By Bruce Jervis
Liquidated damages are assessed against contractors for late completion of a project. They are intended to compensate project owners for the costs of an extended construction period and the delayed use of the facility. Liquidated damages clauses are generally enforceable if the daily rate represents a reasonable forecast, at the time of contract formation, of the owner’s actual costs. If the daily rate is arbitrary – merely an incentive for timely completion by the contractor – the clause may be ruled an unenforceable penalty.
On public works projects, the determination of the daily rate of liquidated damages is controversial. Public project owners do not have construction loans. Completed public projects do not generate revenue. What are the owner’s costs of late completion? They are primarily extended inspection and administration costs.
A contractor on a recent federal project challenged a daily rate on the grounds the government’s inspection and administration costs were phantom. Government personnel costs are fixed; federal employees do not work more hours or get paid more salary as a result of delayed project completion. This argument was rejected. Although personnel costs may be fixed, allocation of efforts to a delayed project detracts from the attention provided to other projects. The resulting inefficiency is a real cost to the government.
What do you think? Are liquidated damages on public works projects justified by real costs to project owners? Or, is the daily rate of liquidated damages really just a threat used as leverage to motivate timely project completion?