What Is Liquidated Damages in Construction Contracts

The engineer must make a reasonable estimate of the damage caused by the owner in the event of late completion of a milestone or closing date of the contract in order to apply this estimate as contractual damages. The more difficult it is to estimate the damage caused by an owner, the more likely it is that a court will limit itself to the provision agreed upon by the owner and the contractor on the lump sum damage. There are several ways to estimate lump sum damages. Lump sum damages are a great way to give your construction contracts more security and predictability. However, as mentioned above, the applicability of these clauses is not guaranteed. As always, it`s important to familiarize yourself with the specific laws in your state that deal with these clauses. Lump-sum compensation clauses may be helpful, but enforcement is at the mercy of a judge. And it can be very unpredictable. Lump sum damages can be advantageous for the customer because it removes his burden of proof of actual losses in the event of delay. They can also be beneficial for the entrepreneur as they limit their liability to a known amount in case of delay. The way in which the lump-sum compensation provisions for two of Boston`s major projects, the Massachusetts Water Resources Authority`s (MWRA) Boston Harbor project at Deer Island and the Massachusetts Highway Department`s (MHD) Central Artery/Tunnel project, were determined, allows for an interesting comparison of approaches and levels of complexity in estimating lump sum damages. (c) Use clause 52.211-13, Time Extensions, in tenders and construction contracts that use clause 52.211-12, Lump Sum Damages – Construction, if that clause has been revised in accordance with paragraph (b) of this article. The contractor sought to prove that the LOD rate was arbitrary by proving that the Coast Guard had applied different rates to various similar projects and that certain elements of the damage contained in the LDCs (p.B government personnel costs and administrative costs) were inappropriately included.

In rejecting the contractor`s argument, the court concluded that a contractor can recover its own personnel and administrative costs in damages claims against the government in various claims, so the government can also claim its personnel and administrative costs if it has a claim against the contractor. With respect to the different rates applied by the government to other projects, the Court stated that the only relevant question was whether the price was reasonable for that particular project – and this is mainly judged by what seemed appropriate at the time of performance of the contract. K-Con Building Systems, Inc.c. United States, 97 Fed.Cl. 41 (2011). (a) This subsection establishes policies and procedures for the use of lump-sum compensation clauses in tenders and contracts for supplies, services, research and development and construction. No matter what many owners and engineers may believe, a lump sum compensation provision cannot penalize a contractor for late completion. The purpose of the provision can only be compensatory. The lump sum for daily damages cannot be set at the amount that the owner or engineer deems necessary to force the contractor to complete on time.

Instead, the owner and engineer must set the lump sum damage at an estimate of what it will cost the owner if the contractor is in default. Contractual remedies, such as lump sum damages, cannot be punished, and the massachusetts courts will not enforce any lump sum damages provision considered a penalty. « Damages for the breach by either party may be awarded in the contract, but only in an amount that is reasonable having regard to the expected or actual damage caused by the breach and the difficulties in proving the loss. A clause stipulating unreasonably high lump sum damages is not enforceable as a penalty for reasons of public policy. As a general rule, the possession or partial completion of part of the work entails the certification that these parts have reached practical completion, and thus to release the contractor from liability for lump sum damages for these parts. In some construction contracts, the owner may not only set a completion date, but also require the completion of certain parts of the work on tentative dates. These tentative dates, commonly referred to as « milestones, » require the contractor to plan and execute the work in such a way that milestones for specific parts of the work are met. In addition to the date of conclusion of the contract, a lump sum compensation provision may also apply to the stage dates. In these circumstances, the assessment of damages in the event of non-compliance with several milestone dates would then be cumulative. Unlike the Boston Harbor Project, however, the Central Artery Project decides on lump sum damages on a case-by-case basis.

The Mass Highway Department reviewed the scope of each individual contract, determined where that contract fit into the procurement and planning of the entire project, and estimated exactly how many support services such as resident engineers, office engineers, field inspectors and secretaries would be needed if the project were to go beyond its contract closing dates. MHD also reviewed the costs associated with permits, fees, licences, rights-of-way and pest management and, most importantly, assessed the impact that late completion of milestones or final project completion dates would have on other contractors. Consequently, construction law has adopted the concept of `substantial completion`. The application of lump sum damages can easily lead to disagreements between contractors and owners. Finally, these disagreements can lead to a lawsuit where the court must decide whether the damage can be applied. When including lump sum damages in a construction contract, it is important to consider the possibility of litigation and determine whether the compensation described is legally enforceable or not. Thus, if what the owner actually incurs for late completion is much less than what is charged to the contractor as lump sum damages, the provision on lump sum damage will not be maintained. Massachusetts law therefore allows for a retrospective comparison between what it actually costs the owner for late completion and what the owner charged the contractor under the lump-sum compensation provision. One of the biggest risks of construction projects is that they don`t finish on time, which is why homeowners try to make sure their contractors share some of the risks of a missed deadline. Almost all construction contracts include a lump sum indemnity, which is a method of compensating one of the parties if the other party fails to comply with its contractual obligations. The calculation of the lump sum compensation can be difficult depending on the project. An owner of commercial office towers or residential homes might find it easier to prove the loss of income resulting from a delayed opening than, for example, opening a library or paving a street.