CHALLENGING ENFORCEABILITY OF LIQUIDATED DAMAGES (IN FEDERAL CONSTRUCTION CONTEXT)

Posted on March 3, 2024March 3, 2024 by David Adelstein

A recent summary judgment opinion from the Armed Services Board of Contract Appeals (ASBCA), Appeals Of – BCI Construction USA, Inc.,ASBCA No. 6257, 2024 WL 773324 (2024), contains a worthy discussion regarding a contractor’s challenge to the government’s assessment of liquidated damages, specifically the enforceability of the liquidated damages rate. Although this challenge is in the federal context, this discussion would be more expansive and apply outside of the federal context.

When dealing with the enforceability of a liquidated damages, the ASBCA “examines whether the liquidated damages amount ‘is extravagant, or disproportionate to the amount of property loss, as to show that compensation was not the object aimed at or as to imply fraud, mistake, circumvention or oppression.” Appeals of – BCI Construction USA, Inc. (citation omitted).

First, the government argued that the contractor waived the right to challenge enforceability of the liquidated damages provision. The government argued this should have been raised in a pre-bid, bid protest regarding the terms of the solicitation. The ASBCA shot this down holding the contractor did NOT waive the right to challenge the liquidated damages rate by not challenging it before its bid as “there was no ‘patent error” of which [the contractor] was aware at the time it submitted its bid. Indeed, there is no allegation that [the contractor] had any knowledge of what it believed might be in error regarding the liquidated damages amount set forth in the IFB [Invitation For Bid].” Appeals of – BCI Construction USA, Inc.

Second, as to the reasonableness of the liquidated damages rate, “‘liquidated damages clauses are perfectly allowable so long as they do not appear to have been designed as a punishment for late performance but, instead, reflect an attempt to place a value on late performance in circumstances where ascertaining that value would be otherwise difficult, if not impossible.’” Appeals of – BCI Construction USA, Inc. (citation omitted).

The contractor bore the burden to challenge the liquidated damages rate was unenforceable. The ASBCA noted this burden “‘is an exacting one, because when damages are uncertain or hard to measure, it naturally follows that it is difficult to conclude that a particular liquidated damages amount or rate is an unreasonable projection of what those damages might be.’” Appeals of – BCI Construction USA, Inc. (citation omitted).

The contractor claimed the liquidated damages rate was not reasonably related to the government’s anticipated damages if the contractor completed the project late. The ASBCA found the daily liquidated damages rate was .001 percent of the contract price and “[t]here is nothing inherently unreasonable about a per day reduction that equates to 1/100 of one percent of the contract price.” Appeals of – BCI Construction USA, Inc.

Moreover, the ASBCA explained, “regardless of how the liquidated damages figure is derived, the clause will be enforced if the amount is reasonable for the particular agreement at the time it was made. This especially is true because, as noted by the Court of Claims, ‘[t]he Government’s damages stemming from delayed receipt of the supplies or construction it ordered are normally hard to measure.” Appeals of – BCI Construction USA, Inc. (citation omitted). Therefore, the ASBCA found the contractor did not carry its burden to support the liquidated damages rate served as an unreasonable projection.

Third, the contractor argued that the government was assessing liquidated damages beyond the date of substantial completion, which was improper. The contractor argued the project was substantially completed on April 23, 2021, which was when the project was capable of serving its intended purpose. The government opposed this because there were numerous (at least 104) items yet to be completed. The ASBCA held there was a question of fact as to when substantial completion occurred: “‘Whether a contract has been substantially completed is a question of fact and a project is considered substantially completed when it is capable of being used for its intended purpose.” Appeals of – BCI Construction USA, Inc. (citation omitted).

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.

APPLICATION OF TWO CONSTRUCTION CONTRACT PROVISIONS: NO-DAMAGES-FOR-DELAY AND LIQUIDATED DAMAGES

Posted on February 5, 2022February 5, 2022 by Edward Garber

A recent Florida opinion between a prime contractor and a Florida public body touches upon two important issues: (1) the application of a no-damage-for-delay provision; and (2) the application of a liquidated damages provision. Both provisions find there way into many construction contracts. Unfortunately, the opinion is sparse on facts. Nevertheless, the application of these provisions is worthy of consideration.

