Construction Contract Administration

Community HTML

A crane

Quick Links

Who we are

The Construction Contract Administration Knowledge Community (CCA) has been established to help our members better understand the issues, actions and resultant impact of the decisions required in this often neglected part of Project Delivery. It is our goal to provide clear answers to issues of concern to the Institute’s membership and share case studies and best practices. We further hope to provide guidance and direction in developing guidelines for new and evolving approaches to Project Delivery as well as guidance in the continuing education of our emerging young professionals.

How to connect

- Join to get occasional emails with new content and resources.
- Post on the discussion board to ask questions and share ideas.
- Read a CCA white paper - or contribute your own!
- Attend an upcoming event such as webinars and conferences.
- Provide feedback on what you'd like to see from your CCA community at cca@aia.org.

Expand all | Collapse all

GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

  • 1.  GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-16-2021 03:52 PM
    Wondering if anyone has experience with this or advice to offer.  We have a project which is supposed to be substantially complete (now in punch list stage), on which the Owner requested a minor addition to scope (a door hardware change).  This request was made several weeks before the end of the Contract Time, but had a long lead time which meant the added hardware didn't arrive until after the Contract Time had expired.  The added work does not prevent the occupancy or use of the building for its intended purpose, thus isn't affecting Substantial Completion.

    The Contractor is treating the change order request for this added hardware scope as a "get-out-of-jail-free card" and is attempting to take advantage of it to avoid liquidated damages ($500/day).  There is a very extensive punch list of incorrect and incomplete items- so much so that we have not yet granted Substantial Completion.  We granted +15 days of Contract Time for this added item, based on anticipated delivery, but that too has now expired.  We believe liquidated damages should now apply (for other good reasons related to Contractor performance).

    The Contractor has been given 30 days to complete the punch list, and the added hardware item, which has just been delivered, will be complete within that 30-day timeframe.  This project uses 2017 versions of A101 and A201.

    Is there precedent to treat a minor addition of scope, which does not prevent Substantial Completion, as an incomplete punch list item so liquidated damages can be applied, or must/should we grant an additional extension of Contract Time for it?

    Thanks in advance for your help!
    -Tim Aho

    ------------------------------
    Timothy Aho AIA
    President/CEO
    Aho Architects, LLC
    Hoover AL
    ------------------------------
    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 2.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-17-2021 06:10 PM
    Know of a somewhat similar situation on a school project by another colleague.  Contractor installed non-fire rated (and incorrect) hardware on a rated opening that was rejected by the architect.  In addition, the AHJ would not grant occupancy, thus substantial completion was not achieved.  The contractual date of substantial completion had expired by the time the correct hardware was installed AND the AHJ could get back to complete his inspection.  Under a narrow definition, LD's applied.  However, because the owner was able to legally occupy the building before the start of school, the Owner decided it wasn't actually harmed and waived the LD's.

    Thinking about your project, if time expired, including the additional time granted for the hardware change order, it seems that LD's would apply.  That said, if the delay in receiving the hardware was beyond the contractor's control (think Covid-19 supply chain issues, force majeure, etc.), he may be due a time extension under article 8.3.

    ------------------------------
    Clarence Babineaux AIA
    Member
    SGB Architects, LLC
    Bossier City LA
    ------------------------------

    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 3.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-17-2021 05:45 PM
    So. a couple of things are happening and can happen.  First, changes in contract time need to be linked to impacts on the contract Date of Substantial Completion, which it looks like you've done with the 15 time extension- which also looks pretty gracious and a forgive me for all past sins gesture.

    I've treated these in a couple of ways.  One way is to exclude the late ordered work (and often some work that comes up during punch list) as being excluded from the Work that establishes the Date of Substantial Completion. Obviously, the contractor would need to agree to this but most would to relieve the time pressure for this added work.

    MOST IMPORTANT is whether the added work impacts Substantial Completion or not, as you've already looked at.  First, if the added work isn't on the critical path, there's no time impact, no time extension, and no relief from LD's. Second, it's what you've done- does the work impact "use for its intended purpose", the definition for Substantial Completion in the contract. If it doesn't, or a simple work around or temporary measure, provides a situation for satisfactory occupancy and use, I would not allow any further time extension or relief, and the project is subject to LD's.

