Liquidated Damages/ Bonuses

Liquidated damage clauses have a number of drawbacks that owners should consider. First and foremost should be the question of competition. Contractors may shy away from projects with an inordinate amount of risk in this regard. In some cases, the contractor may have little choice; their bonding company may say no.

In addition, in a low, lump sum bidding format, you run the risk of attracting those who believe they can escape and evade the liquidated damage charges. That evasion will take the form of counterclaims, delay damage claims, and the burying of everyone in paperwork. Even those not otherwise inclined to that mode of operation are forced into it by such clauses, particularly in a poor economy. Multiple contracts are often viewed as facilitating the ability to escape and evade.

A subject that often comes up in the context of liquidated damages is a bonus clause. In a practical sense, we are not certain that there is much difference between the two except for semantics. Contractors often bid in anticipation of being paid the bonus. If they lose the bonus, they lose money. In effect, loss of bonus is a liquidated damage penalty. Given that, the same aggravations occur.

Liquidated damage or, for that matter, any consequential damage threats create a situation that is the antithesis of partnering. A contractor is forced into over-documentation and expensive claims building. The relationship is adversarial right out of the box. As we said to one owner recently, "You seem to be spoiling for a fight rather than looking for ways to work with the contractors as a team to complete the job on time, within budget, and with a minimum of dispute."

Should you opt for liquidated damages, the following basic ground rules apply:

• Liquidated damages are enforceable only if, in fact, the owner was actually damaged, and they are not to be used for punitive purposes. If the delay in completion would have occurred anyway or if the owner would not have been able to occupy at the completion date, the damages are not generally considered enforceable.

• The damages must bear some resemblance to what actual damages might be.

• You must be able to attribute the lateness to the contractor you intend to charge liquidated damages.

• You may charge liquidated or actual damages, but not both (see 36 NY Jur 2d, Damages, §170 and cases cited therein, wherein it is found that where a liquidated damage sum is stipulated, that amount is the maximum amount which may be recovered).

Public Work Considerations: When you are dealing with separate prime contractors, as is required on public work under the Wicks Law, the issue is even more difficult. Who was at fault for the delay? If the electrical contractor does not finish timely, he might contend that the plumbing contractor delayed him or that the owner was not really damaged because the general construction contractor was not scheduled to complete the project by that time anyway. All contractors might contend that the delay was caused by the owner’s abdication of his responsibility to coordinate the separate primes.

In relation to separate prime contractors, we often see clauses that seek to charge general construction contractors $1,000/day liquidated damages while charging the other primes only $300/day. This brings into question what the actual damages were, $1,000 or $300? The size or type of contract should not be a determining factor in the amount. Either the project is completed and suitable for occupancy or it isn’t. A choice must be made to either raise the amounts of the other primes or reduce that of the general construction contractor or get rid of the clause altogether. We would suggest looking at those options in reverse order of preference.