In this opinion, Sarasota County v. Southern Underground Industries, Inc., 2022 WL 162977 (Fla. 2d DCA 2022), a county hired a contractor to install sanitary and water piping underneath a waterway. During construction, a nearby homeowner complained that vibration from the drilling caused damage to his home. As a result, the county stopped the contractor’s work to address a potential safety issue, as it was contractually entitled to do. The contractor hired a structural engineer to inspect the house and the engineer issued a report determining that any alleged damage was cosmetic and that there was sufficient monitoring of the vibrations to prevent future damage. The contractor also had an insurance policy to cover any homeowner claim for damage. However, upon receipt of the engineer’s report, the county did not lift its stop work order. Rather, the stop work order remained in place for an additional 71 days.

NO-DAMAGES-FOR-DELAY

The contractor sued the county to recover its costs during the additional 71 days the project was stopped. The county relied on its no-damages-for-delay provision in its contract. The trial court, as affirmed by the appellate court, found that the county’s work stoppage for an additional 71 days amounted to active interference and bad faith.

“Although ‘no damages for delay’ clauses are recognized in law, they will not be enforced in the face of governmental ‘fraud, bad faith, or active interference’ with the performance under the contract.” Sarasota County, 2022 WL at *2 (citation omitted). There was no reason to keep the stop work order in place after it was found it was safe to resume the construction activities.

LIQUIDATED DAMAGES

However, the trial court did assess liquidated damages against the contractor because the matter with the complaining homeowner had not been resolved by the contractual date for final acceptance.

For a liquidated damages clause to be enforceable, “the damages consequent upon a breach must not be readily ascertainable,” and “the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach.” “[L]iquidated damages clauses can exist only when they provide for ’damages’ (something to be given by one party who breaches the contract to the other party to compensate the other party for his loss which is a consequence of that breach).”

Sarasota County, 2022 WL at *2 (citations omitted).

The appellate court reversed the trial court’s assessment of liquidated damages because the county did not sustain any loss due to any delay to final acceptance. The contractor had completed all of its work by the contractual date except for resolving the complaining homeowner’s claim. “Thus, because the County had the full use for the completed construction project for over two years before final acceptance, ‘the sum stipulated to be forfeited,” was “grossly disproportionate to any damages that might [have been] expected to follow from a breach.’” Sarasota County, 2022 WL at *3 (citation omitted).

COMMENTS

The limited facts do not do this opinion any justice. However, it’s important to appreciate that a no-damages-for-delay provision is not the be-all-and-end-all of a delay claim. It just isn’t! As this court found, the work stoppage beyond the point it should have been stopped was active interference and bad faith.

As for the liquidated damages argument, that’s a head scratcher unless the court’s point is that once the government got beneficial use of the project, any delay in its final acceptance of the contract constituted a penalty even though sophisticated parties agreed to this provision. (Not how the court worded it though!). Also, this opinion could have the affect of opening up Pandora’s box by allowing a party to take discovery on financial information or otherwise relative to actual damages when, frankly, this defeats the purpose of the liquidated damages provision.

Liquidated damages provisions on private jobs are negotiated by sophisticated parties. On public jobs, you know what the liquidated damages are and how the provision is generally worded and can factor that into your pricing, no different than any other risk included in the contract.

CONSIDERATIONS WHEN DEALING WITH AN ASSESSMENT OF LIQUIDATED DAMAGES

Posted on January 22, 2022January 22, 2022 by Edward Garber

In a recent post I talked about a liquidated damages provision in construction contracts. I participated in a panel on this very topic devoted to discussing the application and enforceability of liquidated damages provisions. I was involved in discussing the application of liquidated damages provisions in terminated contracts, in addition to the flow-down of liquidated damages with downstream trades. A portion of my powerpoint presentation is below.

