Valuation matters: damages claims

We conclude our ‘valuation matters’ mini-series and our articles for 2024 with a focus on damages claims.

While there are some similarities with the contra charges topic I covered last week, I have distinguished the two in the same way as most contractors, where contra charges tend to deal with non-critical delay events and site issues, and damages claims relate to the failure to complete by the completion or a key/sectional completion date.

The starting point for damages, and this article, is the contract position; if you fail to perform, are you liable to pay liquidated or unliquidated damages? I will then cover extension of time-related issues, which are one of your defences to damages claims (the primary defence being completion by the agreed date), and I will conclude with some advice on quantifying unliquidated damages.

Liquidated or unliquidated damages

Some might say that you should always liquidate damages in a construction contract; why would you agree to anything different? That way everyone knows where they stand and the financial impact if they do not perform.

It is nearly always the case that the main contract will contain liquidated damages as a rate per day or week. This is because the employer can, with a reasonable degree of certainty, estimate its losses if the contractor doesn’t complete on time. I also expect that a client looking for a main contractor to take unliquidated damages might struggle to tender their project because the risk profile is too uncertain. The contractor wants to know where they stand, and it is an important consideration in the way they programme the works and price the tender.

When you step down a contracting tier and contractors engage with subcontractors, it tends to be the case that unliquidated damages are more acceptable. If a main contractor were to pre-estimate the entirety of its loss per week (including multiple other subcontractors), no subcontractor would sign up to it. With unliquidated damages, if the subcontractor fails to perform, then it will be liable for the contractor's damages that it caused; this may be all or part of the contractor's damages.

If you are tendering a project and considering this point, you need to take a rounded view of the risk profile rather than a binary one. What is the risk, what can you do to control the risk, what is outside your control, and what is acceptable to your business relative to the return you expect on the project?

If one day of delay has the potential to wipe out your entire margin and you are being pushed to agree to an unachievable programme, why bother?

EoT's

Your primary defence to damages is performing the contract in accordance with your obligations. A simple, but obvious, statement that I am not sure is always appreciated by contractors and subcontractors who sometimes default to blame rather than focusing on delivery.

However, you might be prevented or impeded from completing by the agreed date, in which case you would ordinarily be entitled to an extension of time. If you have agreed to a wide liability/indemnity definition for delay and unliquidated damages or you have agreed to an excessive liquidated damages amount per week, then you must be on top of your EoT entitlements.

You need a contract programme that can be impacted; you should notify when an event occurs that causes you an impact, and you should contemporaneously submit particulars demonstrating the delay impact of an event.

It is hard work, and people avoid it because other tasks tend to be easier, but failing to address these issues will only store the problem for later down the track. If you end up in a position where you are retrospectively seeking to demonstrate delay, using a programme that isn’t agreed upon, then you are in for a world of pain.

If you do the basics and have a structured approach to extensions of time, then, up to a point, they are manageable.

Quantifying unliquidated damages

A simple table with line items and amounts is not enough to substantiate damages claims. The number of times I have seen contractors, some of whom are among the highest profile in the UK, take this approach is a genuine concern both for the industry and the quantity surveying profession.

In simple terms, to justify damages claims, you need to show that there was an obligation, a party breached that obligation (cause), it had an impact and you can demonstrate the impact (effect), and you incurred costs (damage) as a consequence.

The onus is on the claiming party (the main contractor) to prove its claim, and it is not for the defending party (the subcontractor) to disprove the main contractor's claim. You would be surprised how many main contractor QSs struggle with this very basic concept.

Worse still, I see situations where the main contractor refuses to agree to a variation because the valuation is not justified, yet takes exception when asked to prove their claim to the same standard.

If you are substantiating damages claims, then you need to show that the cost was caused by the breach, and you need to establish the connection. A simple example is that the subcontractor finished late; they were on the main contract critical path and caused the main contractor to be on site longer. This caused the main contractor to incur time-related preliminaries, which the subcontractor is liable to pay.

If you demonstrate this cause-and-effect impact, then support your valuation with records and information to prove that the cost was incurred and that it was caused by the breach, then you have a good chance of proving your claim.

Final reflections

If you have agreed to liquidated damages, then it is fairly simple; if you miss the date and don’t have EoT entitlement, then you are paying. Keep on top of your extension of time entitlements.

If you have agreed to unliquidated damages, then your task as a main contractor can be difficult, as you need to disentangle programme delays, determine who is liable for which critical path delay period, and then apportion your costs accordingly. If you end up in a third-party process and you are not relying on contemporaneous analysis and evidence, then you will struggle.

If you are a subcontractor on the receiving end of a spurious and unsubstantiated claim, stand your ground and force the main contractor to prove its claim. Too often I see subcontractors jumping to disproving the main contractor's claim, but that would be dancing to their tune. Put them to proof and focus your efforts on substantiating your claims, rather than trying to disprove theirs.

Remarkably, that’s a wrap for 2024; 52 articles published covering a wide range of industry topics.

Thank you to those who have read and engaged with the articles; it has been much appreciated, and I wish you and your families all the very best for the festive period.

See you in 2025!

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