Blog 014 - Take a Holiday... From Liquidated Damages

As the world deals with rakes of holidays being cancelled, there is one holiday you can’t afford to miss out on, the contractual holiday from Liquidated Damages. Log out of room finder because escaping for a long weekend will not help in this situation.

Without diving in too deep on what Liquidated Damages are, the legalities of their value and when they apply, they can be summarised very simply as late completion charges. If you fail to complete the Specialist Contract works within the time specified within the contract, the Main Contractor is likely to leverage late completion charges against the specialist in anticipation of being charged the same by the employer.

For many different reasons, Specialist Contractors over run their programmes all the time, it is part of the risky nature of the Specialist world. Without confusing matters regarding whether there are Employer related event contributing to that over run, history shows us that even the most competent of Specialist Contractors have delivered projects late, the skill comes in the mitigation of the delays or the recovery of any delays wherever this is possible. However, sometimes it is unavoidable and this article sets out some practical tips to use during contract negotiations to help limit the risk to your Specialist Contracting business in the event of late completion:

1. Holiday from damages – This is the best option to the Specialist, agree a period after completion during which the Specialist is exempt from paying liquidated damages. This is always an awkward one to negotiate at the start of a contract because nobody wants to believe their going to be late but setting out a process to protect your business if it does happen is essential to Specialist Contractor success. All negotiations will be different, but I suggest at opening negotiations at 2-3 calendar days per month of contract duration. For example, if you agree a 6 month contract period, I would propose looking to get a holiday of between 12-18 calendar days holiday from liquidated damages. This is a view you would need to take based on potential severity of the damages and probability of late completion.

2. Capping Liquidated Damages – Probably the most important of all the take away tips, set a maximum cap on your liability for Liquidated Damages. This could be a fixed value or a percentage of original contract value. This will always vary depending on contract, however, if you assume that most Specialist Contractors operate on a 4-5% operating profit (if they get their retention paid…), proposing to cap at around 5% of original contract value would be a reasonable place to settle agreement. Some businesses may look to cap at 1% others at 30%. There is a growing trend for Main Contractors and Employers to request uncapped liabilities, a practice I strongly discourage. Always look to cap your liabilities, at least then you know your maximum exposure. Additional tip – If your Specialist Contract becomes subject to a variation which has a large omission of works or value, remember to agree a change in the cap value as part of this contract variation).

3. Scales of Liquidated Damages – Another option is to agree a scale of Liquidated Damages, a scale that increases in severity the later the works are delivered. For example, if the proposed Liquidated Damages value is £1,000 per calendar day of late delivery, you could agree the following.

a. Days 1-7 past completion payable at £0 per calendar day

b. Days 8-14 past completion payable at £250 per calendar day

c. Days 15-21 past completion payable at £750 per calendar day

d. Days 21+ past completion payable at £1,000 per calendar day

e. All liabilities capped at say £20,000.00

4. Liquidated Damages as full remedy – If accepting a Liquidated Damages in the contract negotiations, be sure to agree wording which details that any Liquidated Damages are full remedy for late completion and there will be no additional consequential costs from other Specialist Contractors or Main Contractor prelims etc which can be levied against the Specialist Contractor.

The above are some very simple tips, the list is not exhaustive and a lot more consideration needs to be put into negotiating agreeing Liquidated Damages clauses in contracts. Every negotiation will need to be treated separately and expert advice should sought if unsure. Just remember to give yourself a brief holiday from the pains of Liquidated Damages and always ensure the level of Liquidated Damages is appropriate to the value and risk profile of the Specialist Contract works.

If you would like to understand more about Liquidated Damages or would like help negotiating holiday periods, drop me an email.