Deadlines and Delays
Deadlines and delays are No. 3 on the list of top ten construction contract terms. A construction contract will often have many deadlines, but one deadline looms largest: substantial completion. That’s because substantial completion is when the Work reaches the point where an owner can rent it, sell it, or work or live in it. And there’s usually a tight schedule for reaching that point.
The deadline for substantial completion is often also critical to satisfy obligations to third-parties: local government requirements for completion by a specified date, availability of public incentives (e.g., tax credits or subsidies for a “green” building), or refinancing a construction loan before a permanent loan commitment expires.
Areas we’ll cover here:
- Identifying deadlines
- “Excused Delays” that postpone deadlines
- Delays caused by an owner, or another, up-the-chain, contractor that postpone deadlines and increase contract prices
- Delay notices
- Delay damages
Identifying the Deadline
First and foremost, you must identify the deadline. You can either identify a specific date and time: March 1, 2013 at 5:00 PM local time at the project site. Or you can set a length of time that runs after a specified date or event: 360 days after the date of the contract or 435 days after the city issues the first building permit for the Work. If you use the second type of deadline, be careful to avoid controversy about when the time starts. And when you’re setting your deadlines, check to ensure they don’t expire on weekends or holidays.
Construction Delays
Nearly every project encounters delays. The bigger and more complex the project, the better the odds for longer delays. Delays pose three big issues:
- Who or what caused the delay and should those affected have expected that kind of delay?
- Will the delay postpone deadlines?
- Will the price be increased to compensate for additional costs imposed by delay?
Excused Delays
When an “Excused Delay” occurs, deadlines get postponed. Contracting parties often focus a lot of negotiation on what qualifies as an Excused Delay. Usually these are events, things that could not be foreseen or predicted before the parties entered into the contract. They’re often called force majeure (French for a “major force” that interrupts progress on the Work).
Sometimes the criteria for what qualifies as an Excused Delay is stated generally. And sometimes the qualification criteria is stated very specifically, identifying select events that, if they delay Work under only specified circumstances, will qualify as an Excused Delay that extends a deadline. Will these qualification criteria be exclusive, or may delays caused by other events also qualify?
Where you fall on the spectrum depends on what kind of project you’re working on, what your role in the project is (e.g., owner, prime contractor, subcontractor), and how much bargaining power you have when you negotiate these terms. Regardless, it’s usually a good idea to focus special attention on what qualifies as an Excused Delay and, to avoid controversies later, make it as clear as possible.
Another issue that Excused Delays bring up is whether the price will be increased for the additional costs that an Excused Delay imposes. You can say yes or no. Or you can classify Excused Delay and provide that if an Excused Delay of one type occurs, the price will be increased, but if the Excused Delay is of another type, the price will not increase. Of course, if you provide for an increase, you should probably also identify how that increase will be calculated.
Owner-Caused Delay
Some delays come from one of the parties. A classic example is delay imposed because the owner changes the project, a problem with the design reveals itself after Work is under way, or the owner defers making a critical decision. Subcontractors can find themselves in the same situation when a prime contractor (or another subcontractor up the chain), instead of the owner, makes an error or doesn’t make timely decisions.
What qualifies as an Owner-Caused Delay is often a contentious issue. It’s usually best to address it in the contract, before there’s any delays. A frequent issue is whether a delay caused only in part by the owner (or an up-the-chain contractor) qualifies, or whether the owner, or other contractor, must be the exclusive cause.
I tend to consider Owner-Caused Delay to be a special sub-category of Excused Delay. So, it usually postpones deadlines. And because the party imposing the delay is also the one paying for paying for Work, it’s usually fair to increase the price too. How much that increase should be is another issue best identified in the contract at the beginning, before any delays occur.
I often like to use a formula based on the additional cost of labor, material, and equipment the contractor incurs, plus a set percentage of that cost to compensate for overhead and profit. This is easier to do in a guaranteed maximum price contract because the parties have already identified what costs qualify as “costs of the Work” in the original contract and are used to accounting for and reporting it.
Delay Notices
Contracts often require a delayed contractor to give notice to their counterparty (e.g., owner, subcontractor) that they are delayed. There is often a deadline for giving this notice: usually a select number of days after the delay sets in. Failing to properly and timely give a delay notice will often waive the contractor’s right to postpone deadlines and increase the price.
The idea behind requiring these notices is ensure that delays are authentic. Owner, and contractors too, don’t want to reach a delayed completion of a project and then have the delayed contractor claim that completion isn’t late because the deadline was postponed by Excused Delays that occurred months, or even years, ago. Owners are wary of late completing prime contractors inclined to retroject all sorts of dubious reasons why late completion was due to Excused Delays. And prime contractors are wary of subcontractors doing the same.
But delay notice requirements have costs too. They can be the catalyst for frequent notices from the contractor that become a clerical headache, not to mention the polarizing effect they can have on the relationship between the contracting parties.
Delay Damages
Someone usually suffers damages if delays extend completion beyond its originally scheduled date.
- Owner Delay Damages – Owners may lose rent, tenants, sales, public incentives, or financing opportunities, just to name the top five. They may also have to pay additional interest on their construction loans
- Contractor Delay Damages – Contractors will often incur additional overhead costs and may lose the opportunity to engage other work because their forces are still held up on the delayed project
Like many other issues, it’s usually best to identify what is at stake if a delay occurs and address these issues in the initial contract before delays impose additional costs and either side suffers.
Many of the damages that arise from delay are considered consequential damages. Depending on what the parties’ pre-contracting communications and the language of the contract, it may be impossible to recover consequential damages. And if the contract includes an enforceable waiver of consequential damages, it will be.
Moreover, damages caused by delay are often dependent on the outcome of future events; some are really speculative. That makes them difficult to prove with “reasonable certainty.” And damages you cannot prove with “reasonable certainty” are damages you will not get.
Liquidated damages are often a good way to avoid consequential and reasonable certainty problems. But, as we’ve discussed in past posts, they have their own issues. So, you must use great care if you decide to put them in your contract.
