Reduce Your Risk In The Contractual Jungle - Liquidated Damages

This is the next in a series of articles where we look at some ways you can reduce your risk in the contractual jungle. The articles are brought to you as collaboration between UK Estimating Support Ltd and Knowles Ltd.

When assessing if a contractor should tender for a particular project there are many considerations to weigh up. One of the most important issues is liquidated damages (LDs), these are often stated within the tender enquiry, however this doesn’t mean they have to be accepted. The enquiry will often not alter the LDs to different trades, it stands to reason then that these are not in fact evaluated against the risk posed by each trade contractor. To be more specific they represent the damages that a client (above the main contractor if applicable) represents and not the main contractor’s damages. Therefore before deciding to tender for a job consider the programme and its complexity and if the damages present a real risk of occurring, e.g. a 10,000m² school refurbishment in 5 weeks. If this common sense test is passed, and you still wish to tender make the damages you are willing to accept an express term o f your tender offer. If your tender falls under consideration, you then have a basis of negotiation and the other party can consider realistically what level of damages you really need to be on. We would suggest always stating in your tender offer a limiting your damages to a percentage of your tender value, or contract value if you expect it to drop.

Geraldine Fleming of Knowles Limited – the dispute resolution experts says:
We recently advised a signage contractor on this exact point. The main contractor’s liquidated damages were in excess of £250,000 per week, the subcontractor’s estimated price for the works totalled £100,000. We advised the subcontractor that if he completed the work late and that delayed the whole project, he may be liable for not just the main contractor’s liquidated damages, but also the main contractor’s prolongation costs as well, a further £15,000 or more per week, so a total of £265,000 per week or part of a week.

We advised the subcontractor to limit his total liability for liquidated damages in the event he finished late to 5% of his final contract price, and that was to be calculated on the basis of 0.5% of the final contract price per week. So, in other words limiting his total liability to a maximum of £5,000, calculated on the basis of £500 per week up to a maximum of 10 weeks. It is of course always advisable to agree such a limit at tender negotiations, however if you as a subcontractor are being threatened with liquidated damages as you completed late, do consider the following.

1) Were you given late access to the site?
2) Has the scope of works increased leading to an entitlement to an extension of time?
3) Did you have problems accessing the work areas?
4) Are other subcontractors also completing late?
5) Were you made aware of the level of liquidated damages at tender stage?
6) Is the liquidated damages level a genuine pre-estimate of loss?

Any or all of the above may reduce the or even extinguish the main contractor’s right to deduct liquidated damages from you.