Delay Damages: What Are Liquidated Damages?
Just as contractors incur and are entitled to recover extended general condition and home office costs due to owner-caused project delays, owners likewise incur and are entitled to recover additional and unanticipated management and carrying costs when the contractor delays the project’s completion date.
The owner’s delay damages are represented as either liquidated damages or its actual damages. The reason that owners include a liquidated damages provision in their contracts is due to the fact that it is difficult or practically impossible for owners to accurately determine their actual damages before the contract is executed. Owners rely on liquidated damages to recover a reasonable estimate of the damages that they will incur if the project is delayed by the contractor.
Typically, liquidated damages are calculated at a daily rate. Similar to both extended field overhead and unabsorbed home office overhead, the owner’s recovery of liquidated damages only results from instances when only the contractor causes a critical delay to the project. Owners should rely on advice from counsel when calculating the appropriate amount of liquidated damages to ensure jurisdictional compliance. However, some of the costs that an owner should consider when preparing an estimate of liquidated damages are as follows:
- Costs for project inspection
- Costs for continued design services
- Costs for the owner’s staff
- Costs for maintaining current or temporary facilities
- Costs for additional rentals
- Costs for additional storage
- Lost revenues
- Costs to the public for not having beneficial use of the facility
- Additional moving expenses
- Costs for escalation
- Costs for financing
More importantly, when a project nears the contract completion date and is expected to finish late, before assessing liquidated damages against the contractor, it is necessary for the owner to determine if and to what extent it is responsible for the forecasted late completion of the project. For example, owners should not assess liquidated damages against the contractor for not completing the project on time when the contractor is due an excusable time extension.
When faced with this situation, and to avoid breaching the terms of its agreement with the contractor, owners should seek legal counsel and, if necessary, a scheduling expert, to ensure that they make the right decision regarding assessing liquidated damages, granting a time extension, or a combination of both.
For more on this or any other topic, please call me at 215-814-6400 or email me at mark.nagata@traunerconsulting.com.
