Project Management Central

Please login or join to subscribe to this thread

Liqudate damages
Network:879



Dears,
I used to hear about liqudate damages a lot in case of disputes from owners and contractors but honestly didn't understand when it should be used exactly and how it differs from penalty?
Sort By:
Network:25



In my experience liquidated damages are normally applied in instances where there is a delay attributed to the contractor, which entitles the owner to a claim against the Contractor when completion is not achieved with schedule. Thats provided that all (if any) contractors claims has been exhausted and the determined EOT has been used up. It is a penalty to the extent that it covers the Employers inconveniences for not being able to use the Project /Service/Result up to a percentage of the Contract.
Network:879



So delay payment which most of times should not exceed 10
% of the contract value considered as liqudated damages.
Network:25



Bluntly speaking yes it is a %. There are other penalties or entitlements of the Employer or Employers Claims; delay damages; rejection, extension of defects notifications periods, remedial works ... All of which have cost and or EOT entitlements
Network:2455



A penalty or an incentive is a motivation to do it right (to deliver contractual duty). If you do not deliver, a damage occurs which you have to repair or liquidate in order to fulfill the contract from your side. This is always the case, if there is no waiver. Penalties are optional terms in a contract.
Network:570



In the US, the standard contract Model can include, if desired by the Buyer, a provision for Liquidated Damages (LDs) in the General Terms and Conditions (T&C) related to contract performance milestones. The most typical milestone for application of LD’s is Substantial Completion (SC). However, LDs can also be specified for intermediate milestones that are specified between Notice To Proceed and SC.

LDs can only apply if they are indicated in the T&C. If not the Buyer’s remedy for damages can only be pursued as a claim for cost due to Seller’s action and be based on actual and well-documented costs incurred by the Buyer.

The LDs are defined based on the Buyer’s estimate of damage/per day if the Seller does not meet the performance milestone date. The estimate is described and quantified by the Buyer in internal records during the contract development, and the LD amount and the specific milestones are highlighted to bidders during the pre-bid conference. The LD’s can be applied at the Buyer’s discretion and be deducted from the next invoice for payment by the Seller.

In cases where the LDs are large, it can easily scare Sellers from bidding the contract. As a result, Buyers can establish an LD cap amount or an LD cap as a percentage of the contract value. This assures Sellers submit bids but is also means that the Buyer is willing to share the risk from the Seller missing milestone dates that exceed the cap amount.

On US funded government contracts, LDs can not be waived. The only alternative to reduce the financial impact is for the Buyer to accept the Seller’s request for a time extension to the milestone and to change the contract dates. The net effect is the accrued LDs on performance milestones are adjusted based on the new contract dates.
Network:109



Hi Riad, Reason for imposing the LD would be well defined in the contract itself, how it will be calculated and what it is based on mentioned upfront. LD is a penalty for not completing a certain milestone. It’s enforced when contractual obligations are not fulfilled by the service provider. At the final stage of the project and its non-negotiable. Project completion certificate is not issued until all the contractual obligations including LD are met.
...
1 reply by Riad Alhammoud
May 31, 2019 8:51 AM
Riad Alhammoud
...
Thanks all

For example, maintenance project for residential villas. As per the contract, in case of the delay then penalty of 10% of the value of the contract will be applied, and in case of bad workmanship, there is no predetermined value, the client will decide. The residents were evacuated and compensated by the amount of rent for the maintenance/contract duration However, the contractor exceeded the contract period and was therefore required to pay the rent for the delay period.

Can all these violations be considered as liqudate damages?
Network:27436



it is a contractual term and refers to the amount of money that one part should pay to another when there is a breach in contract. This amount is designated during the formation of the contract by involved parties.
Network:879



May 30, 2019 11:58 PM
Replying to Ganesh
...
Hi Riad, Reason for imposing the LD would be well defined in the contract itself, how it will be calculated and what it is based on mentioned upfront. LD is a penalty for not completing a certain milestone. It’s enforced when contractual obligations are not fulfilled by the service provider. At the final stage of the project and its non-negotiable. Project completion certificate is not issued until all the contractual obligations including LD are met.
Thanks all

For example, maintenance project for residential villas. As per the contract, in case of the delay then penalty of 10% of the value of the contract will be applied, and in case of bad workmanship, there is no predetermined value, the client will decide. The residents were evacuated and compensated by the amount of rent for the maintenance/contract duration However, the contractor exceeded the contract period and was therefore required to pay the rent for the delay period.

Can all these violations be considered as liqudate damages?
...
1 reply by Ganesh
Jun 04, 2019 7:10 AM
Ganesh
...
Hi Riad,

All LD’s are a violation, but all violations are not LD. The penalty for delays caused would be mentioned in the contract and in most cases it would be “mutually agreeable” ascertaining the damages at that point in time. However, LD is a % of certain progress “not met” mentioned upfront in the contract. Knowing that penalty clause and LD the entire project & management team rally around the project to complete it on time and quality. The margins are low since the projects are bid at lowest quote, ending in penalty and LD would mean projects are losing money.
Network:129



LD´s from a risk management point of view is a desirable measure hence the reason to be widely used! It gives the Contractor a very clear indication of the Client damages in case of default!
So the contractor risk assessment and quantification is not open to uncertainty! LD is the maximum penalty!
The contractual documents should make very clear the steps and procedures to get to that stage!
Network:109



May 31, 2019 8:51 AM
Replying to Riad Alhammoud
...
Thanks all

For example, maintenance project for residential villas. As per the contract, in case of the delay then penalty of 10% of the value of the contract will be applied, and in case of bad workmanship, there is no predetermined value, the client will decide. The residents were evacuated and compensated by the amount of rent for the maintenance/contract duration However, the contractor exceeded the contract period and was therefore required to pay the rent for the delay period.

Can all these violations be considered as liqudate damages?
Hi Riad,

All LD’s are a violation, but all violations are not LD. The penalty for delays caused would be mentioned in the contract and in most cases it would be “mutually agreeable” ascertaining the damages at that point in time. However, LD is a % of certain progress “not met” mentioned upfront in the contract. Knowing that penalty clause and LD the entire project & management team rally around the project to complete it on time and quality. The margins are low since the projects are bid at lowest quote, ending in penalty and LD would mean projects are losing money.

Please login or join to reply

Content ID:
ADVERTISEMENTS

"How far that little candle throws his beams! So shines a good deed in a weary world."

- William Shakespeare

ADVERTISEMENT

Sponsors

Vendor Events

See all Vendor Events