Holloway Consulting is an international construction consulting firm providing construction claims consultant services to a wide range of clients. Some of Holloway Consulting’s past projects and cases are shown at Construction Cases and Consulting Engagements.
This post continues Holloway Consulting’s series on the services we provide as a construction claims consultant in project scheduling matters associated with Liquidated Damages.
Liquidated damages provisions are often specified in construction contracts as a daily amount to be withheld from the contract price for each day of delay to the contract completion date. However, the primary objective for specifying liquidated damages is often to secure the timely performance promised by the contractor, rather than to recover the specified sum. Because liquidated damages provisions are commonly upheld by the courts, the party breaching the contract completion time requirements may have an uphill battle to refute damages without the assistance of a Construction Claims Consultant and a persuasive argument about the cause of the delay.
From a historical perspective, penalty bonds were originally used as a security device for failure to perform. However, a breach of performance would often carry consequences far in excess of the damages incurred. Equity courts intervened to prevent unconscionable consequences and the law courts soon followed. The modern view is that if the amount specified for liquidated damages is being used to frighten the contractor to secure performance rather than as a reasonable quantifying measure of convenience or is disproportionate to the value of the performance promised and consideration paid, the liquidated damages provision will be viewed as a penalty and held unenforceable.
The contract provision is often enforced if the court finds the following:
1. The amount specified is a genuine pre-estimate by the parties of the extent of the damages that will be caused by a breach of the contract completion time requirements, and
2. The actual damages are incapable or very difficult to accurately be determined.
PENALTY VERSUS ACTUAL DAMAGES
If the court determines that the specified amount of liquidated damages is a penalty, the contractor or subcontractor is still subject to actual damages. An owner, or a general contractor seeking damages against a subcontractor, should retain a Construction Claims Consultant and be prepared not only to show how the specified liquidated damages amount was calculated but also be prepared to show through its cost records the extent of the actual damages. If the actual damages are negligible, courts have ruled that liquidated damages would be unreasonable.
The party specifying liquidated damages should do so with care. If the specified amount is too high, qualified contractors may be scared away from bidding. Another consequence is that an unreasonable amount may cause contractors to include a high contingency figure in their bids to cover the possibility of delay damages. In such a case, the owner bears these extra costs whether or not the project is delayed.
Read more about Holloway’s Construction Claims Consultant services
Construction Claims Consultants
12081 W. Alameda Pkwy., #450
Lakewood, CO 80228-2701
Denver Phone: (303) 984-1941
International : (888) 545-0666
Fax: (303) 716-0432
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