Speaker 1 00:00:17 Hi al Jacob Austin here from QS.Zone and welcome to episode 60 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode, number 60, is about two words that no contractor or subcontractor ever wants to hear liquidated damages. And if you're new to the show, please do subscribe for more user friendly advice on all things subcontracting. So liquidated damages. That is one of those topics that can make or break your bottom line. And if you've ever been involved in a project where delays have occurred and they've spiraled out of control, and you've found yourself responsible for costs from the contractor. Then this episode is for you. We're going to dive into what liquidated damages are, how they can impact your business, and what you can do to protect yourself from getting hit with those sometimes hefty deductions. Now, in an ideal world, every project would start on time and finish on time, right? But if you've been in the construction industry long enough, you know that isn't always the case.
Speaker 1 00:01:30 And I say that tongue in cheek because delays happen, right? Disputes arise, variations to the scope are instructed, and suddenly the project is running way past the original deadline. And whilst some of this might be out of your control as a subcontractor, what happens when these delays to the project cause it to finish late? And by light I mean not just beyond its original completion date, but if there are any genuine client changes, then beyond the date that adjusts for those as well. And that's where the concept of liquidated damages comes in. So let's start by defining what liquidated damages are. In really simple terms, this is a pre-agreed amount that a contractor might have to pay the employer or the client if they fail to complete a project on time. It's a set financial deduction for each day, week or month that the project is delayed beyond the agreed completion date. And sometimes that number can even be down to the nearest minute. And that, to some degree, will depend on which kind of area within the industry that you're working in.
Speaker 1 00:02:37 And what it is, therefore, is to set the client right, as if the contractor hadn't caused any delay to them receiving their building. So let's say you're building a warehouse, and because that warehouse now finishes late, the client has got to hire some other place to store thousands and thousands of pounds worth of product. So there's obviously a rental cost that is incurred by that client until the building gets completed. And then there might be additional moving costs. Plus, if they're paying their own management team to manage the project, they might well have a weekly cost of that management team being prolonged. And the liquidated portion of the definition comes in because we need to translate that cost into the liquid cash that you would have to pay, or the contractor would have to pay to the client for them being light. So why does this matter to you as a subcontractor? Well, if the main contractor gets hit with liquidated damages because the project is delayed and you're the one responsible for that delay, you could be on the hook for those costs.
Speaker 1 00:03:44 And we're not talking about small sums. Liquidated damages can stack up fast and seriously impact your business. Now. Liquidated damages actually differ from general damages, which is something that would kick in if there was no liquidated damages clause in your contract. So what's the difference between the two? Well, that is all about certainty. Liquidated damages are pre-agreed and in the contract the amount to be paid for each week or maybe day is set in stone. And that's why you'll often see phrases like £5,000 per week of delay in your contract. The contractor knows exactly what they're on the hook for is the project runs late. On the other hand, general damages, which is, as I say, what applies if there is no liquidated damage clause, these are unlimited. And if there is a situation where the contract gets delayed, then the injured party, which is usually the employer, has to prove their actual financial loss caused by that delay. This will introduce the need to see paperwork to see invoices, and it also introduces a lot more uncertainty.
Speaker 1 00:04:54 It's something that the contractor can't manage. And this is sort of a case of better the devil you know, because at least, you know, with liquidated damages what the bill is going to be, whereas with general damages, that is all up in the air. But here's a kicker with liquidated damages, the amount payable is due to the employer, whether or not they suffer any financial loss at all. So if the delay doesn't really hurt the employer financially, say going back to our warehouse example, if they had their own building and they were actually replacing that with a different warehouse, a bigger one, and all it meant for them if they were delayed, was that they would have to hang on to that original building a little bit longer, assuming they own it outright, then there isn't any real cost to that. But once the liquidated damages are agreed, they don't need to incur that cost, but the contractor still has to pay that pre-agreed amount. So let's talk about how liquidated damages play out in real life.
Speaker 1 00:05:55 There are a few key points you need to understand to avoid getting blindsided by these deductions. First off, the term liquidated means a fixed or ascertainable sum, and you'll often see the phrase liquidated and ascertained damages or lads for short. For example, a contract might state that every week the project is late, £5,000 is deducted from the contractor's payment. That's the liquidated part, it's set that's agreed upon, and there's no more need to prove actual losses. And because we've got a price per week in effect, we then need to look at how do we calculate the period of time for those damages. So there has to be a start date for when the clock starts ticking. And usually this date is the date when the project was supposed to be completed. Taking into account any extensions of time and from there the period of delay is measured up until the actual date that the project is handed over. And it's fairly obvious that the period of liquidated damages is that period of delay. Now this is where it gets really relevant for you as a subcontractor.
