THE CONSTRUCTION PROJECT IS LATE – ALLOCATION OF DELAY

images-1The construction project is late.  Very late.  The owner is upset and notifies the contractor that it is assessing liquidated damages.   The contractor, in turn, claims that the project is late because of excusable, compensable delays and, perhaps, excusable, noncompensable delays.  This is a common and unfortunate story between an owner and contractor on any late construction project.  Now the fun begins regarding the allocation of the delay!

 

Through previous articles, I discussed that in this scenario the burden really falls on the contractor to establish that the liquidated damages were improperly assessed against it and, thus, it is entitled to additional time and/or extended general conditions as a result of excusable delays.   Naturally, this requires the contractor to develop a critical path analysis (time impact analysis) allocating the impacts / delays (and the reasons for the impacts/ delays) to the project completion date. The reason the burden really falls on the contractor is because the owner’s burden is relatively easy – the project was not complete on time pursuant to the contract and any approved changed orders. 

 

In a recent opinion, East Coast Repair & Fabrication, LLC v. U.S., 2016 WL 4224961 (E.D.Va. 2016), the court contained a very detailed and sound discussion regarding this common story between an owner and contractor.   Although this is a case involving a ship repair company overhauling and repairing a Navy  (government) vessel, the court’s discussion would apply to any late construction project and the allocation of delay to a late project.   Please take the time to read the Court’s discussion below as it lays the framework for the allocation or apportionment of delay. 

 

In the context of litigating liquidated damages assessed by the government in a construction contract, the government first must meet its initial burden of showing that “the contract performance requirements were not substantially completed by the contract completion date and that the period for which the assessment was made was proper.” Once the government has met that burden, the burden then shifts to the contractor “to show that any delays were excusable and that it should be relieved of all or part of the assessment.

In order for the contractor to carry its burden it must “demonstrate that the excusable event caused a delay to the overall completion of the contract, i.e., that the delay affected activities on the critical path” because the contractor “is entitled to only so much time extension as the excusable cause actually delayed” completion of the contract.

***

Having considered the somewhat conflicting positions taken on this issue in prior federal cases, this Court finds that the better legal interpretation regarding the proper treatment of “sequential delays” (where one party causes a delay followed by a separate-in-time delay caused by the other), is that “apportionment” should be permitted when the evidence provides a reliable basis on which to determine which party is responsible for which delay. Stated differently, the fact that the Government was solely responsible for some delays in this case…does not preclude the Government as a matter of law from recovering some amount of liquidated damages as a result of subsequent, and conceptually distinct, delays deemed to be solely the fault of ECR/Técnico [Contractor and its subcontractor].

 

As to performance delays deemed to be “concurrent,” (both parties causing a delay at the same time), the established law reveals that ECR [Contractor] is permitted to seek an extension of the project completion date for such delay, as long as the delay caused by the Government would have disrupted the “critical path” in the absence of the delay caused by the contractor. However, while ECR may seek an extension of the performance period for a concurrent delay, ECR is precluded by law from obtaining a monetary award to compensate it for “delay damages” for such delays, with the appropriate relief being only the extension of the project completion date (which, in effect, results in a day-for-day reduction of the Government’s liquidated damages claim). 

East Coast Repair & Fabrication, supra, at *13-14 (internal quotations omitted).

 

 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

LIQUIDATED DAMAGES IN CONSTRUCTION CONTRACTS – WHO BEARS THE BURDEN?

imagesLiquidated damages are in many, many construction contracts.   They are designed to capture an owner’s damages if a project, or portion thereof, is not substantially completed by an agreed date.  The liquidated damages provision contemplates that the contractor will be liable for a daily rate of “x” for each day of delay beyond the substantial completion date (or any agreed change to this date).   Sometimes there is a cap on the contractor’s liquidated damages exposure (say, capped at the contractor’s fee) and sometimes there is no cap.   On private projects, the liquidated damages provision is a negotiated provision.  Typically, on public projects, the liquidated damages provision is not negotiated, but is known upfront and the contractor can try to account for that risk in any bid or proposal.

 

Assume a project is completed 100 days beyond the agreed-upon substantial completion date.  The contract provides for liquidated damages of $2,000 per day with no cap.  This means the contractor has liquidated damages exposure in the amount of $200,000.  The question, however, is who bears the burden relating to the 100-day delay that triggers the application of the liquidated damages provision. Understanding this burden is important, especially if you are the contractor looking to challenge this assessment and, perhaps, support a claim for extended general conditions / overhead.

