The construction industry’s labor woes have left general contractors and their subcontractors scrambling to find workers and, when things get bad, on the hook for damages related to project delays.
Few time-crunched GCs or subs are able to take a fine-tooth comb to the tangle of legalese typically seen in their contracts, but if there’s one provision they should take time to understand, it’s the one regarding liquidated damages.
Simply stated, these damages come into play when the contractor or sub breaches their contract by failing to finish the work on time. In other words, they’re the clauses that cover project delays, among others.
Surety underwriters pay close attention to these widely used clauses, especially formulas used to allocate the damages between GCs and subs.
Before we get too far, it’s important to acknowledge that liquidated damage provisions can make things less complicated than dealing with contracts that force everyone to go the actual damages route.
Proving actual damages takes time and is costly, requiring lawyers, expert witnesses, investigations, depositions and more. With liquidated damages, the owner of a project knows that if a contractor finishes late, they can easily calculate the amount of their damages. Contractors and subs, in the meantime, know from the outset what their exposure might be should they fail to finish a job on time.
Liquidated damages in construction contracts are usually set in one of the following ways:
GCs typically try to pass through at least some of the liability for labor-related delays to their subs. Some try to be fair about doing so; others might not. To protect themselves, subcontractors should carefully review their contract and the GC’s prime contract to ensure liquidated damages are the sole and exclusive remedy for delay.
A liquidated damages provision that keeps things fair also should include a cap. Liquidated damages may be capped, for example, in an amount equal to the contractor’s fee, a percentage of the contract price, or any other amount that may be justified under the circumstances.
Finally, because liquidated damages are not a penalty per se, they must be based on an honest calculation of damages when they were set. If they are not, they may be considered unenforceable by the courts.
Tom Patton is a Surety and Insurance Advisor with CCIG. Reach him at TomP@thinkccig.com or 720-330-7922.
CCIG is a Denver-area insurance and bond brokerage with the full-service capabilities of a national brokerage. We do more than make sure you have the right policy. We also help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.
Also read: 9 Warning Signs that Sureties Watch For
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