It’s important to remember that when dealing with the assessment of liquidated damages, circumstances are fact specific and strategic decisions are fact specific. These considerations are important based on the extent of the liquidated damages assessment and your own claims relative to delay or the manner in which the liquidated damages were assessed.

Questions to consider when dealing with liquidated damages:

What does the contract say regarding liquidated damages?
What is the rate of liquidated damages and total assessment amount?
Is there a legitimate argument based on the jurisdiction to attack the assessment of liquidated damages as an unenforceable penalty (and, if so, can actual damages be asserted that may be proven to be more than the assessment amount)?
When was notice given regarding the assessment of liquidated damages?
What are the factual circumstances / factual context in which liquidated damages are being assessed?
Is there excusable delay that needs to be considered?
Has an expert been engaged to support excusable or concurrent delay — rebut liquidated damages–or, should one be engaged as soon as possible?
Was the contract terminated and, if so, can the argument be made that the termination was not proper (substantively and/or procedurally per the contract)?
Are liquidated damages still accruing and, if so, is there an argument as to the unreasonableness of the continued accrual?
Are there other factual considerations to support that (i) the liquidated damages are being assessed as a penalty, or (ii) should be reduced or offset?

[gview file=”https://floridaconstru.wpengine.com/wp-content/uploads/2022/01/LD-PPT11.pptx”]

“TIME IS MONEY!” IN CONSTRUCTION AND THIS IS WHY THERE IS A LIQUIDATED DAMAGES PROVISION

Posted on January 15, 2022January 16, 2022 by Edward Garber

In construction, the adage “Time is Money!” rings true for all parties involved on a project. This includes an owner of a project that wants a project completed on time, i.e., by a substantial completion date. While substantial completion is often defined as when an owner can use a project for its intended purpose, this intended purpose typically equates to beneficial occupancy (in new construction) and other factors as identified in the contract.

The best mechanism for an owner to reinforce time and the substantial completion date is through a liquidated damages provision (also known as an LD provision) that includes a daily monetary rate for each day of delay to the substantial completion date.

A liquidated damages provision is not designed, and should NEVER be designed, to serve as a penalty because then it would be unenforceable. Instead, it should be designed to reasonably compensate an owner for delay to the substantial completion date that cannot be ascertained with any reasonable degree of certainty at the time the contract is being negotiated and executed. (Liquidated damages are MUCH easier to prove than actual damages an owner may incur down the road.) As an owner, you don’t really want to assess liquidated damages because that means the project is not substantially completed on time. And, in reality, a timely completed and performing project should always be better and more profitable than a late and underperforming project. However, without the liquidated damages provision, there isn’t a great way to hold a contractor’s feet to the fire with respect to the substantial completion date.

There are numerous ways to equitably craft a liquidated damages provision if it is a negotiated provision (like in private projects). It can be based on project phases or milestones. It can be based on one substantial completion date. It can include a grace period. It can include gradual increases in the daily rate based on certain time periods associated with delay. It can be capped at a certain amount to cap the exposure. The bottom line is that it is a risk that gets factored into the contract and substantial completion date to emphasize timely completion.

Many construction contracts will contain a mutual waiver of consequential damages provision. This provision may include specific examples of consequential damages. In other words, regardless of whether such examples truly constitute consequential damages, these damages examples are contractually mutually waived by the parties. Two examples commonly include loss of use damages and increased or additional financing damages. These two examples are categories that do go hand-in-hand with an untimely project. For instance, if a project is late, the owner cannot use the project by the substantial completion date and will have increased and/or additional financing costs. Without a liquidated damages provision, and with a mutual waiver of consequential damages provision, an owner may be sh*t out of luck with recovering delay damages for a delayed project because primary actual delay damages they could prove have been waived. (Thus, there is nothing holding the contractor’s feet to the fire regarding the substantial completion date.) Hence, if you are going to negotiate having no liquidated damages provision, be mindful of the mutual waiver of consequential damages provision and what you may be conceding.

