Liquidated damages for late completion of a project are sometimes referred to as a “penalty.” This is inaccurate. While liquidated damages may feel like a penalty to a contractor, they cannot be punitive in nature. In order to be enforceable, liquidated damages must reflect the costs, reasonably foreseeable at the time of contract formation, the project owner will incur if the project is not completed by the scheduled deadline.
The calculation of the daily rate of liquidated damages is the subject of considerable litigation. Contractors challenge the enforceability of these clauses on the grounds the daily rate is arbitrary and does not reflect a forecast of actual owner costs that will be incurred as a result of late completion. A recent federal case is a good example.
The contract called for liquidated damages of $551 per day. The bulk of the costs that went into that rate were the salaries and benefits of the project owner’s administrative personnel. The contractor argued that these were phantom costs. The owner’s administrative personnel would have received their salaries and benefits regardless of the status of this one contract.
What has your experience been? Do you feel a project owner’s salaried administrators represent real costs the owner incurs as a result of late project completion?
Bear in mind that contractors recover their extended administrative overhead when they are delayed by the project owner. As always, I welcome your comments.
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