LIQUIDATED DAMAGES

  In prior articles we have discussed what liquidated damages are and how to implement them into your contract documents, but there was only a brief discussion on how to enforce this clause. We are even hearing that some entities do not believe the clause works because they do not know how to apply the damages.

The phrase "liquidated damages" means that the contractor for construction or services and the owner/ entity have agreed that if the contractor does not perform the functions specified in the contract, the owner is entitled to pre-arranged, reasonable damages caused by that breach. In order to take advantage of this clause, there must be a project manager or administrator diligently monitoring the contractor's performance. This administrator must have a personality or desire to enforce all provisions including the liquidated damages clause without hesitation.

The simple enforcement procedure is as follows:

  1. Place the contractor on notice that the contractor's performance is heading toward the application of liquidated damages, and send a copy to the bonding company.
  2. Notify the contractor on the first day that the liquidated damages commences.
  3. Summarily report to the contractor immediately after the deficiency has been corrected, and provide the total amount of liquidated damages that were applied.
  4. Subtract the liquidated damages amount from the total contract price, and/or deduct that amount from the next invoice submitted by the contractor.

This last step can be accomplished in several ways by the contract administrator. If there is a purchase order issued to the contractor, then send out a corrected purchase order that indicates the change in the dollar total the contractor is entitled to receive. This will help prevent accidental full payment of the original amount by the finance or accounting staff. If the project is a construction project or similar service, then a change order is appropriate. In standard procedures, a change order or amendment to a contract is mutually agreed upon by all parties. In liquidated damages situations the contractor may not want to sign a document that reduces his/her fee, so the owner's administrator should process it as if the contractor had signed it, but make a note that it was not signed.

If the project has bonds, such as performance, labor or material bonds, the administrator has a fiduciary responsibility to copy the surety with all correspondence, including notices, change orders, problems and resolutions. Most of the time these bond providers will be the administrator's ally if the administrator is acting within the scope of the contract.

If the project administrator does not dutifully keep the contractor informed about the status of the application of the liquidated damages, or is not acting within the provisions of the contract and the scope of responsibility, or the contractor feels that he/she has been wronged, then the contractor has the burden of taking the objection forward to the review process required by the contract. This could be a formal hearing, arbitration, or a legal action which will test the wording of the contract as well as the procedures and actions of the administrator.

The liquidated damages clause is one of our best contract enforcement tools, and should be included in more contract situations.

© 1998 by Donald L. Woods, All Rights Reserved