About


Publications




Search Construction Advisor Today


  • constructionadvisortoday.com

Bookmark and Share

« A $789 Billion Stimulus Program: Where Will All the Money Go? | Main | GBCI Launches Continuing Education Program for LEED Professionals »

08/20/2009

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Dear Mr. Jervis:

You raise an interesting point. Three issues inform our decisions w/r/t setting an appropriate daily rate for LD's; in order or importance, they are:

1. Estimate of the real damages that owner will suffer as a result of the contractor's delay;
2. Potential impact of LD rate on competition--particularly small and minority contractors; and
3. Potential for the LD rate to achieve its purpose-- to motivate timely delivery.

If we have sufficient data to precisely calculate #1, our LD's become "actual damages." What then?

In my experience representing general contractors and owners, the LD daily amount is purely the product of negotiation. The reason is that a forecast of the owner's actual costs would produce an amount far in excess of what any GC could actually agree to absorb. Thus, the goal instead is to find an amount that will motivate the contractor toward timely completion, without being so punitive as to induce the contractor to cut corners on quality to avoid the penalty. So LDs are not about compensation so much as creating an appropriate incentive for timely completion.

Mr. Jarvis

Contrary to the notion of brandishing a club over the contractors, I honestly believe all parties involved in sorting out the strategic close-out of incomplete or non-compliant projects uses up a lot of energy everywhere. If there isn't a basis for substantiating costs, how otherwise would you account for the withholding?
There are differences in project types, project delivery approaches, and project management styles that impact the analysis for liquidated damages. This could become overwhelming at the outset, without taro cards and a crystal ball.
A substantial threat is all our clients have to enforce the contract provisions. These issues can always be negotiated by amendment under a quality contract and having obtained quality services.
If the Contractor fails to perform, the Owner has options, albiet Performance Bonds and Surety Company involvement, or they can reserve the funds for what they can't anticipate as a result. A substantial withholding will likely take care of "real" costs unforeseen from other third party claims against the contract.

In my opinion, how LD's are calculated seems relatively moot. When they are a part of the contract documents bid set, it is the contractor's sole option whether or not to bid on that contract. If the LD's are not desireable, then the contractor has the choice not to bid on or accept the project; no one is holding his or her feet to a fire.

I agree with the result of the DOT case mentioned above. Why must there have been an "explanation of how the rates in the chart had been determined?" Perhaps it would be beneficial for the determination to be explained, however it should not matter legally. It was the contractor's choice to bid on and accept the project with all of the contract requirements contained therein.

Lucy...If you have sufficient data from which to estimate actual damages for late completion, you have met the legal standard for enforceable liquidated damgages: the contractual stipulation (or liquidation) of forecast actual damages which would otherwise be difficult to itemize or document.
I would not emphasize the motivation of timely delivery, however, as that is not the legal test for enforceability.

As a distributor, we often are notified that if the contracator receives LD then we will be back charged for the expense. Most of the issues we face are delivery. To date I have never been charged. I stand on the fact that I did not make the fixture schedule and I can't be held accountable when I had no choice in what was furnished. the architec chose the fixtures adn when we contact them they usually are willing to co-operate in a resolution.

Reese and Brad Henderson both raise an important point regarding liquidated damages. They are a contractual allocation of risk, just like many other provisions of a construction contract. But the clause can only be negotiated on private projects. On public projects, the terms are presented to bidders on a take-it-or-leave-it basis. As Nathan points out, contractors don't have to bid on the contract and they certainly know the terms in advance. But a punitive daily rate of liquidated damages may limit bid competition and be subject to an after-the-fact challenge of enforceability.

LAD's
Historically we have always had a calculation available to contractors for LAD's
In Private Sector jobs LAD's are based on loss of potential rental or sales, extended professional fees and sometimes finance charges but we always have a calculation.In the public sector its more difficult. In the UK for example public sector have formulae for working out. Key to LADS to me is getting a fair calculation available to bidders up front so genuine pre-estimate of loss is seen to be fair and reasonable

Some contracts contain both the liquidated damages and early completion bonous.

