Construction Concepts Tip #3: Liquidated Damages


A recent report from McGraw-Hill Construction’s research and analytics unit reported that the total volume of construction contracts in the Miami/Fort Lauderdale area has reached $2.29 billion for the year to date, a 54 percent increase over the same period last year. This report is one of many indicators of the explosion of new construction in the South Florida real estate market.

In recognition of this construction boom, we gave you tips in our prior postings regarding change orders and construction bonds, which owners and developers should find useful before signing a construction contract. Our third tip can help protect you against project delays.

Liquidated Damages Provision

In our real estate market, it is often the case that the contemplated time period to complete the construction of a project will differ significantly with the actual time. A good way to safeguard against this problem is by including a liquidated damages provision in the construction contract. You, as an owner or developer, can require a predetermined amount of damages, typically in the form of a per diem rate, which will be assessed for each day the completion of a project is delayed. This sum should be a reasonable estimate of actual damages.

However, estimating actual damages that you may suffer in the future can be quite a challenge.  The types of things that you should consider when estimating these damages are, for example: increased costs associated with the financing of the construction project; the lost use of the building, such as loss of income or lost rental of the building; increased overhead, such as additional insurance costs, utilities costs for the construction project, equipment rentals, payment to personnel (i.e. construction manager); and additional costs of monitoring or inspecting the project.

Benefits of Including a Liquidated Damages Provision

A liquidated damages provision has its advantages. One clear advantage is that you safeguard against the difficulty and cost that necessarily follows the effort to quantify and prove actual damages in court. You can avoid the time, expense and aggravation of long evidentiary battles in court in either supporting or contesting the amount of delay damages. Instead, the delay damages are defined. This provision is also as a sure motivator for the contractor to complete the project on time or else be faced with having to cut into his or her profits.

Indeed, including a liquidated damages provision in your construction contract can make a difference in the success of the project. With construction contracts on the rise, there is no room for delay.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bilzin Sumberg Baena Price & Axelrod LLP | Attorney Advertising

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