Written by Wynyard Wood Partner Arthur Chung
There is nothing worse for a builder or an owner than when a building project is delayed.
A liquidated damages (LDs) provision for delays (and a corresponding extension of time (EOT) provision) should be in every building contract. Well drafted LDs and EOT provisions benefit both the owner and the builder in the following ways:
- They incentivise the builder to only agree achievable start and finish dates that have proper regard to the scope of works, the builder’s resources and the likely impact of owner and third party actions (such as design, consents and owner supplied works).
- They encourage the parties to identify and discuss potential delay events at the outset and agree which events would entitle the builder to time extensions.
- They encourage the builder to proactively manage its construction programme and notify the owner of potential or actual delays early to avoid or minimise their impact.
- LDs provide certainty as to what the builder would be liable for if there is delay in completion and can act as a liability cap for damages arising from delays.
- LDs also make it easier for the owner to recover delay damages without the difficulty (and cost) of proving loss.
A LD regime is not intended to unfairly penalise the builder but to compensate the owner if there is delay to completion that the builder is responsible for. Therefore the agreed LD rate must be a genuine and reasonable pre-estimate of the losses likely to be suffered by the owner in the event of such delays and there must be an EOT provision to allow for time extensions when there are delays that the builder is not responsible for.
Most standard form building contracts have LDs and EOT provisions. Before entering into a building contract, have your lawyer check it has adequate LD and EOT provisions (amongst other things) and all relevant information required for these provisions to work have been included.
Finally, be cautious if a builder is unwilling to agree LDs and EOT provisions as it is often those same builders who overpromise and underdeliver leaving the owner having to either bear the full costs of delays or pursue costly litigation to try and recover damages. A builder that commits to realistic dates, proactively manages the project against the agreed programme and applies for EOTs when delay events do occur will rarely face the prospect of paying LDs.
If you have any queries concerning this topic or building contracts generally, please contact our team at Wynyard Wood for specialist advice. We operate in a range of law making us the optimal choice for all your legal requirements.