When are you liable for delay damages?
by Stephen M. Phillips
Consider the following situation. In August, a roofing contractor submitted a bid to reroof a roof on a hotel. At the preconstruction meeting in late September when the roofing contractor was to sign a contract, he was told the owner also had entered into a separate contract with an exterior insulation finish system (EIFS) contractor who would perform extensive repairs on the building's cladding. The EIFS work would take place adjacent to and above where the roofing crew would be working.
To avoid interfering with each others' progress, the roofing contractor suggested the job be done in three phases. First, the roofing crew would remove the existing roof system and install a temporary roof. Then, the EIFS contractor would perform the cladding work. After the EIFS contractor's work was completed, the roofing crew would install the new roof system.
The owner was willing to have the work performed as suggested by the roofing contractor but insisted on a Dec. 31 contractual deadline for completion of the new roof. The contract between the owner and roofing contractor also included a "time is of the essence" clause and $500 per day liquidated damages provision. Based on the EIFS contractor's assurances that his work would be completed by the first week of December, the roofing contractor signed the contract.
Following the meeting, the roofing crew removed the existing roof; installed a temporary, two-ply roof; and left the job site. The EIFS contractor then proceeded with his work. By the first week of December, the EIFS contractor had performed much of his work but was not finished.
Equipment and debris were on the temporary roof, and the EIFS contractor's trash bin was located where the roofing crew had planned to place equipment.
Despite demands from the building owner, the roofing contractor would not proceed with the roofing work because of ongoing EIFS work, congestion in the work area, and masonry dust and debris on the temporary roof. The temporary roof's surface was not acceptable to the roofing contractor until it was power washed by the EIFS contractor; the EIFS contractor did so during the first week of January.
The roofing crew then proceeded to install the new roof but was unable to complete the installation until the first week of March because of snow and ice on the roof. Based on a 65-day delay and $500 per day liquidated damages, the owner deducted $32,500 from the contract amount.
Was the roofing contactor liable for liquidated damages or entitled to additional time provided he gave the owner proper notice that his work was delayed? And was the roofing contractor entitled to additional compensation based on the extra costs he incurred because of the EIFS contractor's presence and weather conditions?
Excusable versus nonexcusable
To determine whether a contractor is entitled to additional time, a delay's cause must be legally evaluated and judged to be excusable or nonexcusable.
Excusable delays are caused by factors beyond the control and without fault or negligence of a contractor. Examples of excusable delays are design problems, owner-initiated changes, unusually severe weather, fire and natural disasters. Excusable delays justify an extension of a contract's deadline.
If a delay is excusable, a contractor is entitled to additional time and an owner cannot recover liquidated or actual damages that may have been sustained because of a delay.
Nonexcusable delays result from a contractor's fault or a construction contract that stipulates a contractor explicitly assumes responsibility for certain conditions that arise. Examples of nonexcusable delays include failure to provide a sufficient work force or order materials in a timely manner, deficiencies in work, typical weather conditions or mismanagement.
If a delay is categorized as nonexcusable, an owner may assess liquidated damages or seek to recover actual damages resulting from a contractor's delay. An owner also may require a contractor to work overtime or add manpower without additional compensation. Depending on a delay's extent, an owner also may be entitled to terminate a contractor for cause and default him, which makes a contractor liable for additional costs incurred by an owner to complete a contract.
Compensable versus uncompensable
In addition to being categorized as excusable or nonexcusable, delays may be classified as compensable or uncompensable.
An act or omission that delays a contractor by an owner or someone for whose acts an owner is liable causes a compensable delay, such as directed changes, changed conditions, failure to fulfill contractual responsibilities or conditions constituting constructive changes. If a delay is compensable, a contractor can recover performance costs and obtain a time extension.
Uncompensable delays, which may be excusable, are beyond a contractor's control and occur without fault or negligence by an owner. Examples are natural disasters, worker strikes and unusually severe weather. A contractor may be entitled to additional time but not additional compensation.
Whether the roofing contractor in the example would be liable for liquidated damages depends on whether the delay in installing the new roof would be considered excusable. If the delay is excusable, the contractor would not be liable for liquidated damages. He also may recover additional costs resulting from the delay if he can show its cause was compensable.
Interference
Just as there is an implied obligation in all construction contracts that a contractor perform his work in a workmanlike manner, there also is an implied duty on the part of an owner not to delay, interfere or hinder a contractor's progress.
Any action or inaction of an owner that delays a contractor from performing his work may be deemed owner interference and cause an owner to forfeit delay damages and be liable for additional costs incurred by a contractor.
Consistent with this concept, many courts have ruled that when an owner retains multiple prime contractors, the owner has a duty to coordinate their activities.
For example, in Amp-Rite Electric Co. v. Wheaton Sanitary District, an Illinois appellate court ruled that during a project with multiple prime contractors, an owner has an implied duty to reasonably use his contractual powers to enforce coordination among the contractors.
The court stated that to the extent the owner actively created or passively permitted a condition that he controlled and, as a result, made performance more difficult or expensive for the contractor, the owner breached his contractual duty and was liable for the contractor's additional costs.
Applying the principle of this case to the facts of the example scenario, the roofing contractor would not have been liable for liquidated damages if he proved he failed to complete the installation by the contractual deadline because of the EIFS contractor's work. By retaining two prime contractors and failing to properly coordinate their work, the owner created a condition that interfered with the roofing contractor's performance. Therefore, the delay experienced by the roofing contractor should be classified as excusable and compensable, entitling the contractor to a time extension and additional compensation.
As for the weather delays, a roofing contractor typically would not be entitled to additional time or compensation unless the weather was unusually severe. However, if the roofing contractor had encountered winter weather because of an earlier compensable delay, he may have been able to recover additional costs.
Tips for contractors
The following tips may help you reduce potential liability for liquidated or delay damages:
- Check the deadline stated in the contract, and be sure it is realistic. If the deadline is not realistic, the contract needs to be modified.
- Include a provision that stipulates the minimum number of days with conditions suitable for substantially completing the roofing work.
- Include a provision describing the substrate and job-site conditions suitable for roofing work to proceed.
- Become familiar and comply with contract requirements concerning delays. Contracts commonly will require you to give written notice of a condition that caused a delay soon after an event. Even if you are uncertain of a condition's effect, provide prompt, written notice to the general contractor or owner so you are not contractually precluded when the effect of an event or condition becomes apparent.
- Once you know a project is not proceeding as rapidly as anticipated, immediately determine the reason. Do not wait until the project's conclusion.
- When agreeing to a change order, consider the time effects. Too often, contractors exclusively focus on the dollar amount of change orders and do not request additional time to perform the extra work.
- Keep accurate, specific records of additional time and man-hours caused by conditions beyond your control.
Stephen M. Phillips is a partner with the Atlanta-based law firm Hendrick, Phillips, Schemm & Salzman.
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