How does an owner or contractor calculate the amount of bonous which will probably be the same as LD amount?

Don...Subs and suppliers are frequently subject to a back-charge or pass-through of liquidated damages assessed by the project owner. I caution you that if you agree to contract terms to that effect, they may be enforced against you even though you didn't establish the fixture schedule. Of course, your willingness to be cooperative probably leads to an amicable resolution in most cases.

Jim,

Bonuses and LD are completely different animals. LDs are there to compensate the owner for actual monetary damages of not being able to take possession of the building as planned. When there is a Bonus clause there is usually opposite, and equal, punitive damages included. These are there to encourage the contractor to complete early or punish him for not. They are often confused.

I have dealt with contractors who will price LD in their bid if they think the cannot meet schedule. How often are they low bidder when doing this? I don't know...probably depends on the bid environment and competition. In this case not enforcing LD would only reward them.

LD is not either a Carrot or a Stick.

It is BOTH.

LD serves the purpose of BOTH a carrot AS WELL AS a stick.

As a public works bidding contractor the amount of liquidated damages are viewed all of the time as a penalty, but this is not necessarily the main issue that makes the decision to bid a project or not.

The issue is that the majority of required completion time periods for projects is to short and unrealistic. It is my professional opinion that if enough contractors spoke out and stood up to the unrealistic completion dates provided by the owners or architects, liquidated damage amounts would not be as much of a contension.

I think that Architects need to look at their own inabilities to produce a completed, permit ready set of plans in the amount of time they estimate and apply that understanding to the actual project. I believe that most professional contractors would agree that the available bid time and construction project time are more contensious than the amount of liquidated damages pulled out of someones hopen and a wishin we get some money back from the low bidder wish list. This would also help curve change orders, which most low bidders are in turn hopen and a wishin for to off set anticipated losses.

In my experience the setting of LD at the bid phase of a project protects both the contractors and owners. If the projects are not completed on time as bid, then the is most times substantial oversight and contract administrative costs that continue to build up, and in most cases are more than the set rate. This limits the impact to the contractors the same as it attempts to compensate the owners for the additional cost. When the value is pulled from a chart the numbers were developed based on the level of effort required for oversight and administration on projects of a larger magnitude. One of the biggest issues surrounding LDs is the inconsistant enforcement of them, so they have been given a penalty stigma by the construction group. In construction there are different types of projects that require different types of oversight. Public infrastruction tends to require more day to day oversight than private buildings or sites, so this needs to be taken into account when the value is set by the consultants and owners, but on the private side there can be other losses to take into account, such as revenue, rent, or tax breaks, etc. In the end, they are an important part of construction contracts and deserve review on every project, because without a completion date would mean next to nothing.

I was interested in the comment that it is easier to forecast the cost of late completion/loss of use in the private sector than in the public sector. That seems logical with regard to project financing costs, lost rental income, etc. Do others agree that LDs are inherently more arbitrary and artificial in the public sector?

This is my take on LADs
They must be a genuine pre-estimate of loss by the Owner
They must be fully described in the Bid and Contract Documents and a calculation of how they are arrived at must be available to the contractor. If the correct procedure are followed and both parties agree the LAD's before contract signature Court precedents show that the Courts will support Owner and he does not have to show proof of loss.
As a previous contributor stated LAD's are quite separate from bonus and penalty clauses and should bever be confused.
Architects should be very aware if they do not fairly assess and award reasonable extensions of
time the Owners ability to claim LAD's is compromised and Owner wil only get damages he can prove .
LAD's should be calculated to show genuine preestimate of loss per calendar day notper week , month etc
Most of my experience in LAD's has been in UK and Caribbean so interested in US take?

