|Do You Know the Entire Contract – Part 8
Critical Components in General Conditions - Liquidated Damages
This is the 8th in a series of discussions that is intended to prompt Project Teams to be aware of the entire contract document, including Information For Bidders (IFB), General Conditions/Terms and Conditions (GCs) and the Technical Requirements [Specifications and Drawings.]
It is important the Buyer’s Project Manager, Contracting Officer, and PM support services (estimator) verify content or provide input that ensures the contract is complete and executable within the Buyer’s organizational assets and business processes.
GC – Liquidated Damages (LDs): LSs is an estimated amount of costs incurred by the Buyer for the Seller’s delay in meeting milestones in contract Performance Schedule requirements. The amount is expressed in a unit measure for the delay. For each hour, day or week delay, the amount is accrued for deduction from the Seller’s future payment requests/invoices. The deduction is at the discretion of the Buyer and it follows the contract requirements for payments, which includes reduction for cause. It does not constitute a change in the contract.
The use of LDs is determined by the Buyer during the contract development process, and they are a function of critical interdependencies with other contract activities, other project work or other projects in a program or portfolio. LDs can also be the result of statutory dates in government regulations and mandates that were used to identify Performance Schedule milestones and completion dates. However, the Buyer’s decisions on LD requirements comes with the potential of higher bid amounts as bidders seek to cover the risks with allocations to mitigate potential delays and respond to events to minimize impacts from delays to milestones, and thereby to avoid erosion of profits.
The LD amount is based on an estimate created from a description of impacts on the Buyer due to the Seller’s delay. This may include expenses for dedicated staff to support the Seller’s work ,including stand-by crews and equipment for schedule activities. The estimate must be a reasonable representation of expenses and be based on the cost metrics and conditions known at the time of the bid.
LDs can apply to one or more specific milestones in the Performance Schedule. The most common milestone is Substantial Completion, which allows the Buyer to use the Seller’s product with the condition that punchlist work is defined and a completion date agreed upon before the contract completion milestone. However at the Buyer’s discretion, other milestones and LD amount can be identifying and added during the contract development.
LDs can not be waived. The only action/remedy to reduce the Seller’s liability for Buyer’s estimate of incurred cost is for the Buyer to change the contract date in Performance Schedule for the milestone associated with the LD. The process for changing the Performance Schedule can be initiated by the Buyer as a contract changes due to an Owner delay or by the Seller as a request for time extension. The implementation of a schedule change requires the same level of diligence and justification as to grant an excusable delay or scope change, and to the documentation to substantiate and process the change in the contract.
Usually, the contract does not include a “capped” amount for the accrued amount of LDs. There may be organizational Lessons Learned that necessitate the Buyer adjusting the LD requirements. This may be needed based on questions during the bid period from numerous bidders. In order to ensure bid responses, the Buyer may adjust the LD amount and/or add requirements to specify a maximum accrued amount.
For contracts in the rail transit domain, LDS are commonly used for contracts involving locomotive and passenger car purchases, specialized work equipment vehicle/shop equipment procurement, and for infrastructure systems for signals, supervisory controls, train movement controls, power substations, and signal power that are interdependent with other contracts within the project or program.
TIP: LDs estimate should be vetted thoroughly to ensure the document can be defended by the Buyer in response to a claim from the Seller or subsequent litigation action by the Seller.
TIP: LDs should be monitored and as potential accruals near, the Buyer and Seller should address the topics at progress meetings and describe actions in the monthly progress reports.
TIP: LDs on multiple milestones should be carefully balanced with the administrative effort to monitor, manage, document and enforce.