This is article explores the complex nature of allocating the risks associated with project delays. It was originally published in Schimenti Construction Company’s newsletter and is reprinted with permission.
Retail construction is no stranger to the inherent costs associated with project delays. Retailers, like all owners, rely upon construction professionals to estimate the duration of a project so that associated hard and soft costs can be quantified and properly budgeted. The majority of retail construction projects today consist of renovations to an existing store or space. It is very difficult for designers on such projects to account for and incorporate all existing conditions into their drawings and specifications. Also, as with any project, it is very difficult at the onset to predict weather, labor conditions, the availability of raw materials and other factors that might have an impact on a project’s duration. These unknowns often result in unanticipated project delays, acceleration or other impacts. One District of Columbia judge said that “except in the middle of a battlefield, nowhere must men coordinate the movement of other men and all materials in the midst of such chaos and with such limited certainty of present facts and future consequences as in a huge construction project…” Blake Cosntr. Co. v. C.J. Coakley Co., 431 A.2d 569, 575 (D.C. Cir. 1981). But, when the duration of a project extends beyond what was originally contemplated, all of the parties in the construction pyramid suffer unanticipated costs; which can and should have been addressed and allocated within the construction contracts.
There are many different ways to allocate and transfer the risks associated with project delays within a construction contract. Two of the most common provisions for doing so are “No Damages for Delay” clauses and “Liquidated Damages” provisions.
“No Damages for Delay” clauses typically protect an owner from increased costs resulting from construction delays by restricting a contractor’s ability to recover for overhead, general conditions and other extended duration costs attributable to delays for which the contractor is not responsible. This provision limits a contractor’s remedy for delay to an extension of the completion date. A typical “No Damage for Delay” clause reads, in part:
Notwithstanding anything to the contrary in the Contract Documents, an extension in the Contract Time shall be the sole remedy of the Trade Contractor for any (1) delay in the commencement, prosecution nor completion of the work, (2) hindrance or obstruction in the performance of the work, (3) loss productivity, or (4) other similar claims whether or not such delays are foreseeable, contemplated, or un-contemplated…. C&H Electric, Inc. v. Town of Bethel, X07 – CV – 106015518 S (Jun. 15, 2012) (Berger J.).
These clauses are enforceable in most states unless the contractor can establish that the party seeking to invoke the clause “actively interfered” with the contractor’s ability to complete its work. There are volumes of treatises and case law throughout the United States attempting to define “active interference” but it is generally considered “some affirmative, willful act, in bad faith, to unreasonably interfere with [the contractor’s] compliance with the terms of the construction contract.” Peter Kiewit Sons’ Co. v. Iowa Southern Util. Co., 355 F. Supp. 376 (S D Iowa 1973).
In today’s economy, “No-Damages-for-Delay” clauses are often found in construction contracts alongside “Liquidated Damages” provisions which protect and compensate the owner for project delays caused by the contractor.
A “Liquidated Damages” clause sets, or liquidates, the amount of damages, usually on a per diem basis, that the owner will recover for project delays attributable to the contractor. Generally, damages can be liquidated if the actual injury to the owner is uncertain or difficult to ascertain and the amount set is reasonable. Such clauses will not be enforced if the clause operates as a penalty. In other words, if no rational basis exists between the owner’s actual damages and the amounts recoverable under the clause, a court will likely refuse to enforce the clause. A typical clause reads:
The damages to the Owner from a delay in achieving Substantial Completion of the Work are difficult or impossible to ascertain with certainty. As such, in the event that the Contractor fails to achieve Substantial Completion of the Work by each of the Substantial Completion Dates described within the Contract Documents, then the Contractor shall pay to the Owner as compensation and not as a penalty, the sum described below for each calendar day that Substantial Completion of the Work is not achieved. Contractor and Owner agree that such sum is a reasonable approximation, as of the date of this Contract, of the damages to the Owner resulting from a delay in achieving Substantial Completion of the Work (the “Liquidated Damages”). Contractor shall pay the applicable amount of Liquidated Damages to the Owner upon demand, and Owner may deduct all Liquidated Damages owed by Contractor from any monies which may then be due or subsequently become due to Contractor under this Contract. It is agreed that these Liquidated Damages are the Owner’s sole and exclusive remedy as it relates solely with respect to delays in the Contractor achieving Substantial Completion of the Work. Contractor and its surety or sureties, if any, shall continue to remain liable to Owner until all such liabilities are satisfied in full.
Another clause that affects the ability of both a contractor and owner to recover damages attributable to construction delays is a “Waiver of Consequential Damages” provision. Many form agreements, including the American Institute of Architects’ A201 General Conditions and B101 Architect – Owner Agreement, contain a mutual waiver of these types of consequential damages. The A201 provides:
The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes
.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents. AIA Document A201, American Institute of Architects (2007).
There are also many owner and project specific form agreements that contain only a waiver of consequential damages in favor of the owner or no waiver at all leaving the design team, contractor and its subcontractors exposed to considerable damages when a project does not finish on time.
It is crucial in today’s economy for all project participants to have an open and informed discussion about unanticipated delays at the commencement of every project and to allocate the risks and costs knowingly and accordingly within the Contract Documents.