This is the third post in the four-part series “Limitations of Liability—The Elephant in the Room.”
Owners often attempt to limit their liability to contractors through what is commonly known in the construction industry as a “no damages for delays” clause. Much like waivers of consequential damages, a “no damages for delays” clause, which limits damages for construction delays, accelerations and other inefficiencies, can serve a fair purpose, despite the perceived severity to a contractor who falls behind schedule for reasons beyond its control. These delay-related costs (especially indirect costs such as extended home office overhead or lost bonding capacity) tend to be speculative and difficult to prove. Proving and defending delay claims is also a very expensive proposition, both as to entitlement and quantum. Finally, project owners presume that contractors are better prepared to confront project delays, and to carry costs for such a contingency in their pricing.
In many jurisdictions these clauses are fully enforceable, albeit with limited exceptions that courts have restricted in recent years. Contractors that choose to ignore these clauses do so at their peril.
Nonetheless, no contractor can anticipate every delay or impact, and a protracted delay in a project can have a devastating financial impact on the construction team. There should be a means by which contracting parties can fairly allocate the cost issues that come with unexpected delays, without leaving the door open for speculative claims.
Let’s take a look at three very different contract clauses that could limit, or even completely exclude, recovery for delay damages.
The first is a prototypical “no damages for delays” clause:
The Contractor’s sole remedy for an excusable delay in the Work shall be an extension of time. The Contractor waives and agrees to make no claims for damages for delay in the performance of this Contract caused by an act or omission of the Owner or its representatives, and agrees that any such claim shall be fully compensated by an extension of time to complete performance of the work as provided herein.
Contractors likely will seek to avoid clauses that are so broadly worded, or at least attempt to negotiate some limit to its applicability. Project owners may also consider avoiding such broadly worded clauses, as they could lead to inflated initial pricing, excess contingency, claims for additional costs outside of delay, or worst case, a contractor default.
A more effective approach to placing checks on questionable delay costs might be to identify the potential areas of delay up front, and have the Contractor consider the impact in its bid and schedule. Note the following clause:
The Contractor shall schedule its operations in such a manner as to minimize interference with the operations of the utility companies or local governments in effecting the installation of new facilities, as shown on the plans, or the relocation or their existing facilities. The Contractor shall consider in its bid all permanent and temporary utility appurtenances in their present or relocated positions and any installation of new facilities required for the project. The Owner will not make any additional compensation to the Contractor for delays, inconvenience or damage sustained by the Contractor due to (i) interference with Project construction caused by the location, condition or operation of utility (including railroad) appurtenances or (ii) the installation, removal, or relocation of such appurtenances; and the Contractor may not make a claim for any such compensation.
This clause is also a “no damages for delays” clause, but with a significant difference. This clause addresses a specifically contemplated event of delay (in this case relocation of utilities), which allows the contractor to address such contingencies in its bid and in its schedule.
If a project owner is particularly concerned with claims over specific types of delay damages, a clause limiting damages for delays may be more appropriate than an outright prohibition:
The Contractor’s sole remedy for an excusable delay shall be an extension of time as provided herein, direct field personnel expenses, general conditions, Subcontractors’ actual field costs, and direct overhead and profit as allowed by the Contract Documents. The Contractor waives all other damages for delay, including home office overhead and allocated portions of indirect or general overhead expenses, incurred by it or anyone claiming through it.
This clause limits the contractor’s recovery to direct, provable costs, such as project supervision, jobsite equipment and other project specific costs, while prohibiting recovery of the more speculative, indirect costs.
While limiting speculative and cost prohibitive claims is a fair concern, both parties gamble on the success of the project when they attempt by contract to shift disproportionate risk to one party. There are ways to control costs and claims for delay without completely eliminating the right to recovery, and allowing for successful project completion.