delay occurs at the peak of construction.
Posted by: Ted Sullivan - Friday, October 25, 2013 11:19 AM


Unless this were a proposal where the Contractor can stipulate the delay impacts to him the Owner could 'buy delay at a much lower price that would normally be negotiated. It does demonstrate the risk the Contractor should incorporate in his Bid to mitigate Owner under compensation for delay impacts, but if the Owners stipulated damages for delay were too low it would reduce the disincentive to slow the project- if the Owner's circumstances no longer demand timely turn over. It would continue the arbitrary and dis-balanced Owner- Contractor relationship.
Posted by: max ellis - Friday, October 25, 2013 12:19 PM


In theory this approach seems reasonable. In practice, a provision like this would seem to conflict with No Damage For Delay provisions. Also, many times the owner writes the contract and has much more leverage over inclusion of contractor favorable provisions. I can tell you there are countless owners out there that would NEVER consider including this provision in a contract.
Posted by: Anonymous - Friday, October 25, 2013 12:38 PM


As in all delays, it is not easy to prove the cause regardless of who brings the claim. Additionally, most LDs must also recognize a benefit for finishing early if there is "cost" for finishing late. This would perhaps imply a refund of unspent general conditions expenses. It seems a better approach is focus on contract language that sets a framework for better cooperation and communications to reduce delay. It would be interesting to see if real benefits in this area are being realized in Lean and similar IPD projects.
Posted by: Marshall Wilson - Friday, October 25, 2013 2:05 PM


Enforceable liquidated damages (LDs) must be reasonable in light of the foreseeable damages for delay to completion. The owner determines the start and completion and its reasonable LDs for a late completion. As Messrs. Sullivan and Ellis point-out, the contractor's loss caused solely by owner delay varies with actual prosecution progress of the work, and; in my view, is unforeseeable, thus can not be prospectively priced by owner or contractor.
Posted by: Richard Bull - Friday, October 25, 2013 2:27 PM


Liquidated Damages and Consequential Damages, these are valid claims in case of contractor delays. LD's tend to be quantified when the client is a "for profit" organization or entity. In the event there is a "not for profit" or even an individual the Consequential damages caused by the contractor delay need to be quantified as expenses incurred by the Owner due to the absence of completion and project turnover/occupancy by the client.
Posted by: JMD - Friday, October 25, 2013 10:55 PM


Contractor delay damages often include more than just time-related costs. While a pre-estimate of extended site and office overheads may be possible, other potential damages resulting from delay e.g. productivity impacts, cost escalation, additional costs due to seasonal variations etc. would still have to be calculated based on the specific actual events on the project.
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