    ------------------------------
    Arlen Solochek, FAIA
    Owner/Principal/Founder
    Arlen Solochek FAIA, Consulting Architect
    Phoenix, AZ
    ArlenSolochek@gmail.com
    ------------------------------

    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 4.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-18-2021 11:18 AM
    Dear Timothy,
    Based on your explanation, if the contractor finishes with 30 days delay (check if work days or calendar), then the Owner is entitled to keep around $15K. (not a big deal).
    In my opinion, this is where retainage plays a big role. because it is not how much, it's who holds this money.
    As the Architect, I think you should not make any reference to the liquidated damages clause. You should be able to affirm, upon consultation and review that to the best of your professional opinion and belief, the change order for hardware does not affect substantial completion. Nothing else; furthermore, the quote upon which approved change order was based should have contemplated an extension in time, especially with a liquidated damages clause, which could have exempted delivery delays and reasons beyond the contractor's control. if they are not in place he's out of luck. you can also refer to such things in your review. Your opinion should be binding. as long as your CA agreement is in place.
    the Contractor can dispute your opinion, but at the end of the day, when substantial completion is indeed achieved and it is time for Owner to make final payment, a fierce negotiation is common. The Owner may be willing to accept a final product with certain defects at a reduced final payment amount, and may want to tally the documented delay as further negotiation, but quite honestly this should not concern you, other than to certify the G702 - 703 and or attest to any condition you are specifically consulted upon.
    Best,

    ------------------------------
    Ivan Contreras, LEED AP, AIA
    Qualifier | Director
    CONTRERAS MUNOZ & CO
    Miami FL
    ------------------------------

    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 5.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-18-2021 11:41 AM
      |   view attached

    Tim-

    Did you issue a Change Order-signed by Owner and Contractor-for this added scope hardware?  And, did the Change Order address the impact on Project Time before Liquidated Damages start to apply?   Since you are using standard A101 and A201 contracts, I assume there are no unusual relevant conditions to the contrary in your other spec Divisions 00 and 01.  If the Contractor has not yet met all requirements in 017700, and the amount of incomplete Work is excessive, then the hardware issue is completely irrelevant to their delay in achieving Substantial Completion.  However, this is a classic example of what I have found in my 40+ years of full-time CA experience to be the real root of many construction phase problems: the unintended consequences of ill-advised LDs

     

    Most building Owners need to occupy their finished facility by a date certain, so they often put a clause in the construction contract stipulating that penalties or liquidated damages, LDs, are to be paid by the Contractor to compensate for Owners' losses if the agreed upon completion date is not met.  LDs give an Owner comfort-in theory.  In actual practice, however, LDs are virtually never paid by a General Contractor, and in fact, more often than not they cause unintended losses for the Owner. 

     

    Here's why: 

     

    •             To the maximum extent possible, all General Contractors delegate liability and risk, including LD exposure, down into subcontracts with trade contractors and suppliers who are less financially able to sustain costs imposed by LDs.  Those subs seldom have any control over the whole project, but they are motivated by fear of devastating losses if any LD delay is blamed on them.  Therefore, they tend to increase their initial bids to offset the added risk of LDs, which become an invisible and non-refundable additional cost to the Owner.

     

    •             Construction has become ever more complex and dependent on a high degree of coordination and teamwork if quality work is to move quickly toward completion.  However, teamwork and efficiency evaporate under the constant threat of LD penalties.  Subcontractors seek self-protection from risk of LDs which, ironically, adds to the likelihood that the project will go slower and miss the completion date-adding even more risk of harm to the Owner.

     

    •             Any General Contractor or Construction Manager who encourages the Owner to include LDs for the GC to use as a way to force their subcontractors into schedule compliance is just paying lip-service to the 'partnering' concept and portraying the Owner, not the GC, as the subs' opponent.  Project -management-by-threat-of-LDs undermines teamwork and obstructs any sense of loyalty to the Owner.  It is also a red flag warning of potential conflicts to come.

     

    •             Subs can only control their own actions, so under time pressure of LDs, they naturally try to rush their work even more than would be the case just to maintain schedule.  If another trade is not "out of the way" fast enough, the precedent work is rushed and/or covered over in greater haste to avoid LD charges-fear usually trumps concern for workmanship.  Loss of quality and impacted building performance is yet another hidden, but very real, cost of LDs to the Owner.

