How To Avoid Paying Out Liquidated Damages
Who here has heard of a construction project running late? Anybody with their hands still down? Didn’t think so.
Each construction project involves a complex schedule, fitting together a huge array of smaller jobs, many of which are dependent on the completion of previous tasks. If any part of the project is delayed, thanks to late supply delivery, poor weather, or for any other reason, it could start a cascade of late starts that causes the entire project to run behind schedule.
A competitive bidding process means each contractor is keen to promise a tight timeline, and that leaves little room for error. If any of a number of key deadlines is missed, the contractor could be on the hook for liquidated damages.
What are liquidated damages?
Liquidated damages are amounts of money that a contractor agrees to pay to an owner for each day a specific significant milestone is overdue. If a contract sets out multiple milestones, each with its own damages attached, the contractor could stand to owe a number of penalties for a single late project.
The amount to be paid is set out in the contract before a project begins, and is intended to cover losses the owner experiences or could experience as a result of the missed deadline. Liquidated damages are often subtracted from the amount an owner needs to pay a contractor at project’s completion.
If an owner wants to collect liquidated damages, the matter may have to go through a court or arbitrator. The court may not uphold the payment if the amount is too high. The idea behind the damages is not to punish a contractor for the project’s late delivery, but to protect the owner against lost revenue or other expenses.
How can I avoid paying liquidated damages?
Paying out damages is not the only expense a contractor may incur in the event of a late project. For each day the project runs over, equipment rentals and labor costs will need to be covered, too, and it may mean a delay in starting the next scheduled contract. All this can eat into already tight profit margins, and fast.
So, how can contractors stay on time with projects and thus avoid all these extra costs? Clearly, it can be tough – according to KPMG’s 2015 Global Construction Survey, only a quarter of projects come within 10% of their original deadlines. But there are ways to help projects stay on track, and to recover them when they’re already running behind.
Preplanning
Not to be a wisenheimer, but the best way to avoid liquidated damages is to keep a project running on schedule. Easier said than done, right?
Solid preplanning can give you more confidence that there won’t be any surprises on the site, that the scope of work is clearly understood by all parties, and that the schedule accurately reflects all the nuances in the work. Site maps can be used to plan out the flow of movement workers will take, and create efficient paths between equipment storage, jobsite office, and other hot spots.
Efficiency in preplanning and operation is dependent on completed and shared documents and forms. Digitizing forms for easy sign-off and dissemination allows paperwork to move seamlessly from office to jobsite, never getting lost or damaged en route. Forms that used to arrive at head office in time for weekly meetings now pass back and forth in seconds, keeping the flow of data moving so all stakeholders are up-to-date.
Stick to Your Processes
Once things start to run amuck, it can be way too easy to lose focus and let everything turn to chaos. Because construction projects keep multiple tasks in progress at one time, maintaining focus and good processes is even more crucial when a project is already running late.
When you receive timely information from a sub that a problem has arisen, that’s the time to proactively work with that sub and any other subs who are impacted to brainstorm possible solutions for keeping the project moving while the kinks are worked out.
Put Your Heads Together
Communication and collaboration between stakeholders capitalizes on the strengths of each, and establishes trust in the process. Faster and more robust information can be captured in the digital era than ever before, facilitating strong relationships and enabling that collaboration.
Compiling digital information makes it easier to compile and analyze data, too, so contractors can see what went wrong and improve processes for better outcomes.
Data Flow is Key to Schedule Maintenance
Realistic scheduling and thorough pre-planning are the first steps to avoiding liquidated damages payouts. Efficient processes and smooth workflows facilitated by lots of communication and data sharing will help keep a project running as possible. If and when there is a delay, collaboration is key to keeping things moving along.
Digital tools are now on the market to help create and monitor schedules to utmost efficiency. Device Magic helps create digitized forms to capture rich data sets, including photos, geotagging, and barcode scanning, to create a single source of truth at any stage of a project and facilitate schedule maintenance.