Keeping Things on Track: Performance Liquidated Damages in EPC Contracts
Performance Liquidated Damages (LDs) are a key tool in Engineering, Procurement, and Construction (EPC) contracts. They act as a pre-determined financial compensation for the Owner if the Contractor misses project deadlines. These LDs incentivize the Contractor to complete the project on time.
Ensuring Attainable Performance Guarantees
The contract should establish realistic performance guarantees. These guarantees should be achievable by the Contractor to avoid disputes. Additionally, the contract must clearly outline the consequences of failing to meet these guarantees.
This includes:
- Specifying the testing conditions, referencing the contract’s Technical Specifications.
- Mutually agreeing on reasonable timeframes to fix any deficiencies and conduct retests.
Remedies and Limitations
- Liquidated Damages as Sole Remedy: Performance LDs are typically the exclusive compensation for delays, representing a full and final settlement.
- ‘Make Good‘ Obligations: Any requirements for the Contractor to rectify issues should be practical and achievable.
- Termination Clauses: The contract should allow for contract termination (not outright rejection) in specific cases of performance failure, such as:
- Reaching the LD cap.
- Failing to fulfill the ‘make good‘ obligation after an additional agreed-upon cure period. This clause should be cross-referenced with the ‘Contractor’s Default’ clause for clarity.
Calculating and Setting LD Rates
- Quantification: LDs are typically calculated as a fixed daily amount or a percentage of the total contract value.
- Variable Rates: The LD rate depends on factors like project complexity, the Owner’s reliance on timely completion, and the projected impact of delays on their operations.
Entitlement and Limitations
If the Contractor fails to deliver on time, the Owner can claim performance LDs as compensation for delay-related losses. However, there’s usually a maximum limit (cap) on the total LDs the Owner can recover.
Distinguishing from Other Damages
It’s crucial to differentiate Performance LDs from other types of damages. Performance LDs address delays, while other damages (consequential or direct) address losses resulting from the delay, such as lost profits, reputational harm, or increased operational costs.
Created by iax, Enhanced by AI
Proudly powered by WordPress