     

    •             In the end, though, if/when the stipulated Completion Date is missed, most Contractors immediately counter by redefining "completion", counter-claiming due to "extenuating circumstances", and/or blaming the designer and the Owner or all the above.  Expensive, protracted litigation over those related issues can exceed the dollar amount of LDs as well as cause other problems, so the wasted energy of conflict is usually better and more productively applied to a belated effort to get the Owner into operation ASAP.  The damage is done.  But even in the absence of a pre-agreed amount for Liquidated Damages, the Owner still may have recourse via breach-of-contract litigation for actual Consequential Damages if all else fails.

     

    For all these reasons, Liquidated Damages simply don't work.  It is never a 'surprise' when a project ends up behind schedule-a lack of scheduled progress should have been obvious to everyone long before Completion Day.  Who was monitoring the project for the Owner, and if schedule was so important, who was certifying monthly payment applications as being in compliance with the contracted schedule?  And if progress was behind schedule due to unforeseen conditions, was there no Contingency fund to deal with that?  Or, if delay was due to circumstances under Contractor control, did the specifications not contain provisions that compel the Contractor to accelerate promptly to get back on schedule?  Having to impose LDs at the end is actually an admission that everyone involved waited too long to even acknowledge the problem earlier and did not respond cooperatively when delays began-at the point where necessary corrective actions were still possible and still reasonably economical to implement. 

     

    I have crafted two alternative solutions to the problem of LDs, and they almost always do work--see my 2-page explanation, copy attached.   If anyone would like to discuss further, feel free to contact me directly.

     

    --Dale Munhall,  AIA

    Director of Construction Phase Services

    LEO A DALY

    dlmunhall@leoadaly.com

    (402) 670-2078

     

     

    LEO A DALY

    Dale L. Munhall, AIA, NCARB, LEED AP

    Senior Associate, Director of Construction Phase Services

    LEO A DALY

    8600 Indian Hills Drive,  Omaha, NE 68114-4039

    402.391.8111    D 402.390.4482    M 402.670.2078

     

    PLANNING   ARCHITECTURE   ENGINEERING   INTERIORS

     

    LinkedIn  facebook  twitter  Instagram 

     




    CONFIDENTIALITY AND PRIVILEGE NOTICE: This email communication, including any and all attachments, (collectively, this "Communication"), is intended solely for the person(s) to whom it is addressed. This Communication may contain information that is privileged, confidential and/or proprietary. Any unauthorized use, disclosure or copying of this Communication is strictly prohibited. If you have received this Communication in error, please contact the sender immediately and destroy any and all copies of this Communication.



    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 6.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-23-2021 02:07 PM
    Thank you everyone, for your thoughts and suggestions.  I will try to add an update to this post once we finish sorting this out.  In our case, this was a publicly-funded, hard-bid project and we were required to include a liquidated damages provision without an incentive clause.  I appreciate the side-discussion on LDs.  One thing I'll add to that discussion (I'm not a huge fan of LDs, but they can have their usefulness):  sometimes they provide a deterrent value greater than the actual amount of money in-play because at least around here, contractors often must disclose if they've had to pay them on pre-qualification applications and on their bond applications.  That tends to "follow" a contractor beyond the particular project in question.

    Thanks again!  I appreciate all your help.

    ------------------------------
    Timothy Aho AIA
    President/CEO
    Aho Architects, LLC
    Hoover AL
    ------------------------------

    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 7.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-19-2021 10:58 PM
    Timothy,

    You have plenty of good advice already.  For my two cents, the central point appears to be the other issues preventing substantial completion.  The hardware change is inconsequential and has no bearing on the status of substantial completion or LDs.

    On a philosophical level, liquidated damages, by themselves, are a nasty item.  Some contract interpretations go so far as to say that penalty clauses without corresponding reward clauses are unfair one-sided contract terms.  That is not something to negotiate after the fact, but it is no surprise that the penalty clause is coming back to bite the project and all conceivable excuses are being argued.

