Reducing the Risk of
Contract Liquidated Damages

By InEight

July 12, 2022

A contract liquidated damages clause is a small part of an overall construction contract, but it can have big consequences.

When invoked, it means owners are now looking at a project that is behind schedule with possible lost business opportunities on top of it. And contractors are on the hook for paying liquidated damages that can further reduce an already slim profit margin and put them in the red for the project.

Fortunately, there are a couple of ways to mitigate the risk of incurring them in the first place.

One is through negotiation. Much of how contract liquidated damages are enforced is based on negotiation between the owner and the contractor. They discuss how to assign the levels of risk and responsibility to each party as well as the methods for calculating liquidated damages. Ideally, it’s a collaborative effort at managing expectations. The two parties work to arrive at realistic timelines for project completion, as well as a reasonable amount for damages should the completion date be overshot due to reasons that were within the contractor’s control.

But really, no one wants a situation that would trigger a liquidated damages claim to begin with. That’s where the second way to mitigate this risk comes in. It’s through using construction technology. There are several different kinds of software — each designed to carry out specific business functions — that can give you more insight into and control over a range of factors that can help prevent damage claims.

Estimating software establishes realistic schedules on which to base liquidated damages

Because contract liquidated damages negotiations occur during the estimating stage, estimating software is going to have a direct impact on how those conversations roll out. Its ability to automate the process of determining reality-based timelines, especially when backed by the historical project data it stores, can serve as validation when those talks begin.

Take a look at that past data, with extra attention paid to your schedule performance index (SPI) metrics. How well did schedules align with the projects’ original estimates? How often and how long did any notable fluctuations occur? What impacted the schedule that you had no control over? Are the causes of these fluctuations — both within and out of your control — likely to surface during this project? How well did contingency plans keep the projects on track?

The timelines you set for the current project will depend on the answers to these questions and can be used to set schedules based on realism rather than on ambitious expectations.

Connected analytics software tracks real-time schedule metrics

Contractors are turning to metrics that track project performance in real time, like earned value management (EVM) (which includes SPI), to help them keep a constant tab on their projects. The most effective way to monitor them is through connected analytics software. Because these metrics are sensitive to internal and external risk factors as they occur, the software can call attention to portions of the schedule that are showing signs of skewing off course. Alerting you, this heads-up about a schedule-impacting situation gives you some lead time to determine the cause and ways to course-correct before it worsens and becomes a contract liquidated damages claim.

Forecasting capabilities promote a proactive approach to prevent liquidated damages

Though both the owner and contractor assume some level of responsibility as agreed upon in a liquidated damages clause, it’s common for the clause to be invoked when there’s an unintended oversight on the contractor’s part. So how can a contractor keep from being on the receiving end? By taking a proactive approach to prevent it from happening in the beginning.

When used as a planning tool, software with forecasting capabilities takes on this preventive role, tapping into past project data to determine likely what-if scenarios and then predicting their potential impact on the current project’s construction schedule. Even real-time, unexpected events and necessary change orders benefit from this forecasting.

What makes this technology so well-suited for averting liquidated damages situations is its ability to suggest contingency plans that help you navigate through risks, so the project schedule endures the least amount of impact.

It puts more insight and control in the hands of the contractor to proactively reduce likelihood of any damages claims.

Reporting software provides visibility into project progress and delays

One effective way contractors can ensure owners don’t hold them accountable for unavoidable delays is to share access to digital daily reports available through reporting software. This regular communication tool keeps them in-the-know on their project’s progress. Owners are able to see how their requirements are being met and the efforts undertaken to keep the project on schedule.

This transparency can keep contractors from being held responsible for project slowdowns or disruptions beyond their control. That’s one of the benefits of reporting software: reports serve as documented proof of all circumstances that occurred on the project, what was done to mitigate them and the end result — and may be used to defend against any contract liquidated damages claims.

Documentation software streamlines the punch list process

Believe it or not, punch lists can be an efficient tool to reduce contract liquidated damages claims. But there are a couple of catches: First, they have to be implemented at the beginning of a project, not during the traditional project completion phase. Known as rolling punch lists, they’re completed throughout the construction period. As issues are found, they’re documented and resolved.

And second, they should be digital. Cloud-based documentation software allows contractors to use templates — standard or customized — for these rolling punch lists. These templates are accessible out on the jobsite via a mobile device, making it faster and more efficient to catch errors and defects that could otherwise have turned into a painfully long to-do list resulting in costly rework. And that rework is one of those late-stage activities that can jeopardize on-time completion of the project, and potentially trigger the liquidated damages clause.

Commissioning software fosters ongoing systems evaluation

Commissioning has traditionally been that last activity to complete just before handover. But like rolling punch lists, cloud-based commissioning software, when launched as construction begins, streamlines this system-evaluation process.

Capital projects often have overlapping phases of construction with multiple systems being installed within each. By relying on software accessible on a mobile device and moving the process up to the start of the project, it’s possible to do regular documenting and testing much more quickly, accurately and efficiently. Logging any defects and malfunctions throughout construction keeps them from becoming full-on repair work that jeopardizes timely project completion — and risks liquidated damages claims.