November 12, 2007

EDITOR'S NOTES

Incentive and disincentive clauses are often financially compelling reasons for contractors to finish on schedule. For example, on two of the seven major heavy highway projects to restore the collapsed double-decked Cypress Freeway in Oakland, Calif., after the 1989 earthquake, the combined incentive on the largest contracts was as high as $9 million, which the contractors collected. Had they finished late, the disincentive on each project would have been $50,000 per day.

Disincentives, or stipulated damages, are not arbitrarily decided. For highway projects, the Federal Highway Administration has created a calculator to help municipalities calculate daily road user costs associated with construction. In this week’s first case, the Louisiana State Department of Transportation and Development used that calculation as a starting point when determining its daily disincentive for late completion. When the contractor balked at the $10,000 per day damages assessed against it for late completion, it argued that the department had not suffered real financial damage. The Louisiana First Circuit Court of Appeals ruled, “The purpose of a stipulated damages clause is to fix the measure of damages in advance and to constrain the timely performance of the principal obligation. It is not necessary ... to show pecuniary or other actual damage to enforce the clause.” As such, it ruled that the fees were reasonable and enforceable.

Also this week, we see what happens to a subcontractor that fails to provide timely notification of price changes on materials. And, a subcontractor is able to secure payment on a project using a theory that it was a third-party beneficiary.

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