Home » MBJ FEATURE » THE PENALTY PHASE — Project owners depend heavily on timely completion  

THE PENALTY PHASE — Project owners depend heavily on timely completion  

Chris Solop

Chris Solop

Nearly every large construction project is planned and financed based on a specified completion date. While many things can disrupt that plan ranging from bad weather to supply or labor shortages, failing to meet the deadline can result in significant penalties.

“Owners of projects, especially in the private sector, depend upon timely completion so use of the facility can generate revenue needed to repay the building loan, recoup funds invested in construction, and to conduct the owner’s business,” said Chris Solop, a partner with Biggs, Ingram & Solop, PLLC, Jackson who has been the legal counsel for Associated General Contractors of Mississippi for more than 10 years. ”The exact amount of damages caused by late completion are very real, but can be difficult to determine in advance.”

“Liquidated damages” are included in a contract so that at the outset both parties know the cost risk of late completion. In a general sense, liquidated damages are a substitute for actual damages. But as a matter of law, liquidated damages cannot serve as a penalty.

“The parties agree in advance that an owner will be entitled to recover an agreed daily rate of damages if the contractor is at fault for late completion,” Solop said. “If the liquidated damages are called a penalty or are so high as to constitute a penalty, they would generally not be enforceable in a construction contract.  Liquidated damages are used where the damages are difficult to calculate and are intended to be a reasonable approximation of the damages an owner might incur if the project is not timely completed.”

Solop said while liquidated damages may be viewed as a “penalty,” they are a tool for risk assessment and, in many cases, likely less than an owner’s actual damages. A liquidated damage provision assists both the contractor and the owner in quantifying the damages assessed in the event the project completion is delayed due to the fault of the contractor. Liquidated damages can be passed down to a subcontractor if that subcontractor is the cause of the delay in the completion of the project as part of the contractor’s damage against a subcontractor.

Where completion by a specific date is an absolute requirement in a contract, its possible that the contract will not include a time extension for a weather-caused delay of any kind.

“This type of contract would put the entire risk of any type of weather delay on a contractor, and that risk would be reflected in their cost,” he said. “However, generally there are provisions in a contract that grant the contractor a right to an extension of time for weather-related delays.”

When requesting an extension of time for a weather-related delay it is recommended that a contractor or subcontractor submit official weather data and daily reports to support a request for a weather-related extension of time.

While it can be difficult to estimate the date of competing a job, competent, experienced contractors and subcontractors typically are able to estimate the time required to complete a project. Solop said they rely upon historical data and the experience of their estimators, project managers and project superintendents.

There also are a number of scheduling software programs that are used to schedule the duration of various tasks and sequences of work (logic) to ensure that the project is completed within the time specified in the contract documents.  What contractors cannot estimate is the time impact of changes to the project by owners and architects, site conditions that differ from what was shown on the plans or that differ from what is expected in that geographic location, design errors, and other unforeseeable difficulties.

Solop said often the most difficult date to determine is not the initial scheduled completion date but the completion date after one or more delays occurs.

In the current economy, competition for work is fierce and profit margins are generally narrow.

“There is little room for error on a construction project,” said Solop’s partner, Lynn Thompson said. “If the daily rate for liquidated damages is substantial, profit margins can evaporate rather quickly. This is why it is critical for a contractor to carefully monitor the progress of the project and the job costs at least a weekly.  If there is any slippage in the schedule or overrun in the project job costs, it needs to be examined carefully and addressed to avoid erosion of any profit the contractor or subcontractor has in the project.”

An owner may recover damages in the form of liquidated damages or actual damages if a project is not completed on time.  But Thompson said you do not typically see damages other than financial associated with the breach of a construction contract.

“Certainly relationships can sour between owners and contractors and a contractor once favored for doing repeat construction say, for example, a regional or national retail owner will likely lose that market,” Thompson said. “Public owners usually reserve the right not to make a new contract award to a contractor on a project if that contractor is already behind in its schedule for an existing project or is having difficulty completion a project.  Sureties may limit or refuse to issue bonds for new projects where a contractor’s current projects are so late that they prevent risk of default—and therefore a bond claim — against the surety.

Thompson said while access to bonding or being refused an award due to existing status of a project are not “financial penalties” per se, they are the very real and practical consequences that spring from a contractor’s not being able to complete a project at the schedule completion time and within the contractor’s estimated costs.

“Much depends on the contractor’s overall financial well-being and its ability to demonstrate that it can successful manage other projects,” she said.

It can get complicated and expensive if one contractor is waiting for a subcontractor to finish before being able to complete the job. Sometimes schedules can be re-arranged and certain portions of work can be accomplished ahead of others.  It does not take long, however, to see the ripple effect of a delay by a subcontractor whose work begins early in the project, such as a plumber, a framing subcontractor or an electrician, impact other trades.

“Contractors have to be vigilant about monitoring the schedule and have the authority in their contracts to require changes to the scheduling of all work so that the impact of a delay can be minimized,” Thompsons said.

 

Thompson and Solop have a construction blog at www.constructionlawtoolbox.com.

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