Schools typically time construction and renovation projects to minimize the impacts on their student bodies and classroom education by focusing on the summer months and school recesses.  If projects are delayed, the results can be devastating.  For example, classrooms and other facilities may be out of service, classes can be disrupted by construction noise, and students, faculty and administration will suffer the inconvenience of learning and working at an active construction site.  This is all in addition to the financial and budgetary impacts of construction delays. Luckily, there are contractual mechanisms available to incentivize a contractor to finish construction on time and mitigate against delays.  It is important to consider these provisions at the outset of construction and include them in the construction agreement.

The most prolific method is the use of a liquidated damages provision in the construction contract.  A liquidated damages provision stipulates the measure of damages due owner from contractor in the event of project delays.  Typically, a liquidated damages provision will take the form of a stipulated sum that the contractor will pay to the project owner for each day of delay beyond the contractually required substantial completion date.

Another option to incentivize a contractor to maintain the schedule is to offer an early completion bonus.  This will drive the contractor to not only meet the schedule but to exceed expectations and earn additional profits.

In addition to financial incentives, there are a variety of other options available to owners to prevent and minimize delays and their impacts, such as carefully crafted force majeure provisions, requiring contractors to work overtime to make up for delays, retaining additional labor, and termination.

Liquidated Damages

Liquidated damages provisions will help ensure that the contractor maintains the project schedule, as the contractor will want to avoid sacrificing any portion of its fee in the event of delay. Before incorporating a liquidated damages provision into a construction contract, there are several important considerations to ensure that a liquidated damages provision is enforceable and the correct strategic decision for the project.

To determine an appropriate liquidated damages value, it is wise to have someone familiar with the accounting and finances of the school estimate financial impacts if the project is delayed.  Potential losses to consider include loss of income, storage and rental costs, financing and loan costs, costs of operating other facilities, and increased construction costs.  Courts will strike excessive and unreasonable liquidated damages clauses as unenforceable penalties.  A thorough analysis prior to the start of the project will help avoid this scenario and determine an appropriate liquidated damages value in the event of delay.

Once a reasonable estimate of the actual damages has been set forth, there are contract stipulations that can help ensure the liquidated damages provision is enforceable.  An owner may want to include the following statements and concepts in the construction agreement:

• the liquidated damages are reasonable;
• actual damages are difficult to anticipate and the parties desire to avoid uncertainty;
• the parties waive their right to challenge the liquidated damages amount; and
• apportionment of liquidated damages in the event of mutual delays.

Courts generally protect a party’s freedom to contract, and these stipulations will add an additional layer of protection to any challenges to the enforceability of the liquidated damages provision.

Notably, liquidated damages provisions are intended to take the place of actual damages.  Included liquidated damages in the contract removes the owner’s obligation to prove actual delay damages, which can be quite difficult and costly.  While it might seem like the prudent “belt and suspenders” approach to include in the contract the right to recover both liquidated damages and actual damages, this is actually counterproductive.  Indeed, if a contract entitles a party to both sets of damages, most jurisdictions deem the liquidated damages provision as an unenforceable penalty and require the project owner to prove its actual damages.

Early Completion Bonus

Schools can also incentivize timely performance by offering contractors bonuses for achieving substantial completion earlier than projected.  These provisions vary in style.  For instance, they could mirror a liquidated damages provision and provide the contractor a daily bonus for each day of early delivery.  Another option is to provide a lump sum payment if substantial completion is achieved by a certain earlier milestone (i.e. one month early).

Provisions to Mitigate Against Delays

Liquidated damages and early completion bonuses are effective ways to financially motivate contractors to stick to the project schedule.  With the tight windows schools have to complete construction to avoid interfering with education, as well as budget constraints, adhering to the schedule is of utmost importance.

There are additional measures schools can consider in contract negotiations to provide effective tools to minimize and protect against delay impacts.  For instance, when a contractor falls behind schedule, the owner can require the contractor to work overtime or increase labor to catch up.  The owner may also maintain the right to retain additional contractors to perform work if the original contractor cannot maintain the schedule.

A carefully crafted delay provision will also limit instances where a contractor can seek additional time to complete the work.  To maintain clarity, the delay provision should impose strict notice requirements on the contractor when faced with delays.  In the worst-case scenario, the owner should also have the right to terminate and replace the contractor if it fails to maintain the schedule and will be unable to achieve the contractually agreed upon substantial completion date.

Construction delays can be costly and cause tremendous interference with the operation of a school.  However, by addressing these concerns at the outset of the project and implementing a comprehensive construction agreement to govern the project, delays can be avoided and their impacts can be minimized.

If you have questions or if you wish to discuss related issues, please contact us.