Can Liquidated Damages in Construction Be Avoided?
March 25, 2021
A liquidated damages clause is one nobody wants to invoke, even though it’s a very common clause in construction contracts. While such damages may be unavoidable when provisions within such clauses are breached, the owner and contractor can take steps to help mitigate their likelihood and frequency as well as their impact. Here are some risk-avoidance measures to consider for protecting your project — and everyone’s ROI.
- Work together on the agreed-upon liquidated damages clause. By approaching it as partners who each stand to lose or gain from invoking the clause, such collaboration between contractors and owners can result in more realistic completion timelines as well as reasonable damages in case of a breach by either party.
How so? A project owner has a reasonable expectation that their desired deadline will be met. So, naturally they want some reassurance the chosen calendar date will be honored by the contractor. And that’s partly what the liquidated damages clause is; a kind of reassurance for the owner that the contractor’s team will meet the agreed upon timeline.
Likewise, the contractor wants to ensure that expectations for their team of subcontractors and craftspeople are reasonable as well. Being involved in creating this clause puts the contractor in a position to negotiate for milestone and completion timelines that are realistic, and for damage values that are practical rather than prohibitive. That means they may avoid being held liable for — and paying liquidated damages on — unforeseen events beyond their control that delay the project, such as natural disasters or even a pandemic.
Working together to agree on how to calculate a fair estimate of what actual damages might be can help keep them from being considered a penalty, which would likely be thrown out. Setting mutually agreed-upon language in the clause, therefore, can head off spending time sitting on opposite sides of the legal table.
- Consider instituting a tiered approach based on phased completion rather than overall completion. This may not only prove financially beneficial to all parties but may better ensure timeliness of the project and also allow for checkpoints along the project’s completion path for any necessary course corrections. Large capital projects may benefit from this approach the most where different phases are likely to be deemed habitable or functional at various points throughout the construction life cycle. So, if a contractor missed the completion of one phase, they might be held responsible for paying liquidated damages only on the affected phase and not on the total of the remaining unaffected phases of the overall project.
- Work to keep costly damage situations from happening in the first place. As contractors are typically on the receiving end of such claims, they may find it especially beneficial to use project management and forecasting technology to help flag any deviations early enough to be corrected before they risk becoming a liquidated damages issue. These software solutions feature functionality to help monitor ongoing project performance, work productivity, schedule adherence, etc. This proactive tracking acts like an advance warning system should things begin to veer off track.
But how about the what-if scenarios that are more sudden, for which there is no trend indicated or a detectable deviation? For example, what if a necessary change order happens midway through the project that affects the timely completion of other tasks? Or an unexpected severe weather event slows down construction? That forecasting software then becomes a planning tool, showing the potential time and cost impact of these risk factors. Contingency plans can then be developed to keep the project on track and adhere as closely as possible to the original schedule (and budget), should any of those scenarios materialize. In this way, contractors can bring project owners into the loop early by being transparent about potential risks as they develop, as well as implications on timely completion. By using forecasting software, they can review the possible financial and schedule impact with them as well. Working together at the first sign of a problem, or planning ahead for unforeseen project hiccups, can turn a potentially detrimental situation into a collaborative problem-solving opportunity. And that could help mitigate delays (and damages claims). Transparency, as always, is key.
Mutually negotiating an equitable liquidated damages clause can be one of the more crucial discussions that sets the stage for a collaborative relationship between owner and contractor. But that’s just one small part of the overall contract activities in which no detail can afford to be overlooked. Consider a software solution that helps ensure a smooth contract development and management process from the start. Created for the construction industry, InEight Contract is designed to bring efficiency and visibility to the entire life cycle of contract management. Schedule a demo to find out how a more streamlined contract process can benefit your company and your project ROI.