Liquidated damages are in many, many construction contracts. They are designed to capture an owner’s damages if a project, or portion thereof, is not substantially completed by an agreed date. The liquidated damages provision contemplates that the contractor will be liable for a daily rate of “x” for each day of delay beyond the substantial completion date (or any agreed change to this date). Sometimes there is a cap on the contractor’s liquidated damages exposure (say, capped at the contractor’s fee) and sometimes there is no cap. On private projects, the liquidated damages provision is a negotiated provision. Typically, on public projects, the liquidated damages provision is not negotiated, but is known upfront and the contractor can try to account for that risk in any bid or proposal.
Assume a project is completed 100 days beyond the agreed-upon substantial completion date. The contract provides for liquidated damages of $2,000 per day with no cap. This means the contractor has liquidated damages exposure in the amount of $200,000. The question, however, is who bears the burden relating to the 100-day delay that triggers the application of the liquidated damages provision. Understanding this burden is important, especially if you are the contractor looking to challenge this assessment and, perhaps, support a claim for extended general conditions / overhead.
The owner’s initial burden is typically an easy burden—known as the burden of persuasion. The owner really just needs to produce evidence that the project was not substantially completed by the agreed-upon date. Once the owner does this, the burden shifts to the contractor to prove that the owner prevented performance, there was excusable delay such as concurrent delay, or the owner caused the delay or a portion of the delay (e.g., design-changes, late change orders, etc.). The contractor will want to do this to not only establish it is not liable for a majority or all of the assessed liquidated damages, but that the owner is liable for the contractor’s extended general conditions / overhead associated with delay. Once the contractor does this, the burden of proof then shifts back to the owner since the owner carries the overall burden relating to its assessment of liquidated damages.
This sentiment was conveyed In the Armed Services Board of Contract Appeal’s decision in In re Idela Const. Co., ASBCA No. 45070, 2001 WL 640978 (ASBCA 2001) (internal quotations and citations omitted):
In order to assess liquidated damages the Government [owner] must prove by a preponderance of the evidence that the contractor is in default, that it did not prevent performance or contribute to the delay, and that the appellant was the sole cause of the days of delay. The Government has established that substantial completion did not occur until 109 days after the adjusted contract completion date.
In order to defeat the Government’s claim for liquidated damages, the appellant [contractor] must come forward with evidence to show that the Government prevented performance or contributed to the delay or that the delay was excusable. Because liquidated damages is a Government claim, the Government continues to have the overall burden of proof, and if the responsibility for days of delay is unclear, or if both parties contribute to the delay, for the Government [t]o recover liquidated damages the Government must prove a clear apportionment of the delay attributable to each party.
See also Sauer, Inc. v. Danzig, 224 F.3d 1340, 1347 (Fed. Cir. 2000) “(As a general rule, a party asserting that liquidated damages were improperly assessed bears the burden of showing the extent of the excusable delay to which it is entitled.); A.G. Cullen Const., Inc. v. State System of Higher Educ., 898 A.2d 1145, 1162 (Pa. 2006) quoting PCL Constr. Servs., Inc. v. U.S., 53 Fed. Cl. 479, 484 (2002) (“As to the applicable burden of proof in a liquidated damages claim, the government has “the ultimate burden of persuasion as well the initial burden of going forward to show that the contract was not completed by the agreed contract completion date and that liquidated damages were due and owing.”).
Remember, a liquidated damages provision is a common provision in construction contracts. Make sure you appreciate how this clause is triggered, the application of the clause, and who carries what burden when its comes to assessing and challenging liquidated damages.
Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.