Liquidated Damages For Delay in Construction? Who uses this?

Question

Hi Everyone -

I'm about to start a new flip and we are trying a new general contractor. It is a fairly large job according to my standards (over $90,000).

We are in the midst of getting the contractor agreement in place and I would like to put in a "Liquidated Damages For Delay In Construction" clause. I like the idea in theory but I'm not sure how successful in implementing and using it.

• Do people use these in their contracts with contractors?
• How successful have these clauses been?
• What is the language you've used in these clauses?
• Do you give the GC a grace period? If so, how long?
• How do you determine whether liquidated damages are due (under this clause) in the normal course of construction?

Any thoughts would be appreciated.

Bill Gulley · Answer

I have used them, to some extent. They are more applicable in new construction and development, not so much for a rehab unless it is detailed about unforeseen events. You tear into a wall and there is no telling what you'll find or what might happen.

Exclusions are Acts of God, insured perils, weather days need to be assessed to the season, lag time of suppliers or materials delayed or not delivered, delays caused by inspectors or regulatory matters beyond the control of the contractor, defective materials and/or equipment installed in the project, normal amounts of waste and other matters depending on the project.

About all you can hold a contractor's feet to the fire on, is failure to continue work when work can be accomplished, their mistakes that exceed some agreed cut off (you will have mistakes and waste) worker's conduct or failure to show, work not to workman like standards or torts, such as walking off the job. These all have grey areas as to the amount of loss of time or money.

Contracting with these aspects will generally drive the cost up too, the more you require the more they may charge. A project is usually pretty much a shared risk matter.

While I bring the matter up with a new contractor I don't with one I have experience with.

I don't think they are really effective, a contractor knows when they screwed up, it's then you place to justify that screw up to a real cost or loss that is reasonable and from there you'll need to find agreement.

I had experience with government contracts, such just aren't appropriate for small jobs, under a half million and as the project gets bigger, the terms can be more involved. Any government contract will be different, the issue is that public funds are involved and such agreements are a matter of protecting public funds to some extent.

A few times, in rehabs, I simply do an on the spot zap of pay or indemnification for real blunders. I only had one contractor who failed to show for days, I always hold the purse and if delays put me off into another market period, like winter, I'll start zapping the pocket, if they walk off, they get to pay the next contractor (if its worth the effort). Small jobs, tick them off they may walk and you might consider when you bring up some issue.

You have to be fair and expect that things won't go as planned. I never was sued or had to sue a contractor, got close to going after one but I didn't, I usually just run a bad one off if needed.

If you deal with a reputable contractor in residential and small commercial you really don't need such penalties, IMO, it's dealing with unknowns or those you take trying to save a few bucks, the fly by nights and you're not likely to collect from them anyway.

Blake Merrell · Answer

George,

I am a industrial contractor. I bid on and perform work for large City water projects. These are not small deals and every single set of specs I get has liquidated damages clause. This is not a direct example to your question, but here are a couple liquadated language examples from specs on my desk currently:

Example 1

PERFORMANCE:

6.1 Timely performance is of the essence in the award of this bid. Vendor shall provide stated services within stated timeline. It is herby understood and mutually agreed to by and between parties hereto that the time of performance is an essential condition of this contract. If said vendor shall neglect, fail or refuse to provide the services within the time herein specified, then said vendor does hereby agree as part of the consideration for awarding of this bid, to pay (xxxYOUxxx) the sum extended by the contract for like services performed by another suitable vendor. The vendor shall notify (xxxYOUxxx) of any delay within (xxxxxx) hours of any delay causing discovering or setback.

Example 2

NON-PERFORMANCE:

A.1 Time is of the essence in this Contract and failure to deliver the services specified within the time period required shall be considered a default.

A.2 In case of a default, the (XXXYOUXXX) may procure the services from other sources and hold the Vendor/Contractor responsible for all costs occasioned thereby and may immediately cancel the contract.

Example 3

LIQUIDATED DAMAGES

Should the contractor fail to complete the required services in the time(s) specified in this contract, or within such additional time(s) as may be granted by (xxxYOUxxx), the (xxxYOUxxx) shall suffer damage, the amount of which is difficult, if not impossible to ascertain. Therefore, the Contractor shall pay (xxxYOUxxx), as liquidated damages, the sum of xxxx$250.00xxxx for each calendar day of delay that actual completion extend beyond the time limit specified until such reasonable time as may be required for final completion of the work. Such sum is mutually agreed upon as a reasonable and proper amount of damages the (xxxYOUxxx) shall sustain per diem by failure of the contractor to complete the services or make delivery within the specified time. The costs for liquidated damages shall not be construed as penalty on the Contractor.

Basically some spell out a figure per day, and other just make it the contractor's problem to pay another suitable contractor to help or fill in to get the work finished on time should contractor 1 fail or fall behind.

Disclaimer:No legal advice given in this reply. You should seek the opinion and services of a legal, licensed, and competent professional.

Account Closed · Answer

Thanks everyone. Great feedback!

@Jeff James   - I completely agree. I'm not doing enough business (yet) to have that kind of leverage and so that's I'm wary (and why I'm asking :). My "Go To" has always been get a draw schedule that is reasonable and where neither party is significantly floating the other and then make the final payment contingent upon my satisfactory completion of the project. So how do you manage this risk?

@Blake Merrell   - Those clauses are definitely solid and thanks for the legal disclaimer! Do you rehab properties yourself? Have you ever used a LD clause?

Bill Gulley  - So you are a contractor and investor? Do you get contractors for your investment properties? If so, what do you do to mitigate the "Delay" risk?

