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Liquidated Damages: Contract Completion Clause

Many of the challenges contractors face in construction are the same regardless of what country they live in. That includes liquidated damages. This note came in recently:

Greetings from Barbados!

I trust you are both doing well despite the global challenges.

I have a question with regards to “liquidated damages”. We’re at the contract stage with a potential client and her lawyer is asking for the inclusion of this clause. They want it to read that should we not complete the works within the specified time period then we agree to pay the client XXXX per week until the works are done. Our lawyer says that it’s not an easy clause to enforce because there are other conditions that must be met first, but it is a clause that the legal fraternity seems to want included.

We personally do not want to include any clause that says we must pay a client because our contract is fixed price and it’s already in our interest to complete our projects on time. My husband believes that if the liquidated damages clause is included to penalize failure to meet deadlines, then a clause should be included to reward completing the works ahead of schedule.

I’d like to get your thoughts on this, so I know how to answer the client without blatantly saying no and have legal hold up the process longer than they already have.

Looking forward to hearing from you.

Her husband is right. If they want a penalty in case the job runs late, then they should be willing to pay an equivalent amount if you get the job done early.

During the last year and a half, supply lines have failed, and suppliers can’t guarantee delivery. In many areas the labor force would rather stay home and collect unemployment than go to work. That means you can’t be sure you’ll have labor to build the job any more than you can be sure of material delivery schedules. These are problems that both you and your subcontractors are facing.

For that reason, I would also write in exclusionary clauses that give you a pass on the penalty if your suppliers don’t meet your time line, if you can’t get sufficient crews assembled to do the work, if you have any inclement weather or other acts of God, if the owners get in the way or won’t make decisions that slow the job progress, etc.

However, we’ve talked about red flags before. This is a situation where you should think long and hard before getting involved. These clients are either out to get you or simply don’t understand how construction works.

Many years ago I had a similar experience on a sales call. A homeowner told me he was going to insist on a penalty clause giving him a price reduction of $150 a day (this was many years ago) for every day the job ran over the time frame he’d set. I told him that was fine if he’d pay $200 extra for every day we finished early. “Oh no”, he said, “You’ll just cut corners on my job to finish early.” Of course, if that was how I conducted business, I could also cut corners to finish the job on time. Thirty seconds later I could see him and his house in my rearview mirror.

It’s reasonable for the building owner to be concerned about how long you’ll take to do a job. Too many contractors are flakes who fiddle-fart around for weeks on a job. It happens even more often on cost plus jobs.

That’s why it’s important to set a reasonable schedule and keep it. Pay attention to what you communicate; if you think the job will take four weeks, warn them it might take five or six weeks. Underpromise and overdeliver. There are many things outside your control, like the uncertainty in the supply chain and the labor force, and if something happens that throws your schedule off, you need to let the homeowners know right away.

The writer is correct that on a fixed price contract, it’s in the contractor’s interest to complete projects on time. That’s a strong selling point when you’re working with an owner who thinks cost plus or time and material contracts are the way to go.

When customers start talking about penalties like this, it’s time to ask why. The reason is seldom in your favor. Every agreement you enter must be win-win, or just walk away. There are plenty of building owners who need your skills.

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