Q: Our firm is the engineer of record on a project providing both engineering and construction management services. The project is completing significantly behind schedule, and the owner has asked us to evaluate whether to assess liquidated damages pursuant to the contract terms between the owner and the contractor. Our question is twofold: First, can you give us an explanation of exactly what liquidated damages are supposed to cover and mean in the context of a construction project; and second, is a schedule analysis necessary to assess liquidated damages, and do we need to retain an expert? If we need to retain an expert, what should we be looking for?
A: Simply put, liquidated damages are contract provisions prepared to create contractual incentives for timely completion of a project or task. Liquidated damages are fixed damages (dollar values) in the event that a particular project, milestone, or the development of an overall project, is completed late past a contractually agreed upon deadline. The often-cited advantage of liquidated damages is that, when project completion is delayed, liquidated damages relieve the parties from having to prove actual delay damages within a reasonable certainty.
Liquidated damages are typically given in the form of a fixed amount for every day of delay, but they do not have to be in that form. In many cases, delaying only a few days is not that costly, but as time passes, costs increase dramatically. An enforceable liquidated damage clause should contain certain elements. At a minimum, such a clause should define the type of damages covered. In projects secured by performance bonds, it is essential that the non-defaulting party protect its right to assess liquidated damages against the completing surety.
The starting point of liquidated damage calculation is the date specified in the contract. The date is subject to challenge for a variety of reasons, including time extensions and excusable delay. In general, to avoid the assessment of liquidated damages, a party merely needs to show that the delay was excusable. Remember to give adequate notice of any delays or impacts affecting the timeliness of the performance, especially in the case where a liquidated damages clause is inserted into the agreement. Such notice is often a prerequisite to negating exposure or liquidated damages.
Equally important is a determination when liquidated damage assessment should stop. It is generally recognized that the assessment of liquidated damage stops when a project or milestone is substantially complete. Unfortunately, a party’s attempt to define substantial completion is often contested. Many times the contract documents themselves define substantial completion. When all else fails, read the contract.
If the problem is serious enough to assess liquidated damages, it is going to need the services of a scheduling expert who can perform an adequate schedule analysis and be prepared to discuss and justify the analysis for the assessment of liquidated damages.
Any consultant who is brought in to determine the validity of the assessment of liquidated damages should give proper consideration to the original construction schedule. While it may seem obvious, the original schedule cannot simply be discarded because facts and circumstances changed. Corollary to giving proper consideration to the original schedule, any analysis undertaken should consider the contractor’s actual performance and take into consideration the reasons why a particular activity or series of activities were delayed. It will be necessary, ultimately, to qualify any impact and demonstrate causation.
Proper schedule evaluation will establish a correlation between as-planned activities, changes, actual performance, and the contemporaneous project records. This is necessary to establish the proper causal relationship between modifications in the schedule and the alleged delays attributed to them.
The owner must consider its own delays in any delay analysis, including delays caused by the owner’s agents, which could include the engineer of record.
Lastly, the consultant retained to do the scheduling analysis must be competent and experienced in scheduling and delay.
The assessment of liquidated damages is a lot more complex than it looks on the surface. Too often, a facile determination is made that a project completion has been delayed X number of days and therefore X times the daily liquidated damage amount equals a proper assessment of liquidated damages. This is not the best approach and will almost certainly lead to controversy.
Michael J. Baker, Esq., is a partner in the Cerritos, Calif.-based law firm of Atkinson, Andelson, Loya, Ruud & Romo. He is an expert in design and construction contracts, mediation, and litigation. Please send him your legal questions via e-mail at firstname.lastname@example.org.
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