As if you didn’t need another reason to stay strictly on schedule, a lot of construction contracts include a liquidated damages clause. If the schedule is overrun, this clause could potentially hold you financially liable.
Here’s a closer look at liquidated damages in construction, and how to avoid a costly dispute.
Key Takeaways
- Liquidated damages are a set amount of funds contractors must pay to the project owner to cover each day a job continues past the initial agreed-upon completion date.
- A liquidated damages clause is typically enforceable with exceptions, for example, if the clause is used simply to penalize a contractor as opposed to compensating the owner.
- To avoid a dispute, be sure to track any delays with scrutiny, maintain a detailed daily log/record, and stay communicative with the owner.
What are Liquidated Damages in Construction?
Liquidated damages are typically a set amount of funds contractors must pay to cover every day the project goes beyond schedule. On jobs where schedule is paramount (like commercial builds that will generate revenue once operational), a liquidated damages clause offers extra protection for the project owner – and more financial incentives for contractors to finish on time.
The good news is, you and the owner will have to agree upon a liquidated damages clause before breaking ground. We recommend trying to negotiate for a cap on the daily amount you’ll owe. For example, including a sentence stating, “In no case shall the aggregate amount of aggregate Liquidated Damages for Delay payable by Contractor exceed [percent (%)] of the Contract Price.”
Another thing to note: if you’re bringing on subcontractors to work on the construction project, don’t forget to make them aware of the LD clause and if possible include a flow-down clause to ensure they are equally motivated to avoid any project delays along with the prime contractor.
Also, if the owner recognizes a substantial cost to any schedule delays, they might also agree to pay a bonus for delivering the project substantially quicker, so be sure to evaluate the schedule from several possible angles and the related costs and logistics required for each scenario.
When is a Liquidated Damages Clause Enforceable?
While the idea of a liquidated damages clause may seem intimidating, they aren’t automatically enforceable, nor can they be used to penalize you as the contractor. In a fair contract, the clause must be agreed upon by all parties, and must be used to provide payback to the degree the owner was damaged in the case of losses caused by schedule delays. Additionally, if liquidated damages are agreed to then they should be the exclusive remedy. For example, Consequential damages, or the actual costs an owner might incur due to delays that aren’t directly related to construction, should be excluded from the contract when liquidated damages are included.
Courts have a mixed view on liquidated damages clauses, and not all of them will be enforced by a judge. This is especially true if the damages claimed are exceedingly large or punitive. To be enforceable, liquidated damages should constitute a reasonable amount, and be either uncertain or difficult to estimate at the time the contract is signed.
How to Avoid a Liquidated Damages Dispute
It might go without saying, but if you want to avoid a liquidated damages dispute, make sure you’re strictly following all notice requirements. Change orders, RFIs, and reporting requirements must all be adhered to, and schedule updates should be clearly communicated to the owner in case of any delays. Change orders in particular can hurt you, so don’t let them go unresolved for too long. If you notice that a change order hasn’t been signed off on, make sure to communicate that promptly.
Record-keeping is particularly important as well. Maintain detailed daily logs, and keep a long lead list on materials and equipment to stay ahead of any delayed shipments. Lastly, when negotiating the contract itself, make sure there’s a clear way to define when/how the schedule can be extended should there be any delays that are beyond your control. And of course, if you can bake more days into the schedule to begin with, you’ll already have a nice cushion just in case.
Ultimately, liquidated damages in the construction industry are pretty straightforward but can prove very costly if your schedule isn’t well planned and well executed.