    Of significant interest is the type of project.  A school trying to open on time, a hospital serving a community with pressing need, a business facing lost seasonal sales, or a hotel or rental property likely to lose cash flow that would hurt its pro-forma, are significant examples.  If the Owner's loss is not so clear, or if the LD clause was just included in hope of being a incentive, then it should be walked away from.

    Best of luck.  Let us all know how it works out.

    Tom


    Thomas J. Donoghue, AIA, LEED AP
    DONOGHUE Project Consulting
    2354 Rexford Drive, Pittsburgh, PA 15241
     
    412 605-7045
     
    This message is confidential and intended for named recipients only.




    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 8.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-18-2021 01:17 PM
    Mr. Daly, it's great to see your post. I met you briefly in DC at a project delivery symposium, I think in 2018 or 19. Your presentation and the follow-up material you were so generous to share has been invaluable to me.
    Be well,

    ------------------------------
    Ivan Contreras, LEED AP, AIA
    Qualifier | Director
    CONTRERAS MUNOZ & CO
    Miami FL
    ------------------------------

    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 9.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-18-2021 02:10 PM

    Actually, Ivan, I'm Dale Munhall at LEO A DALY.  And, yes, I do think we spoke briefly at AIA HQ in March of 2019 when I did a presentation for the CCA Knowledge Community's Innovation Symposium.  

    Please do let me know how it goes the next time you show a client my Liquidated Damages article.  I originally wrote it at the request of one of my clients, who then used it successfully to convince the attorney at his lender not to require LDs because they are so bad for the Owner.  The lender and the attorney had no idea of the downsides of LDs, but they agreed to stop requiring that LDs be included as a condition in their borrowers' construction loans.  There is a far, far better way to keep projects on schedule, as I have shown.

    ------------------------------
    Dale Munhall AIA
    Director of Construction Phase Services
    LEO A DALY
    Omaha NE
    dlmunhall@leoadaly.com
    (402) 670-2078
    ------------------------------

     

     

     

     

     




    CONFIDENTIALITY AND PRIVILEGE NOTICE: This email communication, including any and all attachments, (collectively, this "Communication"), is intended solely for the person(s) to whom it is addressed. This Communication may contain information that is privileged, confidential and/or proprietary. Any unauthorized use, disclosure or copying of this Communication is strictly prohibited. If you have received this Communication in error, please contact the sender immediately and destroy any and all copies of this Communication.



    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 10.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-18-2021 02:54 PM
    Dale Munhall,

    Very interesting discussion and position.

    As an owner/owner rep for 30 years, we generally did not collect LD's unless we could truly and fairly show that we were damaged by a late completion.  That said, every one one of our projects had LD's in the construction contract.  We certainly were aware of the points that you made in the response. However, LD's were about the only realistic leverage and damage protection that owners often have.

    The alternative to LD's is to (a) just hope that the project is on time or (b) claim and try to collect actual damages related to late completion (whether an owner would choose to waive consequential damages as well is another discussion).  Collection of actual damages is always going to be a nasty, lengthy, drawn out fight, with lots of legal fees, and in the end, the owner will end up collecting 25 cents on every dollar claimed for damages, and most of that will be erased in the settlement that often includes "each party will pay for its own legal expenses."

    Our most recent experiences, which were predominantly CM at Risk, were that contractors were confident enough in their ability to schedule and manage the work that LD's were noted in the agreement but didn't cause them any concern or alarm, including at the pre-qualified, better quality level of subcontractors.  Also, with an actual cost agreement, which is the standard AIA CMc agreement, it's really difficult to build in or hide LD's at any of the contracting levels because we can see the actual expenses incurred at every level of the contracted work.

    For the tradeoff of potentially slightly higher contract cost that may include buried LD's, there's much greater certainty and greater ease of collection of damages, including having those funds available immediately to reimburse for damages, which is what LD's are for.


    ------------------------------
    Arlen Solochek, FAIA
    Owner/Principal/Founder
    Arlen Solochek FAIA, Consulting Architect
    Phoenix, AZ
    ArlenSolochek@gmail.com
    ------------------------------

    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 11.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-18-2021 04:50 PM
      |   view attached

    Arlen--

     

    Your Owner-perspective experience describing the nasty, self-defeating process of any Owner trying to 'win' on LDs is exactly the same as mine.  And, yes, I also favor CM at-Risk as a far better way to professionalism the construction process, making it more fair, transparent, economical and collaborative for all parties.