This is important: simply because there is a liquidated damages provision does not mean a contractor should unilaterally be exposed to liquidated damages for a delayed project. There may be legitimate excusable delay that needs to get factored in including excusable compensable delay meaning the contractor is owed its own delay damages. There could be concurrent delay that needs to get factored in. While an owner may not accept a contractor’s request for additional time or claimed excusable or concurrent delay, this does not mean a contractor is just going to cave when it comes to an owner’s assessment and withholding of sums associated with liquidated damages. Most contractors are not going to unless it is irrefutable that the delay to substantial completion was caused by them (more specifically, a trade).

A contractor agreeing to a liquidated damages provision needs to make sure that it flows the risk downstream to trades that may cause the delay. A contractor still needs to prove the trade caused the delay, but the contractor must flow-down that risk. If a trade is unwilling to assume that risk, that needs to be considered by the contractor. In any event, the contractor cannot agree that the trade is not liable for any delay because the risk the contractor has assumed is not transferred to a trade that may cause that risk meaning there is nothing that holds that trade’s feet to the fire.

A liquidated damages provision is neither uncommon nor unreasonable. It is a risk, oftentimes negotiated on private jobs but maybe not the case on public jobs, that is factored in at the onset of any project. It is a risk that cannot be overlooked but is the risk designed to best maximize the emphasis on time is of the essence as to the substantial completion date.

SUBCONTRACT SHOULD FLOW DOWN DELAY CAUSED BY SUBCONTRACTORS

Posted on November 21, 2020November 21, 2020 by Edward Garber

A general contractor’s subcontract with its subcontractor should include a provision that entitles it to flow down liquidated damages assessed by the owner stemming from delays caused by the subcontractor. Such a provision does not mean the general contractor does not have to prove delays caused by the subcontractor or can arbitrarily allocate the amount or days it claims the subcontractor is liable. The general contractor still will need to reasonably establish the delays the subcontractor caused the critical path of the schedule, i.e., delayed the job. In addition to the right to flow down liquidated damages, the subcontract should also entitle the general contractor to recover its actual extended general conditions caused by the subcontractor’s delays (regardless of whether the owner assesses liquidated damages). The objective is that if the subcontractor delays the job, the subcontractor is liable for liquidated damages the general contractor is liable to the owner for in addition to the general contractor’s own delay damages. This is an important subcontractual provision so that the risk of delay caused by subcontractors is clearly flowed down to them in the subcontract.

In a 1987 case, Hall Construction Co., Inc. v. Beynon, 507 So.2d 1225 (Fla. 5^th DCA 1987), the subcontract at-issue contained language that stated, “The parties hereto agree that a supplier who delays performance beyond the time agreed upon in this Purchase Order shall have caused [general contractor] liquidated damages in the amount required of [general contractor] by their contract per day for each day such delay continues which sum the supplier hereby agrees to pay.”

The general contractor was liable to the owner for liquidated damages in the amount of $1,000/day and settled the liquidated damages assessment with the owner for the amount of $20,000 (which was a reduction from a $60,000+ exposure for 60+ days of delay). The general contractor looked to apportion the liquidated damages to subcontractors it claimed was liable for the delay. The subcontractor at-issue disputed its apportionment; therefore, the general contractor sought ALL of its delay damages caused by the subcontractor for the full amount of the 60+ day delay period. The appellate court held that while the subcontract could be clearer, it was still unambiguous that the general contractor could ONLY recover liquidated damages because that is all that contract afforded:

Liquidated damages is a fictitious contractual amount which the parties agree will be paid for breach if damages are not readily ascertainable at the time the contract is drawn. Although the [general contractor] maintains that it is entitled to liquidated damages as well as actual damages suffered as a result of the delay, we find that the parol evidence rule precludes such a finding.

