Contract Management, in general, and liquidated damages, in particular, are serious subjects. But, nothing better to learn about serious subjects than humour and fun. Therefore, we continue this series drawing ideas and concepts about contracts from music as we started with Satisfaction (The Rolling Stones). I admit it is difficult to imagine what “Torn” from Natalie Imbruglia has to do with delay liquidated damages (delay LDs). But give me a minute and you will see. I’ll show it with extracts from the lyrics. If you want to listen while your read, here is the link to YouTube:
Projects normally start on good terms. The Employer selects the Contractor because he trusts him and expects him to do a good job, to finish in time respecting the quality & performance requirements.
I thought I saw a man [Contractor] brought to life
He was warm, he came around like
He was dignified
Unfortunately, often, at some point of time, things start to go wrong. The quality of the communication, or rather the lack of it, is almost always a good indicator of this decline:
Conversation has run dry
That’s what’s going on
When constructive communication is not re-established and things continue to go wrong, the parties end up not delivering anymore. No more confidence, slower progress, project is late with huge potential losses for the Employer, Employer stops paying, Contractor starts complaining/claiming, ever slower progress… the vicious cycle.
I’m all out of faith
Illusion never changed
Into something real
You’re a little late
I’m already torn
Maybe in the emotional life of Natalie, there is no easy solution. But in construction/contracting business, there is one: Delay LDs. Delays in big infrastructure, construction, oil & gas, renewable or power projects are very foreseeable. No need for a fortune teller. Just anticipate on the issue.
So I guess the fortune teller’s right
I should have seen just what was there
And not some holy light
These liquidated damages are not a punishment, not a penalty, not something to scare the hell out of the Contractor but should be a genuine pré-estimate of the losses the Employer would face if the Contractor is late. Typical wording goes as follows: “The Parties hereby acknowledge and agree that the terms, conditions and amounts set forth for liquidated damages are reasonable and reflect a genuine estimation of the damages which shall be incurred by the Employer. The amounts of these payments are agreed upon and set forth by the Parties because of the difficulty of ascertaining on the date hereof the exact amounts of damages that the Employer will suffer as a result of the Contractor’s failure to meet the schedule under the provisions of Sub-Clause xx [Time for Completion].”
And now I don’t care
I have no luck
I don’t miss it all that much
There’s just so many things
That I can’t touch
No need to blame. Contractor can have bad luck on projects: a mistake in the design, a critical path item that was not fabricated to the right quality standards, something got damaged during installation. But Contractor will be fighting to avoid this, knowing the consequences upfront. No better motivation for proper project & risk management than LDs. In all fairness, Employers should also avoid applying liquidated damages for events that are not under the control of the Contractors: Employer’s acts & omissions, force majeure events, delays by authorities etc.
Contractors must be sure that these delay LDs are exactly what they will pay and nothing else, that they are the sole and exclusive remedies for being late. Typical wording: “The payment of the liquidated damages for delay shall be the sole and exclusive remedy due to the Employer for the delay.”
The LD rates and caps should be reasonable. Contractor should not be losing all of the (small) profit they can make on a project just by being late a single day, a week or even a month. A typical order of magnitude is 2% of the contract amount for each month of delay and this capped to 10% of the contract amount, maximum 15%. Before reaching this cap, there should be no right to terminate the contract.
Last but not least, the fact of paying the delay LDs should not affect the continuation of the project execution. Typical wording: “The payment of the liquidated damages shall not relieve the Contractor from its obligations to complete the Works.”
Join the Construction/Contracting business, Natalie, and you won’t feel that bad if the someone is late! Proper delay LDs provisions protect both Employers and Contractors.
This post is part of our series illustrating important contract management subjects by music to make it more fun. You can click here to see other posts of that series.
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