Lessons Learned #32: Liquidated Damages – Don’t Become A Victim

Possibly the worst outcome that you can face on a project is that of being assessed liquidated damages (LDs) for delays. This can be a nightmare, especially if you had nothing to do with the issues that caused the delay!

I’ve decided to give you some recommendations in this issue to help you avoid becoming a victim of LDs. I am assuming, of course, that you don’t actually deserve them.

Negotiate your contract: When it’s time to negotiate your contracts, I think the following points are essential.

  1. Make sure you’re not automatically put in the “pool” to share LDs with others, if you don’t cause the delays.
  2. Try to negotiate a “grace period” of delay before LD’s are assessed.
  3. Have an accurate detailed CPM schedule that shows where/when your work is critical (do it for the Baseline Schedule and for all subsequent ones).
  4. Make sure the schedule is correct with realistic durations for your activities, and that predecessor activities are identified.
  5. Establish a limit to LDs for your contract work (by percentage or dollar value).

Delays are real, so are LDs: Though many contractors think of LDs as “penalties”, they are not; delays present added, real costs to the owner (just like they cost you). Proactive identification of potential delays will provide the owner more options to deal with them (or avoid them). If you take a proactive approach, you will be viewed as cooperative, trying to mitigate the impact to the owner. It will be harder to pin LDs on you at the end, if it’s not clear that you were directly at fault.

LDs are REAL! Contractors who don’t perform well become easy targets in delays. There is a tendency to pile on when damages are in play. I have seen more cases of LDs assessed recently, which confirm what I’m describing. It only stands to reason that assessment of LDs are nearly certain, when project delays are severe.

Avoid 4 common mistakes: Below is my list of key “Do(s) and Don’t(s)” to follow.

  1. Don’t sit back and let problems happen without notice; be PROACTIVE. Spot the problems that have potential to delay your work before they occur. Be sure to document events that affect the critical path of your work.
  2. Don’t be the cause, PERFORM. Demand that your team execute its work as if you were the owner of the project.
  3. Don’t ignore problems. When your work is under the spotlight of “the critical path” (whether you were the cause of delays or not) don’t contribute to the problem by conducting business as usual; do all you can to mitigate delays (expedite, work around issues, micro-manage activities to get out of the critical path.
  4. Demand additional payment for “extra work” efforts (e.g. acceleration, re-sequencing, added manpower, etc.) if you are not at fault and are cooperating to mitigate the delay for others. You must document these efforts! Don’t do extra work without a change order, directive, or contract mechanism that will provide restitution for your efforts.

Build your firewall against LDs:
1. Negotiate terms in contract;   2. Be proactive – document potential delays/issues;
3. Perform;   4. Manage to mitigate;   5. Get mechanism for payment (if not at fault).

Don’t assume it won’t happen to you:
It is naïve to assume that you will not be the target of liquidated damages if there are delays on a project. Your relationship will not protect you from LDs when they are assessed. Remember as well that your leverage is at its lowest point at the time LDs are assessed (at the end of job).

Failure to negotiate, be proactive, document issues, perform, or mitigate will nearly guarantee you will fall victim to LDs at the end.

You’ll find additional advice in my book and the seminars in which many of my clients have participated. Some clients have recognized that they lack the discipline to ensure that they consistently apply these valuable safeguards on their active projects. They have decided to involve me in their on-going jobs to provide periodic monitoring, documenting and training as an effective way to ensure compliance and reduce their risk of LDs (and other liabilities).

E-Book version now available!

Good news for those of you who have waited to purchase a copy of my book “Document to Reduce Risk”. The e-book version is now available at Amazon and Barnes & Noble (only $24.99). This format gives you immediate access to valuable advice with all of the sample documents you can use to write about issues on your projects (available for download through links from the e-book directly to your smart phone, tablet, or computer). With a copy of this resource, you will carrying with you the tools you need to stay ahead of the game with good documentation to reduce your risk!

Thank you for your continued interest in my publications. – Paco Farach

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