Don’t Get Trapped Paying for Owners’ Delays

Everyone knows that project delays increase the project build cost for both contractors and owners. Owners may face higher loan carrying costs, loss of revenues associated with not being able to use the building, or holdover costs from extending leases at old facilities. With delays, contractors face extended general conditions costs, protracted equipment rental costs, and depending on the timing of the delay, things like increases in material costs. 

Who ends up footing the bill for such costs?  The answer is not so clear cut because it often depends on the terms of your contract and how you manage the project regarding on-site work and your contract terms.

There are three types of project delays related to the acts of the contractor and owner.

Contractor Caused Delays:

These are delays caused by the contractor or subcontractor when there have been no acts (or omissions) by the owner or its design team that have hindered the progress of the work, and no other events or conditions delaying the work that are out of the contractor’s or a subcontractor’s control, the most common are  subsurface obstacles, differing site conditions or inaccurate plans. For contractor-caused delays, the contractor will be responsible for increases in the cost of performing its work, as well as actual or liquidated damages suffered by the owner due to the delay.   

Owner Caused Delays:

These are delays caused by the owner and/or the owner’s design team.   Events causing delays that would commonly be blamed on the owner (or its design team) include failing to get permits issued in a timely manner for a design-bid-build project, making changes after commencement of construction, failing to respond promptly to requests for information (RFI’s), and deficient plans.  

Concurrent and Force Majeure Delays:

The term “concurrent delay” often refers to two or more independent events that cause a delay to the work over the same period of time, whether over the exact same duration of time or over a partially overlapping period of time.  When an owner-caused delay and a contractor-caused delay are concurrent, while the completion date is often extended usually neither party can make a claim against the other for the costs or damages either one incurs – this makes sense.

There is usually a similar outcome for a force majeure delays. Force majeure delays are delays caused by an event that is not in the contractor’s or owner’s control. Many contracts define what is considered a “force majeure” event, such as acts of God or nature (i.e. flood, fire, earthquake); war, invasion, hostilities, riot or other civil unrest; government order or law; action by any governmental authority; strikes; epidemics and pandemics; and states of emergency; and any similar event beyond the reasonable control of the party claiming a force majeure impact.

As with concurrent delays, most contracts allow an extension of time for force majeure events, but no additional compensation to the contractor for the delay, and the owner cannot assess delay damages (whether actual or liquidated damages) for the delay.

Two Contract Terms That Can Transfer the Risk of the Delay:

There are two important contract provisions that can interfere with the common theory that (1) for an owner-caused delay, the contractor would naturally get more time to complete the project as well as receive compensation for extra costs due to the delay, and (2) for a concurrent or force majeure delay, the contractor would at least get more time to complete the project.

The first provision that many contracts include is a “no-damages-for-delay” clause. This is a clause under which a contractor will not be compensated for costs it incurs due to delays to its work caused by the owner or others.  Under this clause, the contractor’s remedy for owner-caused delays is limited to an extension of time to complete the project.  If the contract has a no-damages-for-delay clause, then even when the owner is the direct and sole cause of a delay, the contractor will end up paying for the delay because it will have to absorb the time-related costs that increase because of the delay, such as costs associated with rental equipment, jobsite trailers, temporary fencing, job-site supervision, and even increases in material costs. 

The second type of provision causing the risk of delays to shift to the contractor are the notice provisions in the contract. Notice provisions provide deadlines for a contractor to advise the owner that something is delaying its work. If the contractor does not meet the deadline, then often they waive their right for more time or money. And, failure to provide timely notice of delay may result in the owner asserting delay damages against the contractor.

Let’s look at an example:

Suppose a Contractor enters into a contract that states that “Contractor shall be liable to Owner for liquidated damages in the amount of $1,500 per day for each day past March 1 that the project does not reach substantial completion.”  The contract also includes a provision that says “Contractor must submit a written change order request to Owner for an increase in time or increase in cost within ten (10) days after Contractor first recognizes the condition giving rise to the request, and such request must include an estimate of the impact to the cost of the work and the project schedule.”  

As the project progresses, Owner makes various changes that clearly cause a delay in the project and, at one point, work comes to a standstill for three weeks due to a plan recheck because of the changes.  Despite its work obviously being delayed, and despite change orders being issued to increase the cost of the work due to the design change, Contractor never submits a request for a change order for a time extension nor does the Contractor make sure a time extension is included in the issued change orders.  The project reaches substantial completion by April 15.  Owner then sues Contractor for $67,500 because substantial completion was met 45 days later than the substantial completion date stated in the contract.  Contractor’s argument in its defense is that Owner is not allowed to assess LD’s for delays the Owner itself caused. 

While the Contractor’s defense seems pretty solid on a practical level, there is a real possibility that the Contractor will lose on this defense.   This is because the Contract’s substantial completion date of March 1 was never changed.  The Contractor never bothered to submit a change order request to try and get the substantial completion date extended. 

Under this situation, a Court could make a ruling that, because substantial completion occurred 45 days after the March 1 deadline, the Contractor owed LD’s in the amount of $67,500.  Under these circumstances, the Court would not analyze the cause of the delay.  Instead, the Court would merely look at the fact that the substantial completion deadline remained as March 1st and then assess as many days of LD’s as the project was delayed past the contractual deadline.  Had the Contractor at least requested a change order for an extension of time, even if the Owner rejected it, the Contractor would have been allowed to defend itself by arguing that the Owner caused the delays and wrongfully denied the Contractor’s request for the change order extending the time.  This is a hard pill to swallow for any Contractor!

The moral of this story is: make sure your contracts do not rob you of the ability to charge extra costs for delays and make sure you understand the notice deadlines so that you don’t end up unexpectedly paying for an owner’s delay