Liquidated damage assessments frequently become contentious. Contractors bid and sign contracts without fully appreciating how fast these daily charges can add up. In one recent case, the contract called for a daily assessment for late completion of the overall project plus a daily charge of $42 per unit for each of the 30 housing units covered by the contract. The contractor incurred almost $100,000 in liquidated damages for unit-based delays.
There was an interesting twist to this case. The contractor was entitled to an extension of time due to government design changes to one of the 30 units. The government issued a contract modification extending the completion deadline for that one unit while maintaining the original contract deadline for the other 29 units. The contractor signed off on the change order, leaving unanswered the interesting question of whether the government can mandate a partial or severed extension of this nature.
Contractors are accustomed to challenging the reasonableness of the daily rate of liquidated damages. Contractors are accustomed to arguing that entitlement to an extension of time should mitigate liquidated damages. But it is unusual to be confronted with a situation where the completion deadline for the delayed portion of the work is extended while the deadline for the other work remains unchanged.
Have others seen situations such as this? Given critical path issues and the practicality of construction, can one segment of the work be delayed by the project owner without impacting the rest of the project? I welcome your comments on this and any other unusual liquidated damage issues you have encountered.
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Bruce Jervis, Editor
Construction Claims Advisor
Seems to me this ought not work. LD's are agreed prior in Contract as "reasonable". Offered discounts which may be based upon "actual" costs at time of late finish, or changes invalidate the orig. estimate (called "Liquidated") and I believe make them unenforceable.
Posted by: Phil George | 06/16/2011 at 11:23 AM
In your example, it comes down to the contractor signing a contract and accepting a change order that he shouldn't have. Shame on him. He has no one to blame but himself.
Posted by: william pangelinan, jr. | 06/16/2011 at 12:27 PM
How do we get the Contractor to pay the Design Professionals compensation for administering the Construction Contract after the completion date???
What and where do we put something in our Project Manual??? Even if the Owner reimburses the Design Professional, how do we get the Contractor to reimburse the Owner???
Posted by: Bob Kleinpeter | 06/16/2011 at 01:53 PM
Earlier in my career I did a lot of public type projects, most of it schools. I think we learned how to deal with these situtations.
We wrote in the project manual that if the contractor exceeded the time for the project construction funds would be withheld for his contract by the owner to pay the architect for additional services which were defined in the owner architect contract.
You should know if A/E additional services are going to be required before the end of the project. If not the Bonding Company would be responsible for the A/E additional service, I have been paid by the Bonding company several time also.
The A/E has some control over payments to the contractor and the Owner has equal control with the contractor over retainage.
I have had projects with liquid damages set up on a per unit bases and on a dailey bases and have enforced both. What I tend to like best is damages based on actual losses / cost to the owner. Which should be determined on a project bases and changes with the project type and the owner, in my opinion.
I once had a contractor who did not conplete his contract until 3 years after the completion date he set out on his bid form. He had a stack of change order on the project and never once ask for a time extention. We wrote the CO's for what he requested and he signed them all. He thereby gave up his right to time extentions.
Time extentions and additional cost are the contractor responsible to request and defend to the Architect and owner. They are to be requestred as the project goes on or within so many days of the event causing the change.
Partial occupancy - should be addressed by the architect in the project manual. It requires additional work for the architect and his consultants. The question is how much additional work do you want to do for free and when does someone start getting charged?
In most cases thew contractor sets the schedule. If the work is on the critical path it most likely will change the completion.
You might check with the owner's attorney about using the term "liquidated damages".
Posted by: Paul T. Pierson | 06/16/2011 at 06:58 PM
Boy i'de love to be an architect or engineer these days. Its like being a weatherman, you get paid even when your wrong. How many delays in projects are directly caused by the A/E not knowing what they are doing, or a junior guy draws the plans and the senior guy signs off on it. Its very easy for these A/E's to sit and there office and say "oh the owner should not pay for this or that",and tells the owner "Oh you should withhold paymnet from the GC". You all forget that all this affects the subcontractors and its not ALL the subs fault. Too many subs suffer from problems with another sub holding up the money cause the owner wont pay GC until such and such is done. Most all subs are small businesses and in this economy just trying to survive, if you dont pay your vendors they will close your accounts based on one GC withholding funds, and not everyone can finance the job for you. I have seen many jobs behind schedule because of poor management by the GC's Super. Now a days its way to easy for these owners or A/E's to sit back in the offfice and not pay the people who are doing their best to get the project done for the owner. This affects all the people involved - the men in the field, the suppliers, small businesses etc. If the Gc cant pay the sub, maybe the sub cant pay his men, and then the guy who has nothing to do with it suffers and cant pay his mortgage on time because the owner wants to save $100 on a $1M job. Since everyone is so eager to collect LD's from the GC, then the contractor needs to be more adamant about collecting late charges for past due bills. All checks should be cut to GC in 15 days so the money can get to the subs and suppliers in 30 days. Why should we finance the job for the owner? We did not tell you as the owner to do the job in the first place, you asked US to do the job, so you either have the money for the job or you dont. If you cant pay the bills on time then you shouldn't do the job until you can. Owners - stop trying to come up with ways to screw the contractors and subs and just pay the money that is due. If you learned a thing or to about construction work and real what it takes in the field to get stuff done, and not only take the advice of your A/E and make your own decision it would be better for everyone.
Posted by: Frank B. | 06/17/2011 at 04:38 AM
As a public owner, LD's along with termination are the only hammers with real merit over the Contractor. How many times have I had a contractor delay for months starting the job or even ordering long lead materials when having more then enough time. We consistently inform that LD's will be imposed if the contract is not completed on time and there is no VALID reason for an extension of time. Even so, they are SURPRISED when LD's are imposed and offer every excuse in the book when they have only themselves to blame.
Posted by: Joe | 06/17/2011 at 06:54 AM
Delays hurt the Contractor just as much as the Owner if not more. Contracts should allow LD's enforced on the Owner for Owner & A/E caused delays as well. Either way LD's are not a penalty but are intended to reimburse for actual damages. If the issue ends up in court, the Owner will be required to show that their actual damages are similar in amount to the liquidated damages enforced. Too many Owners still view LD's as a penalty on the contractor and try to use LD's as a pay day for themselves.
Occasionally I will get a project with an onery Owner that has an unrealistic schedule and a ridiculously high LD clause. In those cases I usually calculate how long the project will actually take and then I include the LD's that are likely to be charged in my bid and project budget. This only ends up costing the Owner more becasue they end up paying their own liquidated damages along with the added gross receipts taxes on them. I like to bid these kind of jobs becasue they usually scare most of the other bidders away, and then if we finish a little earlier than we thought, we get to keep all the remaining money budgeted for LD's as profit.
Posted by: Stobals | 06/17/2011 at 02:26 PM