Speaker 1 00:07:08 Most standard forms of subcontract don't contain liquidated damages clauses. So the reference that you see in your subcontract to liquidated damages is actually that from the main contract. And it's for good reason, because if the main contractor is late finishing a project, that delay might have nothing whatsoever to do with you or your work. But what if you are actually late and you're part of the project causes the main contractor to miss their deadline? Well, in that case, the main contractor can claim their losses from you. And this really turns into a big layer cake of different costs. Because if your delay causes the main contractor to be late. You're not just responsible for the liquidated damages that they owe the employer, but also the contractor's own costs for being on site longer and further costs for dealing with claims from other subcontractors who are impacted by your delay. So imagine the contractor owes £20,000 per week in liquidated damages to the client. On top of that, they're incurring their own costs for staying on site longer, and they've got subcontractors submitting claims to them for extra costs because the delay has prolonged their work, too.
Speaker 1 00:08:23 So suddenly your liability could add up to way more than that liquidated damages amount. And this is where the risk for subcontractors becomes really significant. Now that might set a few hairs running, but before they run off into the distance and get away from me, let's just talk about how you as a subcontractor can protect yourself. One of the best ways to do this is by securing extensions of time. If the delay isn't your fault, maybe it's down to bad weather, design changes, delays caused by other trades. You need to request an extension of time for that as soon as possible. Don't wait until the project is delayed to start that process. Now, I spoke about this in previous episodes, where I've spoken about obtaining extensions of time and submitting notices, and you've really got to think about the notice as a document to protect yourself from this risk. This risk of damages, delay costs, contra charges, and as soon as you can foresee a potential delay, you need to document it and notify your main contractor.
Speaker 1 00:09:28 You need to make it clear that the delay is not due to your own work. And this way, if the project runs over time, you've already laid that groundwork to stop yourself being blamed for the delay. And I've said it before and I'll say it again. You need records. Records, Records of everything. If another subcontractor is holding you up, you need to document it. If materials are delays, keep copies of delivery dates and correspondence with your suppliers. It might seem like it's a tedious, pointless activity, but it's only pointless if you don't need it and you don't know at that time whether you need it or not. And the fact of the matter is, having that paper trail can save you when it comes to proving the delay wasn't your fault. But if you haven't taken the records, you've got nothing. So what should you be looking out for when you're signing a subcontract and thinking about protecting yourself from liquidated damages? First and foremost, make sure you understand if and how liquidated damages might apply to you.
Speaker 1 00:10:33 As we discussed earlier, most subcontracts don't contain liquidated damages clauses, but that doesn't mean that you're off the hook. If you delay the project, the main contractor can still come after you for their losses, and this could include the liquidated damages they owe the employer. Plus that layer cake of other costs that they might incur as a result of that delay, such as extended time on site and prelims costs and associated claims from other subcontractors. So as you're reading your subcontract, clarify your responsibility. Make sure it's clear what your role is when your work is due to start and finish, so that you can take that away and resource the site properly. Vague terms can lead to misunderstandings. So if you're looking at your sub contract and you're not sure when the start date is going to be, or there isn't at least a window of when you might start and that clock starts ticking, then you need to ask for that to be clarified. On extensions of time, you need to make sure that there's a clear process in your subcontract for requesting those, and you need to know what circumstances you're able to ask for an extension, and if you are seeing a liquidated damages clause and show you understand the amount and under what circumstances those liquidated damages can apply to you.
Speaker 1 00:11:56 Of course, you don't want to find out later down the line and that come as a big surprise. Now, I've known contractors deal with liquidated damages in completely different ways. So let's talk about a couple of scenarios that you might see in your subcontract and what that might mean to you in terms of the risk that you're going to hold. So the most common scenario is that you find your subcontract contains some extracts from the main contract. And in there it specifies a liquidated damages sum. And let's say you're a plumbing contractor and you're carrying out some work to a school. And you've got a handover date of early August in your subcontract, in line with around about a week later in the main contract, and liquidated damages are stated as £1,000 per week for every week that the main contractor is late. He's a pretty cheap damages, but I'm keeping the figure nice and easy so I don't have to do any hard maths without the help of Excel. Now here's the issue. You as a plumbing contractor, finish your work late, but it's still in time for the school to open in September, and you ended up causing about A33 and a half week delay.
