ConstructionPro Week, Volume: Construction Advisor Today - Issue: 17 - 08/20/2009

Liquidated Damages: A Forecast of Costs or an Incentive for Timely Performance?

 Liquidated damages are stipulated in construction contracts in order to compensate the project owner for the contractor’s late completion of the work. The establishment of the daily rate can be somewhat murky and controversial. The legal standard, seldom applied in practice, is that the daily rate should be a reasonable forecast of the costs the owner will incur in the event of late completion of the project.

The amount should not be intended to penalize the contractor or to prod the contractor into timely performance. But how often does a project owner actually make an attempt to calculate the prospective cost of late completion? In a recent case, a state transportation department took the daily rate of liquidated damages from a chart in the department’s standard specifications. That rate was based solely on the amount of the fixed-price contract. There was no explanation of how the rates in the chart had been determined. There was no indication there had been any consideration of projected actual costs. Yet the liquidated damage assessment was enforced against the contractor. I would like to hear from project owners and their advisors. How do you determine the daily rate of liquidated damages stipulated in your contracts? Is there really any consideration of foreseeable actual costs such as loss of use, extended administration and supervision of the contract, or project financing costs? In reality, aren’t liquidated damages more of a crude club over the contractor’s head than a reasonable forecast of anything?

As always, I welcome all comments below.

In the upcoming issues of Construction Claims Advisor . . . case summaries and articles covering:

  • Liquidated Damages Upheld in Federally-Funded Highway Contract
  • “Responsive” Proposal not the Same as a responsive Bid
  • Past Performance Considerations Justified Negotiated Procurement

Bruce Jervis, Esq., Senior Editor 

 

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