***

Had the general contractor been aware of the parol evidence rule, a different contract may have been provided. For example, a contract with one paragraph for indemnification of all liquidated, or other, damages paid by the general to the owner and another paragraph for payment of other actual, consequential damages suffered by the general as a result of the delay caused by the sub.

Hall Construction Co., 507 So.2d at 1226-27.

CONTRACTOR’S BURDEN WHEN IT COMES TO DELAY

Posted on September 13, 2020September 13, 2020 by Edward Garber

When a contractor is challenging the assessment of liquidated damages, or arguing that it is entitled to extended general conditions, the contractor bears a burden of proof to establish there were excusable delays that impacted the critical path and, in certain scenarios, the delays were not concurrent with contractor-caused delay:

When delays are excusable, a contractor is entitled to a time extension, such that the government may not assess liquidated damages for those delays. The government bears the initial burden of proving that the contractor failed to meet the contract completion date, and that the period of time for which the government assessed liquidated damages was correct. If the government makes such a showing, the burden shifts to the contractor to show that its failure to timely complete the work was excusable. To show an excusable delay, a contractor must show that the delay resulted from “unforeseeable causes beyond the control and without the fault or negligence of the Contractor.” “In addition, the unforeseeable cause must delay the overall contract completion; i.e., it must affect the critical path of performance.” Further, the contractor must show that there was no concurrent delay.

Ken Laster Co., ASBCA No. 61292, 2020 WL 5270322 (ASBCA 2020) (internal citations omitted).

Arguing delay without understanding your burden of proof obligations will be problematic, as the contractor in Ken Laster found out. In this dispute, a contractor was issued task orders to repair, prepare and plaint certain floating structures pursuant to task orders. The contractor was liable for liquidated damages if it did not timely complete the work. The contractor completed the work 289 days late and the government assessed liquidated damages. The contractor challenged the assessment of liquidated damages. However, the contractor did NOT show how anything it claimed the government did to delay completion impacted the critical path or that there was no concurrent delay. Without such showing, the contractor was unable to establish that liquidated damages were improper as it was unable to show there was excusable delay or that the delay to the critical path it caused was concurrent with an owner-caused delay to the critical path.

Remember, if you are a contractor challenging the assessment of liquidated damages and/or claiming you are entitled to delay damages (extended general conditions), you have a burden of proof. You will want to establish that there was excusable delay, i.e., owner-caused delay, that impacted the critical path of the project resulting in the delay to the completion date, and the excusable delay was not concurrent with delay you caused to the completion date. This burden will routinely require expert opinion that will need to analyze schedules and contemporaneous project documentation to render these opinions (that there was excusable delay, the delay impacted the critical path, and in certain scenarios, the excusable delay was not concurrent). It is important to note, however, that if you are able to establish there was concurrent delay, you would still typically be entitled to a time extension, however, you would not be entitled to compensation for the delay (extended general conditions). But, the burden is still on you to establish there was concurrent delay.

MUTUAL OR CONCURRENT DELAY CAUSED BY SUBCONTRACTORS

Posted on January 1, 2020January 1, 2020 by Edward Garber

How are delay damages treated when two subcontractors cause a mutual or concurrent delay to the project?

Assume multiple subcontractors concurrently contributed to an impact to the critical path resulting in a delay to the project. The delay caused the prime contractor to: (1) be assessed liquidated damages from the owner and (2) incur extended general conditions. The prime contractor will be looking to the subcontractors for reimbursement for any liquidated damages it is assessed along with its extended general conditions costs.

There is really no great case that addresses this point when two (or more) subcontractors mutually or concurrently delay the project. It is also not uncommon, and frankly expected, that a subcontractor will point the finger at another subcontractor for the cause of the delay or that another subcontractor was concurrently delaying the project.

The prime contractor should absolutely, without any exception, undertake efforts with a scheduling consultant to allocate the delay caused by subcontractors. Taking an approach that joint and several liability applies between multiple subcontractors and/or not trying to apportion delay because the subcontractors concurrently delayed the critical path at the same time is probably not the best approach. The prime contractor should have an expert render an opinion as to the allocation of the delay period amongst responsible subcontractors that delayed the critical path. Not doing so, in my opinion, is a mistake.