Speaker 1 00:13:09 So in this scenario, even though the actual job has been able to be finished before that September start date for the new school year, because you've got £1,000 written into your subcontract on the same in the main contract, liquidated damages apply and they're due to the employer in the amount of the thousand pounds a week that was specified. And on top of that, as we mentioned before, you've got the prelims, the other subcontractor claims that might come alongside it. So now let's look at another example. In fact, two examples that are quite similar but very different. So the next example the contract specifies that liquidated damages are nil £0. And it has that stated liquidated damages are £0. This is a bit of a weird place to be because on the one hand, the employer is saying that there are liquidated damages and that liquidated damages apply, but at the same time they're saying that they apply at £0 per week or day or whatever. And in this situation, if there were to be a delay caused, the employer can't then claim any liquidated damages at all.
Speaker 1 00:14:26 And the courts have backed this up because the employer has had the opportunity to specify the amount that they would lose if there was a delay, and they've specified that to be zero. And in that scenario, they also lose the opportunity to charge for general damages. So no money is going to change hands between the contractor and the client for that delay. But that doesn't mean that you can't be contra charged, of course, because you've still got those contractors costs for sitting on site longer and managing the work. Now, third and final scenario, let's say the liquidated damages clause in the main contract isn't filled out. There's nothing stated. It's blank. No sum of money, not even a zero. In this situation, this means the employer can't claim liquidated damages. But that doesn't mean there will be no damages at all. Instead, the contract has damages at large and rather than populating that with their genuine estimate of the loss that they would incur, they're leaving it blank. They perhaps thought it was too big an activity to try and determine it.
Speaker 1 00:15:41 So what they've said is like, I don't know how much it will cost if you delay the job rather than put some kind of guesstimate in there. Let's just leave it blank and I'll only charge you what it actually costs me to cover that period of delay. And on the one hand, there's no pre-agreed penalty hanging over the contractor's head for being late. But on the other side of that, the contractor hasn't really got any certainty over what the delay cost might be, and instead the client is going to come to them with their Sainsbury bag full of invoices to prove their actual loss for the late completion. And you can imagine the amount of work that goes into vetting all of that and deciding how much it's worth. Now, as you can imagine, the client probably wants to avoid all of that activity, painstakingly collating all of their invoices and tallying it all up. So the default position is for a specified sum to be included, and that sum needs to be a genuine price estimate of the loss that the client would incur for taking that building.
Speaker 1 00:16:47 Lite and many occasions has been argued over the level of liquidated damages included in the contract. And for me, it's a little bit of a sour grape situation, because if you're arguing about liquidated damages after you've signed the deal, then you're already too late and you're probably only really pissed off about it as the main contractor because it's now being deducted from your account. And oh no, it's unfair, it's too much. And whilst some judges have held that that needs to be a genuine pre estimate, and they've then later revisited the damages, similarly some judgements have been made to say look you guys can agree anything between the two of you and if you're stupid enough to sign up to that Mr. Contractor, then you're going to have to fork it out. But of course, for you as the subcontractor, by the time you're getting involved in the job, the liquidated damages are a done deal. So now that you know what you could be on the hook for, hopefully you've got a little bit more incentive to manage any delays, a little bit more proactively if they come about.
Speaker 1 00:17:55 And when it comes to managing the risk of lads as a subcontractor, that is about the most you can do, barring not working at all and not making any money, of course. So if delays are happening or they look likely, don't sit on that information. Bring it up, document it, keep your records. Make sure the contractor you other subcontractors are on the same page. Being proactive is your best defence against potential claims. So write that notice and protect your business. So to wrap things up liquidated damages can be a major issue if they're not managed correctly. While it might seem like something that only affects the main contractor. Delays that are even partly your fault can mean you taking some of that hit to your business. So understanding your contract, knowing your responsibilities, and staying on top of your timeline is key to protecting yourself. And if something outside of your control is causing delays. Make sure you request an extension of time and document every little step of the way. Remember, construction jobs are rarely straightforward.
Speaker 1 00:19:11 Things change. Schedules change, delays happen. But now, by understanding how liquidated damages work and how to protect yourself from them, you can avoid the financial pitfalls that can come with that late project delivery. My mission with the show is to help the million SME contractors working out there in our industry. If you've taken some value away from today's episode, I'd love it if you'd share that show and pass on that value to somebody else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. Thanks for tuning in. If you like what you've heard and you want to learn more, please do find us at WWW.QS.Zone, where you can subscribe to our training and support system for like minded subcontractors. In there you'll find how to videos, templates, interviews, and more. It's less than the price of a cup of coffee per day, and you can cancel any time or also on all your favourite socials at @QS.Zone. Thanks again! I've been Jacob Austin and you've been awesome!
