When a construction delay occurs, there is no question that the Owner suffers financially. But the extent to which an Owner can recover its loss of income from the Contractor, and, more importantly, minimize the risk that such delays will occur, depends largely on how the construction contract was drawn up – long before the first piece of heavy equipment rolled onto the site. As the result of the Perini case and the 1997 alterations to the standard American Institute of Architects (AIA) construction contract forms, Owners find that the damages they are able to recover in the event of a construction delay have been dramatically limited.
The Perini Case Leads to Changes in Standard Contract Forms
In 1983, Perini Corp. entered into a contract to manage the partial renovation of the Sands Hotel and Casino in Atlantic City, New Jersey. The guaranteed maximum price was $24 million and Perini’s agreed upon fee was $600,000. The project was delayed by nearly four months, forcing the Owner to keep part of the resort closed during the lucrative summer season. Even though the contract did not contain a “time is of the essence” provision, the Owner was awarded over $14,500,00 in damages for lost profits, including $4,000,000 in delay damages.
The Perini case roused the contracting community to action. At the urging of the Associated General Contractors of America (AGC), the AIA significantly changed the forms of agreements commonly used for construction projects. In 1997, the standard AIA General Conditions (Form A201) were revised to include a mutual waiver of consequential damages.
Consequential damages include those damages that were reasonably foreseeable or contemplated by the parties at the time the contract was entered into as the probable result of a breach.
However, in many instances, lost profits are not consequential damages, but are direct damages which are typically compensable. The AGC and AIA realized this, and therefore broadened the Owner’s waiver in the standard AIA form construction contract to include claims for loss of rent, use, income, profit, financing, business and reputation, and loss of management or employee productivity. For this reason, the form contract considerably undermines the value of the Contractor’s promise to complete the project on a timely basis, and may leave the Owner with no effective remedy if construction drags out past the agreed-upon deadline.
There are a range of strategies which Owners can use, in negotiating construction contracts, to confront these issues. One approach would be to modify or eliminate the waiver of consequential damages so as to allow the Owner to retain the right to recover from the Contractor any damages that the Owner can prove.
As contemplated by the AIA form, a second approach would have the parties agree upon a liquidated damages formula which fixes the Contractor’s exposure. This approach has the virtue of forcing the Owner to examine its possible losses in the event of a delay before the contract is executed. The Owner may even agree to a liquidated damages formula that does not fully recover the possible loss, on the theory that the agreed-upon formula is better than no remedy and no contract.
In the second installment of this article, which will be published in the next issue of the AECRE Newsletter, we will describe a third approach which can achieve the Owner’s objectives without making the contract negotiations contentious.