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Watch Out For This New Liquidated Damages Loophole By Mark Nagata

There’s a new argument contractors can make to sidestep paying liquidated damages. Unfortunately, a new standard published by the American Society of Civil Engineers might give contractors new footing to make this argument. This could result in more unnecessary claims and increased costs to defend them. Therefore, it’s important for owners to understand what the offsetting delay argument is and how to protect themselves.

How The Offsetting Delay Argument Works

The offsetting delay argument is quite nuanced. And to some respect, that’s part of what makes it so insidious.

Here’s an example I’ve used to help explain the argument. Let’s say you are building a school with a September 1st contract completion date. And let’s assume that contract has a liquidated damages provision.

The contractor delays the critical path by 60 days. When the project completes 60 days late, the owner would be entitled to assess 60 days of liquidated damages.

That’s pretty standard stuff. But here’s where the new argument comes in.

The contractor says, “Wait, your late selection of the cafeteria wall color in August delayed the cafeteria completion 10 days later than the September 1st contract completion date.  Even though the cafeteria work was not on the project’s critical path, your delay offsets a portion of my delay. Therefore, I won’t pay liquidated damages for 10 of the 60 days.”

What’s Going On Here

Over many years of CPM scheduling, certain truths became standard practice within the construction industry. One of them is that only delays to the critical path can delay the project. And the activities on that critical path are known as “critical activities.”

But if you change one of those definitions, you can change the outcome of any schedule analysis. For example, if you change the definition of “critical activities” to say they don’t have to be on the critical path, you could argue that activities not on the critical path delayed a project.

That’s exactly what’s happening here.  ASCE’s new standard changes a few industry recognized CPM scheduling definitions. And this results in the liquidated damages loophole known as the offsetting delay argument.

Why This Argument Is Unfair To Owners

On its face, the argument almost seems logical. If the owner’s actions (or lack of action) after the contract completion date delayed any of the work, why should the contractor be assessed liquidated damages when those delays occurred?

But unfortunately, the offsetting delay argument is unfair to owners because it doesn’t work both ways.

Let’s go back to the school cafeteria example. Let’s say the contractor is working with another owner. And let’s say that owner caused a 60-day delay to the project’s critical path. This time, the contractor’s painting work (which wasn’t on the critical path) took longer than planned and finished 10 days after the contract completion date.

You might think the owner could just say, “Your painting activity was completed 10 days later than the contract completion date, so we’re only granting you a 50-day time extension.” But under ASCE’s new standard, the owner is not entitled to the same consideration.

Suggestions for Owners to Protect Themselves from Offsetting Delays

The best protection against an offsetting delay argument is to make sure your contract properly defines specific CPM scheduling terms and includes a detailed time extension provision.

I recommended that your contracts include the following components:

  1. A “critical activities” definition that states a “critical activity” is an activity on the project’s critical path; the definition of this term should not rely on an activity’s total float value.
  2. A “critical delay” definition that states a “critical delay” as a delay that delays the project’s critical path and, thus, the project’s forecast completion date.
  3. The time extension provision should require the contractor to demonstrate its entitlement to a time extension by showing that the project’s critical path and, thus, the project’s “predicted” or “forecasted” completion date was delayed by an excusable delay as defined by the contract.
  4. A time extension provision that expressly prohibits the extension of time or relief of time-related damages (LDs) for delays that occur on a non-critical path.

We’ve Only Scratched The Surface

The offsetting delay argument is a complex and nuanced attempt to sidestep the contractor’s responsibility for liquidated damages. And it’s something you’re likely to see more of in the coming months and years.

I’ve evaluated delays on many projects. And I can see just how temping it will be for contractors, who are already behind on a project, to look to this argument as a way to reduce their exposure to liquidated damages.

This article just scratches the surface on a complex topic. If you want to learn more, ASCE’s full schedule Delay Analysis Standard can be purchased at this link. You can also read a published whitepaper about the problems with the offsetting delay argument here.

Mark Nagata is a Director/Shareholder of Trauner Consulting Services and is an expert in the areas of critical path method scheduling, delay and inefficiency analysis, and construction claim preparation and evaluation. He loves to get questions at mark.nagata@traunerconsulting.com.