     

    But, for all the reasons listed in my attached 2-page 'white paper', Liquidated Damages simply do not work.  It is never a 'surprise' when a project ends up behind schedule; a lack of scheduled progress should have been obvious to everyone long before Completion Day.  Having to invoke LDs at the end is actually an admission that everyone involved waited too long to even acknowledge the problem earlier and did not respond cooperatively when delays began, at the point where necessary corrective actions were still possible and still reasonably economical to implement. 

     

    But there are two alternatives, and they almost always do work:

     

    1.  In specification Section 007300 GENERAL AND SUPPLEMENTARY CONDITIONS, modify the AIA A201 General Conditions §3.10.1 CONTRACTOR'S CONSTRUCTION AND SUBMITTAL SCHEDULES as follows: require the Contractor to submit at the start of construction a cost-loaded Critical Path Method (CPM) schedule along with a detailed Construction Progress chart showing costs and estimated progress for the various components of the Work.  The chart should present a composite curve showing estimated cost progress for the project.  Then, insert in §3.10.1: "If actual progress of the Work falls behind the estimated progress as indicated by the charts, the Contractor must, at no additional cost to the Owner, accelerate the Work back into compliance with the approved CPM Schedule in a time period and manner satisfactory to Owner and Architect."

      

    2.  And/or specify a bonus as incentive for achieving an exceptional completion objective or another project-specific benefit for the Owner.  Note: careful consideration is necessary, however, in order to keep an incentive for speedy completion from undercutting quality of the work in a rush.  In reality, LDs do not motivate a General Contractor with fear because any losses will fall on the backs of subcontractors.  But a bonus-it doesn't have to be very large-does motivate the GC because they get to keep that extra profit for themselves.  Consequently, a Contractor virtually never fails to achieve the incentive bonus attached to targeted completion or extraordinary performance. 

     

    For all these reasons, Owners should carefully consider the cost/benefit risks of LDs.  The far better alternative is to require that the Contractor use cost-loaded Critical Path Method scheduling (including a tight acceleration clause in the specifications) followed by all parties closely monitoring progress during construction.  An incentive bonus can also be negotiated to achieve a specific objective.  A quality project delivered on budget and on time-without the negative impacts of Liquidated Damages-is to the benefit of both Owner and Contractor. 

     

    I would like to hear the results from anyone who applies my better-alternative-than-LDs concept.  Please help me make our industry more collaborative and reduce risks for all parties through more enlightened application of professional CA practices and procedures.  We architects who specialize in the construction phase are in the best position to achieve that.

    ------------------------------

    Dale Munhall, AIA

    Director of Construction Phase Services

    LEO A DALY

    Omaha NE

    dlmunhall@leoadaly.com

    (402) 670-2078

    ------------------------------

     

     

     

     




    CONFIDENTIALITY AND PRIVILEGE NOTICE: This email communication, including any and all attachments, (collectively, this "Communication"), is intended solely for the person(s) to whom it is addressed. This Communication may contain information that is privileged, confidential and/or proprietary. Any unauthorized use, disclosure or copying of this Communication is strictly prohibited. If you have received this Communication in error, please contact the sender immediately and destroy any and all copies of this Communication.



    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 12.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-24-2021 06:03 PM
      |   view attached
    Here's one more article that's pretty short and on topic.

    The idea of all of this is a proper allocation and pricing of risk- making a party absorb more than appropriate share of risk most likely means that they (a) will build in costs to protect themselves which the owner may not know about or never get back if unused (b) sets up a contentious project from the start and force majeure or default is definitely not the direction to start off with or end up with.

    ------------------------------
    Arlen Solochek, FAIA
    Owner/Principal/Founder
    Arlen Solochek FAIA, Consulting Architect
    Phoenix, AZ
    ArlenSolochek@gmail.com
    ------------------------------

    Open: Call for leaders. Applications due by Monday, November 8 at 5pm Eastern. Click here to view and apply to join the CCA leadership group!


  • 13.  RE: GC Claiming a Minor Scope Addition is "get-out-of-jail-free card" from Liquidated Damages

    Posted 06-24-2021 07:17 PM