I'm wondering what people are seeing in the market for liquidated damage terms in their construction contracts for commercial and multifamily projects. I'm curious if people see the market soften and terms are getting better than they were in 22-23
I'll start:
Market: Mountain West
Damages: $500/day after a 15-day grace period.
By law, liquidated damages are supposed to be a reasonable going-in estimate of what the actual damages due to a delay might be. If they're set high enough that they're clearly a penalty rather than a reasonable estimate of actual damages, they could be thrown out by a court as unenforceable. So, $500/day is not really a meaningful number in the abstract; you have to look at the size of the project and the expected rent levels, at a minimum, to estimate what your damages might be.
Makes sense - are to typically able to get a GC to agree to the values for lost rent, carry costs ect.?
I've never heard of anybody ever collecting on LD's, but it's good to have the mechanism in there.
I haven’t seen this myself either but I’ve heard from contractors that there is more inventive for the GC to work overtime to avoid the possibility of damages or getting caught up in a lawsuit. They may never pay them in the end but they might be more willing to spend there money to ensure delivery stays on schedule to avoid the risk all together.
When I worked for a GC we had a project (not one that I was on, thank god) that had to pay LDs. It was a total shit-show of a project, partially because of the developer's idiocy, but mostly the project management team was incompetent and leadership replaced them too late. I think they paid ~$20k in the end.
What exactly are liquidated damages and more specifically, in this context?
Liquidated damages are a cap to the damages a contractor can cause to the owner for delays in the project delivery (consequential damages) such as lost revenue, increased debt carry costs etc.
LD's in my experience usually are way smaller than any financial damage caused by delayed project. Plus there will be a bunch of outs for LD's, i.e. shitty inspector, plan check delays, supply chain issues, etc to protect the contractor. So much stuff out of their control and most contractors are usually incentivized to move quickly anyways and onto the next job.
If you can get them in there good but more of a minor deterrent.
We typically take our forecasted stabilized NOI and divide it by 365 days. This would tie out to a daily LD rate that we assign to the contract.
We've had multiple contractors fail to deliver on time and have never taken the LDs as we would spend more in legal fees then the value of LDs.
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