'Liquidated Damages' (LDs)

Liquidated Damages (LDs) is primarily a performance clause tool. The supplier or contractor suffers financial penalties for not meeting contractual agreed to equipment delivery dates, or site contracts start/completion dates.

In my experience in heavy industrial projects, I typically table this clause for discussion in negotiations under certain conditions as listed below:

A.?????When reviewing bids for custom engineered equipment/services offered from ‘equally qualified and reputable' bidders, on occasion one vendor/contractor will advise their ‘manufacturing lead time’ (we will discuss this in a further post), or site contracts start/completion date as significantly less than their competitors. Of course, with a view to maintain projects schedule, such is attractive to my client. I will ask the vendor or contractor, ‘How can you deliver the goods or services 25% earlier than your 'also' reputable competitors? Please take us through your processes’.

Upon initial explanations, this could just simply be their recent custom fabrication experience of a similar product the vendor may have gleaned valued time saving lessons within their own unique manufacturing process.?On the site contracts side, efficiencies knowledge was gleaned at another site having similar scope.?

B.?????If the customer’s engineering, contracts/procurement, and construction representatives teams appear convinced, ask the supplier/contractor the following:

• ‘Timely delivery of your offered equipment or services start date is crucial to our project maintaining it's critical path schedule. Your 'at site delivery' date is attractive, and your stated confidence is high in achieving timely delivery. Can you guarantee delivery dates today here in this meeting'?
• 'Great, I will assume then your firm will not take exception to us imposing a liquidated damages penalties clause in the purchase order for late delivery, or services start/completions date. Such will make it easier for us to recommend your firm within our internal approvals & level of authorities process'.

If these questions are asked in a face-to-face meeting, watch for the vendor representative’s non-verbal reaction to this questions, and potential back peddling on milestones. While deciphering such is not a proven science, one should take note of it.

C.??????When the ‘liquidated damages’ clause is accepted (typically at 10%) it should not be structured into the contract or purchase order, as a 10% penalty imposed immediately after delivery is one day late. The penalty for being one day late, or one month late should not be the same. For example, structuring it at 2% penalty per week of delay incentivizes the supplier to mitigate his financial loss. Unless the supplier in swimming in cash reserves, he will want to avoid the remaining 8% of penalty losses still in play.

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#scheduleiseverything #criticalpath #performanceincentives #meetthedate

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