Blake Merrell · Answer

Since you asked for examples in your original post,

Just like Bill Gulley said here are examples as to the language that forgives delays due to acts outside of the contractor's control:

Force Majeure. Contractor shall not be liable for failure to carry out the terms of this Agreement to the extent such failure is due to a Force Majeure event, except for failures that could have been reasonably foreseen and guarded against so as to avoid or reduce the adverse impact thereof. A Force Majeure event is hereby defined as the failure to carry out any of the terms of this Agreement due to any one of the following circumstances beyond the control of Contractor: (a) the operation and effect of rules, regulations, or orders promulgated by any commission, county, municipality, or governmental agency of the State of XXXX or the United States, (b) a restraining order, injunction, or similar decree of any court of competent jurisdiction, (c) war, (d) flood, (e) earthquake, (f) fire, (g) severe wind storm, (h) acts of public disturbance, (i) quarantine restrictions, (j) epidemics, (k) strikes, (l) freight embargoes, or (m) sabotage. The times specified herein for performances include delays that can ordinarily be anticipated due to adverse weather conditions. The XXXYOUXXX is not obligated to grant an extension of time due to adverse weather conditions unless such conditions rise to the level of Force Majeure.

Delay. Contractor shall not be compensated for delays caused by Contractor’s inefficiency, rework made necessary by Contractor’s error, failure to perform the Work as scheduled, or any other corrective or productivity measures made necessary by errors, omissions, or failures to properly perform the Work. Neither shall the Contractor be compensated for delays caused by events by force majeure as described in sub-para (a) XXXNAME OF YOUR LEGAL DOCXXX above. Within ten (10) days after the onset of a delay, Contractor shall notify the XXXYOUXXX in writing of the delay, which shall provide: (1) a detailed description the delay and its probable duration, (2) the specified portion of the Work affected, and (3) an opinion as to the cause of the delay and liability (if any) for the delay. Notices provided more than ten (10) days after the inception of the delay shall only be effective as to additional delay incurred during the ten (10) day period preceding receipt of such notice. In the case of continuing cause delay for the same cause, only one notice of delay is necessary. Failure to provide this notice waives any claim for extension of time resulting from such delay. If the delay is due to the failure of another XXXYOUXXX contractor to complete its work in a timely manner, changes ordered in the Work, a Force Majeure event, or any other cause which the XXXYOUXXX, in its sole judgment and discretion, determines to justify the delay, then the Completion Date may be extended as necessary to compensate for the delay. All time extensions shall be in the form of a written amendment signed by both parties.

These examples contain a lot of big government crap that isn't really necessary, but its an example!

No legal advice given, just an example!

Bill Gulley · Answer

By saying I'd zap them, means I'd take up the matter of default or loss, justify my position as to what that cost me, justify that such was not usual or customary and why it was his responsibility and make my demand for my indemnification that would be taken care of by my withholding payment and I would document that as a credit from the contractor. In most cases, while no one is happy about it, you need an agreement as to what is fair.

I only had one issues where is wasn't really agreed, the work stopped, I fired him, he was not paid anything as he had to be replaced, if I got the remaining work accomplished for less, he'd get his money, if it cost me even more, he'd get nothing and I could seek the difference from him, I just didn't seek the difference. A GC or contractor who walks off a job becomes liable for the difference it may cost to finish the work as contracted. :)

Aaron McGinnis · Answer

@George Sarianos  - Yes. Actually, Investor before I turned contractor. We run our own rehabs, so the only person I get to complain to if something gets behind is myself. We maintain good relationships with our subs and know what to expect from them, so we schedule accordingly and don't let critical path fall behind.

Aaron McGinnis · Answer

I pretty much second everything that @Bill G. just said.

Our contract specifies the length of time I expect the job to take, and has a clause about delays due to weather, acts of God, materials, customer indecision, permits, and inspections and other delays beyond my control. I don't ask for completion bonuses and I don't give penalty money.

In my opinion, if you're dealing with an experienced and responsible contractor, they're going to be able to tell you with quite a bit of specificity how long your project will take. The thing I tell my customers is... if I tell you 55 working days, don't expect it to be done in 35 working days. (Although we are often ahead of schedule)

Roger Doe · Answer

Blake's post is pretty good.  Shows you what can be done.

Additionally, you can also put in a clause that rewards the contractor if they actually finish the work earlier than planned.  It pushes them to finish faster which decreases your carrying costs.

Get a good lawyer that focuses on development (not just real estate transactions).  This will cost you some money now but you can use this same contract for your future projects.

Jeff James · Answer

I have never personally used these clauses but I know someone who has.  However, he is a very active investor and contractors want to do work for him since he represents a large volume of work.  I do not have such leverage and I am not sure I could get a contractor to agree to that language in my contracts.

My day job is related to highway construction contracts.  I am very familiar with the use of this concept in that environment.  A primary problem that I see in implementing this strategy in real estate construction is related to what happens when an unforeseen circumstance develops during construction.  We all know that never happens, right?  If something is discovered that was not known at the time that the contract was executed and requires additional work to resolve the contractor is entitled to additional time to perform the additional work.  In order to make ld contract language effective, the owner would have to negotiate the appropriate contract time extension required to perform the additional work and ideally this would be done at the same time as the financial considerations associated with the performance of the additional work.

I hope that I didn't make the issue more confusing.  Like you I am interested in the success or lack thereof of other investors in this area.

Liquidated Damages For Delay in Construction? Who uses this?

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