For example, in the unpublished decision in Alcan Electrical & Engineering Co., Inc. v. Samaritan Hosp., 109 Wash.App. 1072 (Wash. 2002), a dispute arose between a general contractor and its electrical subcontractor on a hospital project. The general contractor looked to recoup assessed liquidated damages caused by the electrical subcontractor. The project was 201 days late attributable to the electrical subcontractor and, largely, the mechanical subcontractor. The trial court determined that the electrical subcontractor was only liable for 31 days of delay.

An appeal arose because the general contractor wanted to hold both subcontractors jointly and severally liable for the 201 days of delay. The Washington Court of Appeals was not accepting this argument. Instead, it held that that the amount of delay attributable to the two subcontractors is a question to be resolved by the trier of fact. This is exactly what the trial court did by finding that of the 201 days of delay, 31 days of delay was caused by the electrical subcontractor while the remaining 170 day of delay was caused by the mechanical subcontractor.

But, in another example from an unpublished decision, U.S. el rel. Belt Con Const., Inc. v. Metric Const. Co., Inc., 314 Fed.Appx. 151 (10^th Cir. 2009), a general contractor looked to allocate liquidated damages to its masonry subcontractor due to delays to the construction of a federal training center. The subcontract allowed the general contractor to equitably allocate delay damages among subcontractors as long as its decision was made in good faith. The trial court, affirmed by the appellate court, found that the general contractor did not allocate the damages in good faith because the initial delay analysis it performed was submitted to the owner and allocated ALL of the delay to the owner. Then, for purposes of trial, it simply adopted its trial expert’s analysis that allocated delay to subcontractors. This issue alone hurt the contractor and, importantly, its expert’s credibility at trial. (This is a reminder that there should be ONE delay analysis for the project and what is presented to the owner should not be conflicted with by delay analysis separately presented to subcontractors.)

Moreover, the court, applying California law, found that there was no law that supported the apportionment of a true concurrent delay. But, in my opinion, this did not make much sense because at trial both the general contractor and subcontractor’s experts rendered opinions allocating the delay caused by the culpable subcontractors.

Irrespective of the Court’s decision in this case, the best approach, mentioned above, is to allocate the delay period. Thus, if two subcontractors mutually contributed to a 30-day window of time, an expert should be used to analyze that 30-day window of time to allocate the days to the two subcontractors. Again, taking the approach that joint and several liability should apply or that an allocation is not necessary is a mistake.

PROVING IMPACTS TO CRITICAL PATH TO DEFEAT LIQUIDATED DAMAGES ASSESSMENT

Posted on September 15, 2019September 15, 2019 by Edward Garber

When a contractor is staring down the barrel of an owner’s assessment of liquidated damages, the burden will fall on the contractor to establish that the delay was attributable to the owner and the owner’s agents. The contractor will want to do this not only to defeat the assessment of liquidated damages, but because it will want to establish that the delay caused it to incur extended field overhead (general conditions) for which the owner is responsible. A contractor supports its burden by proving the impacts to its critical path. “In general, proving an allegation of government-caused delays without a means of showing the critical path is a steep prospect.” James Talcott Construction v. U.S., 2019 WL 1040383, *8 (Fed. Cl. 2019) (unreported opinion) (finding that because contractor did NOT present a critical path analysis it could not support its claim for delay caused by the government).

Avoiding the assessment of liquidated damages means the contractor needs to support that it encountered excusable delay and it is/was entitled to an extension of time to complete the project.

An excusable delay is one due to causes that are unforeseeable, beyond the contractor’s control, and not resulting from its fault or negligence. The delay must be to overall contract completion, meaning ‘it must affect the critical path of performance.’ If the failure is excusable, then appellant [contractor] would be entitled to time extensions and thus remission of LDs [liquidated damages].

