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Why Have Liquidated Damages in a Construction Contract

Why Have Liquidated Damages in a Construction Contract published on

The original contract contained a clause on lump sum damages. The lump-sum compensation clause provided for a weekly rate of $13,846 per week, accumulating daily from the date set for practical completion to the actual practical completion date. The party challenging a lump-sum compensation clause – usually in the case of contractors` public contracts – has the burden of proving that the clause does not constitute a penalty. DJ Mfg. Corp., 86 F.3d at 1134; Jennie-O Foods, Inc., 580 F.2d to 414. The burden is high, « because if the damage is uncertain or difficult to measure, it naturally follows that it is difficult to conclude that a certain lump sum or a certain rate of damages is an unreasonable projection of what those damages might be. » DJ Mfg. Corp., 86 F.3d at 1134. Since lump-sum compensation is intended to approximate actual damage, courts will consider whether the amount of lump-sum damages is based on a reasonable estimate of the actual damage suffered by the owner or contractor, or whether the amount of lump-sum damages was simply an arbitrary random amount. Finally, the court will consider whether the lump sum damages have a frightening relationship with the actual damage. The courts have ruled that lump sum damages, which are twice as high as actual damages, are proportional to actual damages. Therefore, the party opposing lump sum damages must prove that the lump sum damages far exceed the actual damages in order to successfully impose an unenforceable penalty. « If the Contractor does not complete the Work within the contractual deadlines or does not reach any of the stages of the Contract, the Contractor agrees to pay the Owner $X per day as lump sum damages to cover the Owner`s losses, costs and damages for each individual day on which the Contractor has not completed the milestone work or the entire project. » The Central Artery/Third Harbor Tunnel project is the largest project in New England.

Like the Boston Harbor project, the Central Artery project will have many contractors working in interdependent schedules. Similarly, the Central Artery project has a significant and costly management and support services burden for the construction of the project. The flat-rate daily allowance cannot be determined on the basis of an amount which, according to the owner, would oblige the contractor to complete the project within the contractual deadlines. That would be a punishment. Instead, the amount of damage must be calculated on the basis of what the owner expected if the project were to be completed late, and these calculations must be reasonable. Substantial completion does not release the contractor from the completion of the entire project and does not require the owner to pay the full contract price. However, substantial completion gives the Contractor the right to receive payment of the balance of the contract less the value of the work remaining to be performed, which is generally referred to as a « list of defects ». Most contracts also require release from « detention » after a substantial conclusion. Retention is a percentage, usually in the range of 5-10% of the value of the work already completed, that is retained by the owner as an additional incentive for the contractor to achieve significant completion.

Therefore, in theory, if it is determined that the daily fees charged to the contractor exceed what the owner actually lost due to the late completion of the project, the liquidated fees will not be charged. Lump sum clauses are usually written as a kind of formula, for example: the date of initial conclusion of the contract is the date specified in the contract by which the project is to be « completed ». Many contracts simply set the number of days of execution instead of a specific completion date to account for uncertainty about when a project can be approved. « If the actual damage is difficult to determine and the amount agreed by the parties at the time of performance of the contract is a reasonable estimate of the actual damage, such a contract shall be performed. » If the contract prevents the customer from claiming lump sum damages, or if the actual losses differ significantly from those estimated at the time of the conclusion of the contract, the customer may assert a claim for unliquidated (i.e. real) damages in court. Non-lump sum damages are damages the exact amount of which has not been agreed in advance and is usually determined by the courts. Whether the assumptions inherent in MWRA`s proportionate methodology are so restrictive for a court that it considers the resulting lump sum damages to be punitive and therefore unenforceable will be decided if or if a contractor challenges this wording […].

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