Construction Law Insider
Construction contract strategies for Owners and Developers.
Limiting a Contractor’s Delay Damages
The COVID-19 pandemic wreaked havoc on virtually all construction projects throughout the nation. Work stoppages, new stringent safety protocols, materials shortages and restricted access all contributed to massive job delays and contractor claims for extensions of time and additional compensation. In response, owners and contractors dusted off their contracts to see what relief the contractors were entitled to as a result of these delays. While most contracts allow for extensions of time due to such force majeure or, as we have expanded the phrase in our contracts, “unavoidable” delays, the availability of additional compensation varies from contract to contract. This blog addresses contractual provisions dealing with contractor delay damages.
As a general matter, the goal of an owner should be to restrict, in a reasonable manner, a contractor (and its subcontractors) from asserting compensation claims against the owner for delays over which neither the owner nor contractor has control, commonly referred to as a “no damage for delay” clause. However, even where such a clause is included in the contract, the courts will not enforce the clause if the delay was due to the owner’s intentional wrongdoing or was not contemplated, such as an unforeseen site condition preventing the work from proceeding. The issue of what is “contemplated” can be problematic. A general “no damage for delay” clause will not be read literally by the courts and will not prevent recovery of uncontemplated owner-caused delays. Thus, where it is expected that a particular type of delay may occur, such as a delayed regulatory approval, owners should identify such delays specifically in the clause.
From our perspective, the approach to a “no damage for delay” clause is first to identify types of delays which the contractor may encounter, including force majeure delays and owner driven delays, collectively referred to as “unavoidable delays.” Examples of force majeure delays are unusually severe weather, industry-wide strikes, civil disturbances and, topically, pandemics, In the case of this category of delay, the contactor is entitled to an extension of time equal to the impact on the substantial completion of the project, but not greater than day for day. Under the clause, the contactor is not, however, entitled to additional compensation. This limitation often becomes a business issue subject to negotiation and may result in some form of risk sharing, such as allowing the contractor compensation for general conditions costs after a grace period, during which the contractor would not be entitled to such costs.
The second category of delay involves owner driven delays, i.e., resulting from the improper or negligent acts, omissions to act, or failures to timely act by the owner. In this situation, the contractor is entitled to an extension of time, as with a force majeure delay, but also may recover direct subcontract and general conditions costs directly attributable to the delay. The contractor may not, however, make any claim for other delay costs, such as loss of productivity or efficiency, lost profits or extended home office overhead on account of any delay, or obstruction or hindrance for any cause whatsoever, whether or not foreseeable, and whether or not anticipated.
In both instances of delay, the contractor is obligated to advise the owner promptly of the delay (for example, within five business days) and recommend strategies to mitigate the effect of the delay. As required by case law, the failure to provide this notice is deemed a waiver of any claim for additional time and cost. Finally, these provisions relating to relief for delay should be incorporated in all subcontracts.
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04.19.2021 | PRACTICE AREAS: Real Estate Law | INDUSTRIES: Real Estate