Jim...Your experience in the UK and Carribean is consistent with the prevailing rule in the US. The daily rate of liquidated damages should be based on a reasonable forecast or estimate, at the time of contract formation, of the actual costs the project owner will incur as a result of late completion. The owner has no obligation to disclose to a bidder/contractor how the amount was determined, but should be prepared to do so if the amount is later challenged. If LDs are determined to be unenforceable, due to lack of a reasonable forecast, the project owner may still attempt to document and recover actual damages for late completion.

Testing comment form

In Alberta, Canada, the Provincial government highways contracts has two devices: a stated Liquidated Damages to cover costs, and a Site Occupancy - essentially a fixed rental of the site, where the contractor competes on the quantity of Days.

The LD value is close to what it would cost the direct supervision of a resident engineer per day. Priority projects often have an early milestone with a 'double' LD. But the LD is always stated up front, and always the same.

Milestone dates can be delayed by weather-days on a 1:1 basis.

The Site Occupancy is an interesting incentive. The contractor sets the number of days in his tender. The Site Occupancy (or Rental) continues every day the contractor is scheduled to work. If the contract number of days are passed and the contractor hasn't finished, the rental continues to be deducted from the contract item, essentially a budget over-run, that comes out of the contractors pocket.

Both LD and the Site occupancy can occur at the same time - if the milestone is missed and the days run out - both kick in.

If the contractor can complete the project before the days are finished, he keeps the remaining amount.

The interesting part is the owner management - trying to get the site days, while managing the weather days and avoid the LD.

I have closed tenders where we knew that the schedule was impossible to meet without penalty, and ended up including for the penalty and site days that took us 60 days past the contract completion.

Much to the amazement of the engineer, who hadn't realized just how risk-adverse Contractors are. Contractors will always take the risk, provided the pay out is appropriate.

Based upon past claim evaluations, there have been instances where LDs are included into the anticipated cost of the project. Those contractors understood the meaning of risk.

The use of the Site Occupancy "rental" by the Alberta Provincial Government is interesting. I haven't seen that concept used that way in public contracting.

In my experience as a public owner's rep, the LD's are arbitrarily set depending on the size of the contract. They are usually set low enough that the issue of whether they are a fair estimate of anticipated extra cost never comes up. Public Design/Bid/Build contracts usually have a slim profit margin. This makes even a smaller than reality amount still effective as leverage. Yes, the contractor agrees in advance to the figure, whatever it is based on.

In my experience, quite often the delays are a result of poor or incomplete drawings. The architect and engineers are under the gun so they pass the liablility off to the contractor. Then standing at the owner's side the contractor gets blamed for the recent college graduates inexperience. Great CAD operator with no real world, hands on, get your pants dirty understanding of what is being drawn and built. Personally, I feel that the design professional needs culpablility with the root cause of the need for LD's.
On the other hand, if the contractor has grossy mismanaged the project he/she should be held accountable.

While I represent both contractors and owners, I usually represent owners when negotiating contracts. I agree with the comments above that owners should (and my clients always do) start by developing a reasonable projection of their losses if the project is delivered late. These can be very large, especially if the owner is anticipating significant revenues from the completed project (e.g., income from a blockbuster patented drug). So, once the projected loss is known, the owner realistically has to be prepared to accept much less than that in liquidated damages. Whatever the owner's loss, the contractor's calculus is based on its own potential gain on the contract (which is nearly always less than the owner's) as compared with the downside risk. So liquidated damages are not a perfect solution for the owner. But, since contractors on most projects with potentially huge actual delay damages insist on a waiver of consequential damages, the owner needs some remedy in cases of delay -- other than terminating the contractor, which often entails even more delay.

Another issue owners often face in these negotiations is that the contractor insists on a cap on the liquidated damges or an overall limitation of liability, or both. The reason for this is the same: the contractors are not willing to take on risk they perceive to be excessive compared with their upside profit potential from the job.

Next »

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment