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Limit Liquidated Damages

Limit Liquidated Damages
Pat Dickson - Wed Jun 06, 2012 @ 09:36AM
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As a subcontractor, you must always know your liquidated damages exposure. Your LDs can be extremely high on large projects, and sometimes they are hidden somewhere within a morass of contract documents.

I have seen multiple cases where small subcontractors have just signed subcontracts without having any idea they were subjecting themselves to extremely high liquidated damages exposure. When something goes wrong with the critical path, they end up being charged exorbitant LDs.

Imagine the following dialog between you and a Contractor when you discover you are hit with a big liquidated damages demand you never expected:

"What do you mean I owe $20,000 per day in LDs! We are five days late and you want $100,000? You can't do this. This insanity isn't in my Subcontract!" you plead to your Contractor. This has to be a mistake because your Subcontract is only worth $35,000.

"I'm sorry, it is in your Subcontract. Your Subcontract incorporates the Prime Contract and all the Contract Documents. It is all on the disk I gave you when you bid this job."

"What? Incorporates what? Prime Contract?"

"Long story short, you are bound to all the terms of my contract with the Owner. You caused the delay. You have to pay."

"But this is madness! My Subcontract is only worth $35,000 and your work with the Owner is like $5 million! It isn't fair!"

"Sorry, welcome to the subcontracting business."

Long story short, don't ever let the above nightmare happen to you. Always make sure you know what your liquidated damages are before signing a subcontract. Get them reduced to a reasonable amount, if possible. Sometimes there is nothing you can do because the Contractor says take it or leave it. However, if you have to take a high LD risk, and know it, you can take additional steps to make sure you don't miss any deadlines. You may also be able to negotiate more reasonable milestones.

THE QUICK LIQUIDATED DAMAGES FIX:

If liquidated damages are set forth in your Subcontract, and you believe they are too high, strike them out and put in a more reasonable number. Make LDs a negotiation point. If the Contractor won't budge on LDs, see if you can get him to agree to more reasonable milestone or completion dates.

However, as we have seen, LDs are not always set forth in your Subcontract. They can be hidden and lurking somewhere within the Prime Contract or the Contract Documents, or even somewhere else. Maybe you've missed them among the 1000s of pages on the project disk?

Whenever you can't find liquidated damages listed anywhere, always ask the Contractor to put them in writing. He'll either respond to your request, show you where they are hidden, or he'll be obstinate and say "Find them yourself. I already gave you everything!" If the Contractor is obstinate and of little help, just put the following term in your Subcontract:

"Notwithstanding any other term in this Subcontract, the Prime Contract, the Contract Documents, or any other document, requirement or obligation connected with [NAME OF ENTIRE PROJECT], Subcontractor's liquidated damages shall be limited to $1 per day."

This little addition almost always smokes the most obstinate Contractors out!

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