The Drama is in the Details - Damages Provision in Construction Contracts
Construction is inherently a risky business, so why take on more risk by having onerous contract terms in your construction contracts? Tougher terms tend to progressively flow downstream, beginning at the owner level with the general contractors and construction managers, and then funnel down the subsequent tiers of subcontractors and suppliers. One area of particular concern is the “damages provision” contained in these prime contracts and subcontracts that triggers when contractual terms are breached. A primary example of this being milestone completion dates.
When reviewing a contract, it’s essential to look for the following:
- Actual or Direct Damages
These are generally considered to be costs incurred by the owner that naturally arise due to a contractor’s breach of the contract terms. These would include the costs to the owner to hire a replacement contractor to complete unfinished work and possibly correct defective work. Predictably, this oftentimes leads to disagreement between the owner and contractor on arriving at the true or fair amount of actual damages, which can result in timely and costly legal action.
- Consequential Damages
Consequential damages take this a step further than actual or direct damages because these are losses that are reasonably foreseeable due to the contractor’s breach of the contract terms. This results in a grey area of what can be considered “reasonably foreseeable.” This in turn can have an enormous financial consequence to a contractor. Some examples include loss of use, loss of revenue and profit, loss of business opportunity, loss of reputation and third party claims to the owner.
- Liquidated Damages
Since actual damages are often uncertain and difficult to quantify, a pre-determined sum is specified, typically expressed as a per day dollar amount. This is seen as the most favorable approach as it reduces the potential for timely and costly legal battles over compensation for damages. The set dollar figure provides a more quantifiable amount for a contractor to weigh their risk vs. reward in a given contract and the terms therein.
And just because a contract doesn’t contain a damages provision – sometimes referred to as being “silent” on damages – it isn’t necessarily to a contractor’s benefit. This head-in-the-sand approach can potentially expose your company to a lawsuit for breach of contract. A savvy opposing attorney may be able to sue you for direct and consequential damages.
Contracts can take many forms, and owners can take varying stances when negotiating these contract terms. When it comes to the damages provision, at a minimum, a contractor should strive for a mutual waiver of consequential damages in all of their contracts.
Are you or someone at your construction firm closely reviewing your contracts? Do you have a trusted advisor such as a surety agent reviewing them? There are plenty of risks in construction, why not minimize the ones you can?
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