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« President’s New Better Buildings Initiative Wins Trade Groups’ Praise | Main | Texas A&M Seeking Participants for BIM Survey »

02/17/2011

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I have contract with damages of 5400.00 a day for impeeding comerce, if I don't open a road on time, were did they come up with that number.

We are a small sign company specializing in ADA compliant signs, and most of our projects are schools. We have not been paid at all in several cases because the contractor has stated that we are the cause of substantial liquidated damages. In one case, we were able to find out, much later, from the school district, that the contractor had lied and there were absolutely no liquidated damages. However, they still refused to write us a check and the amount ($12,000) was too small for us to hire an attorney. They just laughed at us, and pocketed the money the school district paid for the signs. For us, it was a substantial loss. In two other cases, the school district told us that we were not the cause of the liquidated damages, but refused to put this in writing without a subpoena, which we could only obtain by suing the contractor. Again -- too expensive for us, so we lost $65,000 in contract payments and received 0 dollars for two complete school sign systems. Why are we the patsies? Because we are the last people on the project, and when we are late, it is almost always because painters, floor people, door people, are late. However, we get no payment at all until signs are installed, so it's easiest to stiff us. Our amounts are too small to hire an attorney. Some of these projects take 3 years, and we have spent many hours, designing signs, translating braille, making a shop drawing and schedule for each individual sign -- sometimes 500 signs. Installing the signs is only a tiny proportion of the work, but they refuse to recognize that we have done anything until the sign is on the wall.

Stop notices do no good. They just put our small amount in escrow for a year, get rid of the stop notice, and continue on.

I do not believe it matters. The time to negotiate these matters is before you sign the contract. Once signed, you live with it. You can try to renegotiate at the end of the project but you are probably not coming from a position of strenght so you probably take what you can get.

I have worked on both sides of the fence on this issue. Yes owners have delay costs too. The owner support personnel would have worked on something else if the project was complete, perhaps they would be laid off. Also there is always cost of money. The burdon remains with contractor to prove the LDs act as a penalty and not real damages--not an easy task. I once worked on a contract with $35,000 daily LDs. Believe it or not, the damages were reasonable because they had to maintian paying many bus drivers for their salaries and etc.

If the contractor is to disagree with the LD (or any other) requirements in the contract, that must occur and agreement be reached on the front end before the contract is executed. Once he has entered into a contract he shouldn't be asking for (and the owner has no obligation to give) any justifications for the conditions of the contract.

I am an architect who as an inhouse owner's rep, wrote contracts and this issue of appropriate contract language always was troubling. For us, developers, owners and managers of medical office properties, any completion problems represented real costs that could exceed over $100,000 a month minimum. Liabilities with lucrative doctor practices having to relocate, expensive equipment and FFE deliveries, health state licensing issues. Not to mention the loss or restructuring of other ongoing projects with the same (hospital) owners because they blame the owner for not reigning in the contractor. Contractually, do you it's possible,realistically, to even contemplate up front having a contractor's attorney seriously look at real potential damages to this degree? In a competitive marketplace? So yes, the LDs get written in as a punitive small amount, that frankly never made us happy, because we knew we'd always be on the hook. The contractor rides away into the sunset, usually with a buyout never truly representing our real losses, while we were forced to make do with broken longterm client relations and tenant relations immediately off on a rocky footing.

We had to deal with a local irrigation company that had rights that even trumped municipal rights. We were forced to relocate a pipe that, if work not completed in a scheduled 2 week dry period, had the potential to keep water from reaching citrus and cotton fields in the height of summer. We, as owners, were forced to sign agreements that put us on the hook for unlimited loss of crops liability to third party farmers,etc. Of course, you don't want to sign these things, but time is money, scheduled completion dates with impatient tenans are looming, and do we really have six months to sit down and go through intense negotiations that we know will never result in contracts being signed with clauses that frankly are unenforcable in timely manners.

The major problem with LDs is that they always tend to create an adversarial relationship between the Owner/GC and the Contractor.

I advise my clients who are executing contracts that include LDs to be in the Owner's/GC's office demanding an extension to the contract's completion date for every single day the Owner or his GC, or other contractors/subcontractors/suppliers delay the Contractor's completion schedule. Fair is fair. If the Contractor fails to complete on time due to his own failings, then he is subject to LDs. If the the Contractor is delayed by the Owner, the Owner's GC or others, even one day, then the Contractor is entitled to an corresponding extension of time and perhaps costs associated with the delay.

There is no question owners can incur additional expenses. A few examples might be the cost of temporary storage during interim moves, or manpower costs related to interim moves, or financing costs.

There is also no question that the proper (and only) time to address the LD question is prior to signing the contract. That is when signatories need legal advice - not after the horse has left the barn!

Sharon Toji's post illustrates this concept perfectly. It is not cost effective to hire lawyers to pursue $12,000, perhaps. But would it have been cost effective to pay someone a few hundred dollars to better understand the risks? Most certainly, even if the advice is "do not sign this contract!"

We do alot of work for the department of transportation and munisipalities, our contracts always include LD's. On one occasion we had a night job that the roadway had to be open by 6:00 AM and LD's of $2,000.00 per hr. for every hr. of delay. I don't know where they come up with the cost of the delay, but when we ask for a change order on a project do to additional cost we have to show every cost involved to justify our request. I think the owner of the project should have to show justification for the additional cost of LD's. It only seems fair.

LDs are about risk assumption. LDs can only exist, if at the commencement of the Contract; 1. The potential damage for failure to perform is uncertain, 2. The amount of the proposed LD is reasonable when measured against the potential harm, and 3. The proposed LD does not function as a penalty. If all 3 conditions are not met, the requirement for an LD is void. As to penalties, they are a separate incentive to perform, which are completely separate from the potential damage assessments established in the LDs. A penalty does not have a relationship to the scope of potential or real damage suffered by the Owner, when the Contractor fails to perform. The time for assessment of LDs and their risk assumption/mitigation is prior to execution of the Contract.

Regarding the Project Owner’s salaried administrators representing a real cost, it reasonable to assume that if the administrators were not performing Work associated with delayed Project, they would be reassigned to other tasks and thus representing lost opportunity costs or, they would have left the employment of the Owner and thus representing extended general overhead costs. Further, frequently the Owner has engaged the services of professionals, such as architects, engineers and construction managers who could have reasonable claims for additional services, when such claims are solely based on the Contractor’s failure to perform. This would represent a direct overhead cost to the Project.

What the Contractor’s argument against LDs frequently fails to address, is the risk assumption of the Owner. For example, the damages associated with lost commerce when a mall fails to open on time, may be easy to calculate for a few days or even a few weeks. After that, the mall owner may suffer substantial damages should tenants walk away from the Project. The assumed risk/damage exposure of the LD caps the Owner’s recovery rights.

Bud (02/21/11 5:54AM),
I couldn't have said it better myself, even if I tried.

LD's are a sad fact of contractural life. They should be tempered by some sort of incentive reward for completing on, or ahead, of time.
www.kendall-dinielli.com

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