 

The owner’s initial burden is typically an easy burden—known as the burden of persuasion.  The owner really just needs to produce evidence that the project was not substantially completed by the agreed-upon date.  Once the owner does this, the burden shifts to the contractor to prove that the owner prevented performance, there was excusable delay such as concurrent delay, or the owner caused the delay or a portion of the delay (e.g., design-changes, late change orders, etc.).   The contractor will want to do this to not only establish it is not liable for a majority or all of the assessed liquidated damages, but that the owner is liable for the contractor’s extended general conditions / overhead associated with delay.  Once the contractor does this, the burden of proof then shifts back to the owner since the owner carries the overall burden relating to its assessment of liquidated damages. 

 

This sentiment was conveyed In the Armed Services Board of Contract Appeal’s decision in In re Idela Const. Co., ASBCA No. 45070, 2001 WL 640978 (ASBCA 2001) (internal quotations and citations omitted):

 

In order to assess liquidated damages the Government [owner] must prove by a preponderance of the evidence that the contractor is in default, that it did not prevent performance or contribute to the delay, and that the appellant was the sole cause of the days of delay. The Government has established that substantial completion did not occur until 109 days after the adjusted contract completion date.

 

In order to defeat the Government’s claim for liquidated damages, the appellant [contractor] must come forward with evidence to show that the Government prevented performance or contributed to the delay or that the delay was excusable. Because liquidated damages is a Government claim, the Government continues to have the overall burden of proof, and if the responsibility for days of delay is unclear, or if both parties contribute to the delay, for the Government [t]o recover liquidated damages the Government must prove a clear apportionment of the delay attributable to each party.

  

See also Sauer, Inc. v.  Danzig, 224 F.3d 1340, 1347 (Fed. Cir. 2000) “(As a general rule, a party asserting that liquidated damages were improperly assessed bears the burden of showing the extent of the excusable delay to which it is entitled.); A.G. Cullen Const., Inc. v.  State System of Higher Educ., 898 A.2d 1145, 1162 (Pa. 2006) quoting PCL Constr. Servs., Inc. v. U.S., 53 Fed. Cl. 479, 484 (2002) (“As to the applicable burden of proof in a liquidated damages claim, the government has “the ultimate burden of persuasion as well the initial burden of going forward to show that the contract was not completed by the agreed contract completion date and that liquidated damages were due and owing.”).

 

 

Remember, a liquidated damages provision is a common provision in construction contracts.  Make sure you appreciate how this clause is triggered, the application of the clause, and who carries what burden when its comes to assessing and challenging liquidated damages.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

BURDEN OF PROOF CHALLENGING ASSESSMENT OF LIQUIDATED DAMAGES

UnknownA contractor is working on a project that includes a contractual liquidated damages provision.  The liquidated damages provision says the contractor is liable for $2,000 per day in liquidated damages if the contractor does not achieve substantial completion by January 1, 2016, a date extended through agreed-upon change orders.  Substantial completion has not been achieved by this date and is not projected to be achieved until May 1, 2016.  The owner already notified the contractor that it plans to assess liquidated damages and such assessment will be deducted from the contractor’s payment (retainage payment application). 

 

When it comes to liquidated damages, who has the burden of proof: the owner or the contractor? 

 

The owner’s burden is actually quite simple. It is merely a burden of persuasion.  All the owner has to do is establish that the project was not substantially completed in accordance with the contract and any approved extensions of time.  Typically, an easy burden of persuasion.

 

This shifts the burden of proof to the contractor challenging the assessment of liquidated damages to establish that the owner was the cause of delays to the substantial completion date (or other contractual date triggering the enforcement of liquidated damages) (e.g., design errors, change orders, change order directives, permit delays, differing site conditions, etc.).  See, e.g., PCL Const. Services, Inc. v. U.S., 53 Fed.Cl. 479 (2002) (government has initial burden of persuasion showing contract was not completed on time shifting burden of proof to contractor to establish excusable delays); accord K-Con Bldg. Systems, Inc. v. U.S., 97 Fed.Cl. 41 (2011) (contractor failed to establish owner caused delays precluding the owner from assessing liquidated damages); Carrothers Const. Co. v. City of S. Hutchinson, 755, 207 P.3d 231, 241 (Kan. 2009) (“By placing the burden of proof on the party challenging a liquidated damages clause, we promote a public policy favoring settlement and avoidance of litigation, and allowing parties to make, and live by, their own contracts.”); TAL Fin. Corp. v. CSC Consulting, Inc., 844 N.E.2d 1085, 1092 (Mass. 2006) (“The burden of proof regarding the enforceability of a liquidated damages clause, therefore, should rest squarely on the party seeking to set it aside.”).  

