Don’t Be Late! (But Assume That Your Project May Be)

Originally published as an Op-Ed by the Oregon Daily Journal of Commerce on June 17, 2021.

The combination of the COVID-19 pandemic, skyrocketing construction material costs, labor and material shortages, and a hot housing market presents a predictable risk: despite your best efforts, your project might not finish on time. What should owners and contractors do to prepare?

Evaluate whether to waive consequential damages

“What do you mean I can’t recover all my damages?” Owners often unwittingly agree to a mutual waiver of consequential damages as many industry standard construction template agreements include a mutual waiver. The consequences of overlooking a waiver of consequential damages can be devastating. When a project is late, the owner and contractor (but principally the owner in my experience) may suffer consequential damages. As generally known in the industry, consequential damages include, among other things, lost profits, loss of use, increased financing costs, lost opportunities, and damages to reputation. These damages often dwarf the owner’s direct damages and can possibly exceed the total contract value. The strategy for contractors is generally straightforward: insist on a waiver of consequential damages. Contractors may even want to strengthen the template waiver provisions found in many standard construction agreements. Owners, on the other hand, are wise to address this issue head-on during the contract negotiation and not accept the waiver of consequential damages as a foregone conclusion. Market forces will likely dictate whether owners can strike the waiver altogether. But even if the waiver cannot be avoided, owners have options such as: 1, linking the waiver to apply only to non-insurable damages, 2, setting a cap on the recovery of consequential damages, 3, excluding certain categories of damages from the waiver, 4, limiting the waiver to damages incurred prior to the date of substantial completion (during which period the owner may be protected by a liquidated damages provision), or 5, insisting on a liquidated damages provision as a condition for including the waiver of consequential damages. Owners are also cautioned to avoid or limit a consequential damages waiver clause’s application to lost revenue after substantial completion, which arises when construction defects cause the need for repairs and tenant evacuations. Don’t be the party uttering the first sentence of this section.

Consider liquidated damages

To allocate the risk of delay before construction begins, owners and contractors should both consider stipulating to liquidated damages. These should be a reasonable forecast of the owner’s delay damages, and ordinarily should not be a penalty (a liquidated damages provision that is a penalty is at risk of being unenforceable). Contractors benefit from a liquidated damages provision because they can price the risk of delays from the outset of the project and better evaluate the cost of accelerating. Contractors also often pair an agreement on a liquidated damages provision with a mutual waiver of consequential damages. Among other benefits, this pairing means the contractor’s risk for delays substantially decreases once the project reaches substantial completion as liquidated damages are typically linked to the date of substantial completion. Owners benefit from a liquidated damages provision because they can predictably measure the cost of delays. Owners can also use liquidated damages to push contractors that fall behind schedule. Owners are cautioned, however, to avoid back-of-the-napkin calculations of liquidated damages as undervalued liquidated damages can backfire and possibly even motivate the contractor to finish late. As discussed in a prior column written for the DJC (“When to have the hard talk about setting liquidated damages,” by Colm Nelson, on Sept. 18, 2020), deciding when to negotiate liquidated damages is also a tricky issue that should be approached with care during each project.

Double-check claim-related contract provisions

Does your construction contract require the contractor to submit an analysis (often referred to as “time impact,” “critical path,” or simply “delay” analysis) to substantiate a request for additional time? Can you recover attorney fees under your contract if you have to file suit or demand arbitration? Can you recover expert costs in the event of a dispute (for instance, the expert hired to prepare the required critical path analysis)? Will you be presenting your delay claim to an arbitrator experienced in the construction industry or a judge or jury that may have little to no familiarity with construction claims, let alone delay analyses? Does your contract have a force majeure provision? How about a material cost escalation clause? These are some of the issues that should be carefully reviewed in any contract negotiation with an eye toward the risk of project delays.

One silver lining of the COVID-19 pandemic may be the reminder that we should always expect the unexpected. That is the right mindset when reviewing your next construction contract amid the many challenges facing the industry today.