Appeal of – Maruf Sharif Construction Co.,ASBCA No. 61802, 2019 WL 410470 (2019) (internal citation and quotation omitted).

A contractor presenting a critical path analysis allocating delay may become imperative when seeking remission of a liquidated damages assessment and, potentially, proving its own entitlement to extended general conditions. Again, the burden falls on the contractor; therefore, not proving the impacts to the critical path and the excusable delay the contractor should be entitled to will likely result in the contractor failing to carry its burden.

THE CONSTRUCTION PROJECT IS LATE – ALLOCATION OF DELAY

Posted on November 13, 2016November 13, 2016 by Edward Garber

The construction project is late. Very late. The owner is upset and notifies the contractor that it is assessing liquidated damages. The contractor, in turn, claims that the project is late because of excusable, compensable delays and, perhaps, excusable, noncompensable delays. This is a common and unfortunate story between an owner and contractor on any late construction project. Now the fun begins regarding the allocation of the delay!

Through previous articles, I discussed that in this scenario the burden really falls on the contractor to establish that the liquidated damages were improperly assessed against it and, thus, it is entitled to additional time and/or extended general conditions as a result of excusable delays. Naturally, this requires the contractor to develop a critical path analysis (time impact analysis) allocating the impacts / delays (and the reasons for the impacts/ delays) to the project completion date. The reason the burden really falls on the contractor is because the owner’s burden is relatively easy – the project was not complete on time pursuant to the contract and any approved changed orders.

In a recent opinion, East Coast Repair & Fabrication, LLC v. U.S., 2016 WL 4224961 (E.D.Va. 2016), the court contained a very detailed and sound discussion regarding this common story between an owner and contractor. Although this is a case involving a ship repair company overhauling and repairing a Navy (government) vessel, the court’s discussion would apply to any late construction project and the allocation of delay to a late project. Please take the time to read the Court’s discussion below as it lays the framework for the allocation or apportionment of delay.

In the context of litigating liquidated damages assessed by the government in a construction contract, the government first must meet its initial burden of showing that “the contract performance requirements were not substantially completed by the contract completion date and that the period for which the assessment was made was proper.” Once the government has met that burden, the burden then shifts to the contractor “to show that any delays were excusable and that it should be relieved of all or part of the assessment.”

In order for the contractor to carry its burden it must “demonstrate that the excusable event caused a delay to the overall completion of the contract, i.e., that the delay affected activities on the critical path” because the contractor “is entitled to only so much time extension as the excusable cause actually delayed” completion of the contract.

***

Having considered the somewhat conflicting positions taken on this issue in prior federal cases, this Court finds that the better legal interpretation regarding the proper treatment of “sequential delays” (where one party causes a delay followed by a separate-in-time delay caused by the other), is that “apportionment” should be permitted when the evidence provides a reliable basis on which to determine which party is responsible for which delay. Stated differently, the fact that the Government was solely responsible for some delays in this case…does not preclude the Government as a matter of law from recovering some amount of liquidated damages as a result of subsequent, and conceptually distinct, delays deemed to be solely the fault of ECR/Técnico [Contractor and its subcontractor].

As to performance delays deemed to be “concurrent,” (both parties causing a delay at the same time), the established law reveals that ECR [Contractor] is permitted to seek an extension of the project completion date for such delay, as long as the delay caused by the Government would have disrupted the “critical path” in the absence of the delay caused by the contractor. However, while ECR may seek an extension of the performance period for a concurrent delay, ECR is precluded by law from obtaining a monetary award to compensate it for “delay damages” for such delays, with the appropriate relief being only the extension of the project completion date (which, in effect, results in a day-for-day reduction of the Government’s liquidated damages claim).

East Coast Repair & Fabrication, supra, at *13-14 (internal quotations omitted).

LIQUIDATED DAMAGES IN CONSTRUCTION CONTRACTS – WHO BEARS THE BURDEN?

Posted on June 18, 2016June 18, 2016 by Edward Garber

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.