 

When you sign a construction contract with a liquidated damages provision, understand the application of this provision if the project is not completed in accordance with the provision.  Make sure to ask for and document extensions of time and excusable delays.  In other words, preserve your rights under any notice provisions in the contract asking for extensions of time or notifying the owner of scheduling impacts.  Also, consult with a scheduling consultant, as may be necessary, to analyze the critical path of the schedule to isolate excusable delay and any concurrent delay establishing that although the project was late there were events or issues that would reduce or fully negate the number of days the owner is assessing liquidated damages for.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

A LETTER OF INTENT CAN FORM THE BASIS OF AN ENFORCEABLE CONTRACT

letter of intentJust because there is not an executed subcontract, does not mean there is not an enforceable written contract between a contractor and subcontractor.   While it is good practice for there to be an executed contract in place, this does not always occur.  But, this lack of occurrence does not necessarily mean a performing subcontractor can escape contractual obligations merely because it never signed the subcontract.  Indeed, many times a subcontractor starts performing based on a letter of intent that it received from the contractor.  The letter of intent may indicate that a formal subcontract will be furnished to the subcontractor such as when the contractor is awarded the project or after the subcontractor starts performing under the letter of intent. If the subcontractor starts performing based on the letter of intent that it received, this letter of intent can certainly form the basis of an enforceable contract!

 

The decision in Sealevel Construction, Inc. v. Westcoast Corp., 2014 WL 3587264 (E.D.La. 2014) exemplifies how a letter of intent can form the basis of a written contract.  Here, a subcontractor on a federal project solicited bids from sub-subcontractors to perform aspects of its work based on the plans and specifications for the project.  The specifications, among other things, contained a liquidated damages section.  A sub-subcontractor submitted a bid to install concrete piles. The subcontractor accepted the bid and issued the sub-subcontractor a letter of intent. The letter of intent was signed by both the subcontractor and sub-subcontractor and referenced the specifications. The letter of intent further stated that a formal subcontract would be entered between the parties; however, a subcontract was never executed.

 

pilingThe sub-subcontractor started to perform its scope of piling work based on the letter of intent.  Thereafter, the subcontractor notified the sub-subcontractor of delays with the sub-subcontractor’s scope of work.  The sub-subcontractor was unable to cure the delays and the subcontractor hired another entity to supplement its sub-subcontractor’s work.  Nevertheless, as a result of delays to the sub-subcontractor’s scope of work, the government assessed liquidated damages against the prime contractor.  The prime contractor, in turn, withheld the amount of the liquidated damages from the subcontractor in addition to the prime contractor’s own extended general conditions.  The subcontractor then withheld this money from its sub-subcontractor in addition to its own extended general conditions. 

 

The Eastern District of Louisiana found that the letter of intent served as an enforceable contract between the subcontractor and sub-subcontractor and the sub-subcontractor breached the letter of intent through its delayed performance.  As a result, the subcontractor was entitled to withhold / back-charge the sub-subcontractor for (i) the costs spent on the supplemental entity to mitigate the sub-subcontractor’s delay and (ii) the portion of liquidated damages attributable to the sub-subcontractor’s delay.  The court did not, however, allow the subcontractor to back-charge the sub-subcontractor for other delay-related costs (such as the prime contractor’s and the subcontractor’s extended general conditions) since the sub-subcontractor never contractually agreed to these types of damages unlike the liquidated damages section that was included in the specifications referenced in the letter of intent.

 

 

Take-aways:

  • If a letter of intent is issued, the letter of intent should identify the subcontract amount, the applicable scope of work, and reference the plans and specifications.  The more detail in the letter of intent the better so that if the subcontractor starts performing based on the letter of intent there is a strong argument that the detailed letter of intent served as the contract between the parties (such as if the subcontractor refuses to sign the subcontract, the parties are unable to agree on the formal written subcontract, or if the subcontract is never issued).

 

  • It is good practice to have both the contractor and subcontractor sign the letter of intent.

 

  • An unexecuted contract does not mean there is not a written contract between the parties.  Parties need to consider this before taking an extreme position that a contract does not exist or that they are not bound by certain requirements.

 

  • It is  good practice for a party subcontracting work to be able to flow-down damages such as liquidated damages and their own extended general conditions.  In this case, the subcontractor would have been able to flow-down the prime contractor’s and its extended general conditions attributable to the sub-subcontractor’s delay had this been identified in the letter of intent or clarified by an executed written subcontract. 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.