Liquidated damages – What’s the deal?
A member has recently written in to ‘What could possibly go wrong?’ asking about liquidated damages, justice and retribution.
Dear What Could,
We’ve just about finished a really great house for some very nice clients and we’ve both had to put up with a very difficult, very rude builder, who thinks he can get away with anything. The project is now over 3 months late and I would like to see the builder penalised and the client compensated for their stress and anguish. The client wants to claim liquidated damages. When I told the builder this they said this wouldn’t be fair because there hasn’t been any actual financial loss because of the delays. Would the client have to demonstrate actual financial loss to claim damages?
DEAR ARCHITEAM MEMBER,
There is a lot going on here, mostly under the heading of ‘contract administration’, it’s a big topic. The contract is your stock in trade, make sure you understand it, know and love it to the point where you can quote it verbatim. Should you sleep with it under your pillow? Yes. I’ve seen very experienced architects with the contract noted with tabs and highlighted passages especially for the trigger / time clauses. When asked about this they said they had a duty to the client to know what they are doing to protect the client’s interest (as well as their own) in administering the contract to be fair to all parties. Hard to argue with this.
TALK THROUGH THE PROS AND CONS.
It’s important to remember that ‘administering the contract’ is not just about bits that you like but the whole contract. You are not empowered to change the terms of the contract. If you don’t act appropriately, including liquidated damages, you could be subject to a claim by a party who has suffered loss by your action / inaction. It is the owner’s decision as to whether or not to enact liquidated damages, not the architect’s decision. The architect is required to notify the owner that it is their option to do so, but it is up to them to make the decision.
LIQUIDATED DAMAGES, THE LAW IS PRETTY CLEAR
It’s not about justice or retribution or a penalty, in fact they are specifically excluded and would void the damages if enacted. Liquidated damages are solely about compensation for a breach of the contract for late completion. The amount must be a genuine reflection of the loss that would be suffered by late completion. This must be estimated when the contracts are prepared and if there is no actual damage when there is a breach liquidated damages are still payable. To make sure the damages estimated are genuine, keep notes of the process and your assessment of how you calculated damages. If your client is going to rent while the building works are being undertaken, the likely rental costs for your client may be an appropriate amount. Make sure all tenderers are aware of the contract condition.
CONTRACT ADMINISTRATION – IF IT’S NOT YOUR THING DON’T DO IT
Contract administration can be tough and it’s not for everyone especially when you have a very difficult and very rude builder. If it’s not your thing don’t do it, it will stress you out and you may finish up with a claim on your hands. If you want to push on with it your first port of call is your judgment in assessing possible tenderers. Be more circumspect in the future; don’t want to dance with the devil again.
FINALLY AND IMPORTANTLY
This is not legal advice; you must always seek your own independent advice in all these matters prior to preparing contracts.
Peter Finn, architect
Disclaimer – ‘What could possibly go wrong’ is not an advice column, it is only general comment from ArchiTeam who are not aware of your circumstances with any issue that you may have. You cannot rely on these general comments, each member must make their own decisions about any action they should take and seek independent advice of their own if they are unsure.
Dear What Could Possibly,
My client says that it is not fair for me to invoice them for extra work that I’ve had to do with the additions to the project that they’ve made during construction. They say that it is should just be included in the overall percentage for the total cost of the project.
I feel a bit awkward about asking them to pay more for all the extra work that I’ve had to do. What is the right thing with this?
Of course, clients don’t want to pay, who does? But then you are not a charity. You are running a business that must make a profit and you have various bills to pay, maybe staff to pay and at home, there are mouths to feed. All this is paid for by someone paying you for your expertise and effort, usually costed on a time basis, either inhouse against the fee or an invoice for your time to the client.
It is the client’s project and naturally, they must pay for everything, as well as you.
As far as any ‘extra’ charges are concerned, what are the terms of your engagement? The charges are not an ‘extra’ if they are a part of your engagement for work outside the percentage fee. If necessary include the passage from the agreement allowing this with the invoice. Your agreement must have hourly rates for additional works which have been outlined in your fee proposal. In the initial meeting with your client discuss examples where these fees could be incurred. The client deserves all of the information to make an informed decision, and this also helps form mutual respect. There’s no benefit for anyone in mystery and misunderstanding. You also have legal obligations to the ‘consumer’, make sure you understand what they are. Where fees are liable let the client know before you do any work so that the client understands and can sign off.
If it is not part of your agreement this time make sure it is in the future. You are entitled to get paid for your work.
A director from a large well known and respected practice recently told me that they charge for every ‘extra’ now ‘wherever we can’.’ We didn’t use to do this; we always did things for the client at no charge.’ Why the change in attitude? He said that this is the result of being screwed down by project managers for cost and performance. For any work that might be outside the brief or approved documents etc. a variation claim is sent in, just like a builder does, and no work is done until it's signed off. He said he still doesn’t like project managers but feels a bit better about them now when they approve the ‘extras’.
Another architect that I spoke with said that they have additions such as yours quoted to the client on a time charge basis which is signed off by the client as a variation before any work is done. They said that before they adopted this process there were requests for variations where drawings were prepared and quoted by the builder, but the addition did not go ahead. Because the contract sum didn’t alter, there wasn’t a charge as per the usual percentage fee. This seems a bit too charitable. They now get a lot less of the ‘suck it and see’ approach from clients.
You are in the business of being an architect who provides a great value service and looks after the client’s interests and you are entitled to get paid for your work.
Disclaimer – ‘What could possibly go wrong?’ is not an advice column, it is only general comment from ArchiTeam who are not aware of your circumstances with any issue that you may have. You cannot rely on these general comments, each member must make their own decisions about any action they should take and seek independent advice of their own if they are unsure.