Tips & Tools: Limiting the Impact of Liquidated Damages

Tips & Tools to Improve Your Bottom Line: Limiting the Impact of Liquidated Damages

By Mary L. Matthews, Esq. 
In this issue of Olson Construction Law, P.C.’s Tips & Tools to Improve Your Bottom Line, we examine how contractors can proactively limit the impact of liquidated damages. We continue to encourage you to share these e-mails with the project managers and superintendents in your company. 

Limiting the Impact of Liquidated Damages 
Nearly every construction contract contains a liquidated damages provision, and literally all subcontracts incorporate this provision. The assessment of liquidated damages not only affects the bottom line for each of your projects, but can also affect your ability to secure future jobs: the assessment of liquidated damages on one of your current projects can be used as a basis to reject your low bid on future public projects. Although contractors have little control over liquidated damages provisions, contractors can control and influence the owner’s ultimate decision whether to assess liquidated damages.

The easiest way to avoid the assessment of liquidated damages is to ensure that you provide immediate notice to the owner of any excusable delays. As we have discussed in previous issues, excusable delays are any delays for which the contractor is not responsible (e.g. owner-caused delays, delays caused by abnormal weather, delays caused by untimely utility relocation, etc.). By providing immediate notice to the owner, you will prevent the owner from later claiming that you waived your right to a time extension for these otherwise excusable delays. And, by giving immediate notice, you provide the factual basis for the owner to see both the existence and extent of the delay. Regardless of whether you believe that the project will finish before the substantial completion date, it is imperative that notice be given. While you may have sufficient time to complete the project when the excusable delay is first encountered, you may have limited control over future delay events, which could push your work past the substantial completion date.

Additionally, ensuring that you give timely notice for each delay event as it occurs will prevent the owner from later trying to negotiate out of paying for added/changed work by agreeing not to assess liquidated damages. Consider the following scenario… At the start of the project, the owner fails to provide you with proper site access and your work is delayed by three weeks. Later, during the project, you encounter differing site conditions which make your work more expensive, but do not delay the project. Despite giving proper notice for both project changes, no change orders are agreed to for either event, and you finish the project three weeks behind schedule. The owner proposes that you give up your legitimate claim for extra costs, and, in exchange, the owner will not assess any liquidated damages. 

Liquidated damages should not be a part of the discussion regarding payment of your extra costs. By giving proper notice and attempting to secure a change order when the delay and/or changed work occurs, you have limited the owner’s ability to leverage these damages against your compensable extra costs. You can now respectfully respond that you are under no contractual obligation to give up your claim for extra costs in exchange for the owner giving up something that it does not have the legal right to assess.

If you are a subcontractor and the prime contractor is responsible for the project delays, the same rules apply: give immediate notice of the delay event to the prime contractor and seek a time extension. Because the owner is not responsible for this delay and has no obligation to grant a time extension to the prime contractor, you should also provide written notice to the prime contractor that the delays were beyond your control, and you cannot be held responsible for any liquidated damages assessed by the owner.

Finally, even if you are not entitled to a time extension, you still may have a defense to the proposed assessment of liquidated damages. The daily ‘amount’ of liquidated damages may be so high that it qualifies as an unenforceable penalty. In addition, when a project is substantially completed, the owner may not have the legal right to assess liquidated damages.

While excluding a liquidated damages provision from any construction contracts is unlikely, by giving prompt notice of excusable delays, clarifying your position in writing, and refusing to allow the owner to use liquidated damages as a bargaining chip, you can manage and minimize the assessment of liquidated damages. If you are facing the assessment of liquidated damages, we encourage you to consider using Olson Construction Law, P.C.’s “first call free” service. We can assess the specifics of your particular situation and help you develop a strategy to reduce or eliminate the impact of liquidated damages on your bottom line.    

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