Delay can be devastating on a project for everyone involved. Construction contracts typically allocate the risk and costs of delay. It is critical to put your company in the strongest position should delay occur.
What are the Damages for Delay?
The general rule is that a party delayed on a construction project though not fault of its own has a claim for the direct costs resulting from that delay. From the perspective of the owner/developer, those damages could include increased financing costs, increased insurance costs, and change orders from the general contractor. For contractors, those damages could include increased costs in the form of manpower, general conditions, supervision costs, and overhead. The delayed party could also have a claim for consequential damages if they are foreseeable (more on consequential damages here). However, the general rule is often altered by contract.
What are Liquidated Damages?
Construction contracts often include a liquidated damages provision. Liquidated damages are a fixed damage calculation used when the actual damages would be difficult to calculate. For instance, a contract could provide that the general contractor fails to complete the project by the completion date, the owner would be entitled to $1,000 for every day the contract runs over. Liquidated damages cannot be a penalty. In order to be enforceable, the provision must truly be an attempt by the parties to estimate the amount of the damages caused by the delay. A provision that requires a party to pay liquidated damages and actual damages fails in that attempt and is invalid.
How Do Contracts Limit Liability for Delay?
Owners and general contractor's often limit their liability to lower tier contractors for delay. This is a common provision: "Should Subcontractor's performance, in whole or in part, be delayed, disrupted, accelerated or suspended in the commencement, prosecution or completion of the Subcontract Work ("Delay"), for reasons beyond Subcontractor's control and without its fault or negligence, Subcontractor's sole remedy against Contractor for claims based upon the action or inaction of Contractor, including action or inaction to a breach of the Subcontract, shall be a reasonable extension of the time for performance in which to complete the Subcontract Work." In other words, if the general contractor, whose only job is to manage the project, fails to manage the project causing delay and cost to the subcontractor, the only remedy available is an extension of time. Even if the delay rises to the level of breaching the subcontract. This is an enormously unfair provision.
This provision should be stricken everywhere it appears and replaced language that provides that the subcontractor is entitled to change order. If the owner or general contractor is unwilling to agree to this, demand that the provision be reciprocal. What is good for the goose is good for the gander. If the subcontractor has no right to additional compensation for owner/GC-caused delays, then there should be no liability for subcontractor-caused delays. Of course, they will never agree to this, which should hopefully reveal the inequity of the provision as written.
There are also other provisions in the contract that have this same effect. For instance, buried in the termination provisions of the contract is often the following: "Contractor, upon forty-eight (48) hours written notice, shall have the additional right to suspend all or any part of the Subcontract Work for such period of time as may be determined to be appropriate for the convenience of the Contractor." As with termination, suspension on a project can be extremely disruptive. At a minimum, the subcontractor should be permitted to submit a change order for increased costs. But that is often insufficient. How do you calculate the cost of being put on hold for weeks or months? How do you calculate the cost of shifting your crew to a new job and then being forced to hire new people when instructed at a moment's notice to remobilize? Subcontractors should build into this provision the right to terminate after a particular period of time. If, for instance, the suspension lasts more than a week, the subcontractor should have the right to fully demobilize and terminate the contract at its option.
Can a Party Terminate for Delay?
In a similar vein, delay by an owner, general contractor, or subcontract could rise to the level of default, warranting termination for cause. Common types of default by a subcontractor include failing to prosecute the work diligently, failing to proceed with the work in sequence, failing to adhere to schedules, and causing delay to other work. For owners and general contractors, default can include delaying the issuance of the notice to proceed, failing to adhere to schedules, and interfering or inhibiting the contractor's work.
Typically there will be a provision requiring that the delayed party provide notice and the right to cure. Failure to follow these procedures carefully can result in a wrongful termination. Even when the delay is egregious, the safest course is to send formal notice and wait to terminate until the cure period has expired. More on termination provisions here and termination claims here.