There is nothing more terrifying to a trade contractor than the threat of liquidated damages. The apparent unfairness of liquidated damages is increased when quite often the cause of the late finish is the head contractor’s poor management of the project.
Every now and then a trade contractor will be presented with what appears to be the greatest dream come true or negotiate that dream by setting liquidated damages at Nil or $0.
As tempting as Nil liquidated damages may seem it is a trap that leaves the trade contractor vulnerable to something far nastier and frightening called General Damages. While the value of the general damages may ultimately equate to the same amount of the liquidated damages the horrendous legal costs of resolving that question are likely to cause a trade contractor to go into liquidation.
General damages are a detailed accounting of every element of loss and damage including consequential losses caused to the builder by the trade contractor breaching its contract and not completing on time. They are recovered by commencing an action in Court.
In order to overcome the difficulties and costs associated with general damages the concept of liquidated damages arose. Basically they are a pre estimation of the loss and damage that the builder would suffer if the project is not completed on time. In order to get the trade contractor to agree to such an arrangement the agreed liquidated damages should be less than the actual general damages.
However, differences in negotiating power have resulting in trade contractors agreeing to large amounts of liquidated damages. The courts have held that if the amount specified per day for liquidated damages is a penalty and does not bear any relationship to calculated damages that it will be void. However, the cost of litigating that issue is in itself horrendous.
On the other side of the coin, there is considerable eminent opinion and a limited number of decided cases to the effect that if the amount of liquidated damages specified in a contract are Nil
or NA
then the intention of the parties is that General Damages would apply.
The way to beat that is to ensure that a realistic amount is specified for liquidated damages. That should be an absolute minimum of $500 and rising as the projects get larger.
Then any experienced trade contractor is going to point to the extent to which they get messed around on site by builders that could not organise the purchase of two beers in a pub. That would seem to be just giving money back to a builder as a reward for their disorganisation.
The answer to that is to make sure the contract provided for extensions of time to the due date for practical completion due to delays and the payment of prolongation and delay costs.
You must then follow the contract and claim those delays.
The reality is that being messed around and delayed on site is the big black hole that trade contractor profits are disappearing into these days. The dark secret is that a trade contractor can turn those losses into a profit. All it takes is a bit of knowledge.
To see how this can work consider the example below of two different trade contractors Fred and Sid.
Fred has negotiated $Nil liquidated damages in his contract. He is messed around on sit but is confident that it is not a problem as he is not in danger of being hit with liquidated damages. At the end of the contract he has gone way past the due date for completion and has suffered a large loss due to the chaotic way the site was managed. At the end of the job the builder sues Fred for breach of contract for not finishing on time. To defend that action will cost Fred a lot of money in legal bills on top of the money he lost because he was delayed.
On the other hand Sid has entered into a contract that does allow for liquidated damages but he has made sure that the contract allows for clear uninterrupted access. When he is delayed he delivers Notices of Delay and EOT Claims as the contract progresses. At the end of the job he has finished on the extended date for completion, he is not backcharged liquidated damages and has made a profit out of the delays and disruptions.
The bottom line is that you can make money out of delay and disruption instead of a loss. In reality $Nil or $0 liquidated damages does nothing for you and can operate against you.
We have courses available that assist trade contractors to deal with this issue and many others where trade contractors are constantly losing money. It is called the survival course.
Given the huge difference between the profit trade contractors should be making and the profit they are actually making it is not a question of can you afford to do the course. The real question is can you afford not to?