While Delay Damages Are a Very Real Risk, They Can Be Mitigated Through Thoughtful Risk Management Strategies.
By Sarah A. Johnson, Esq.
A design error can, and often does, lead to significant hard costs, i.e., additional material and labor costs. The hard costs resulting from a design error are typically easy to recognize and calculate. However, design errors can also result in soft costs, which are harder to substantiate and calculate. One category of such soft costs is damages resulting from a delay in the construction project. Damages for delays in a construction project can be significant and include interest on a construction loan, lost rent, and/or the average daily costs for each day of delay, as well as total excess labor costs over the amount initially budgeted, among others.
In Skidmore, Owings & Merrill v. Intrawest I Limited Partnership, the Court of Appeals of Washington upheld the jury’s award of interest on a construction loan as damages in relation to delays caused by an architectural firm on the construction of a high-rise building complex.1 The case involved a claim by the architectural firm against the developer to recover outstanding fees for its services and a counterclaim by the developer for negligence and breach of contract against the architectural firm, seeking to recover cost overruns and damages for delays on the project.2 The architectural firm provided plans that were only 65% or less complete, despite representing that the plans were 90% complete, and was aware that the developer would rely on the plans to establish a guaranteed maximum price (“GMP”) for construction.3
The GMP proved to be inadequate as construction progressed because the architectural firm’s designs required extensive structural, electrical, plumbing, and mechanical changes, and construction was completed more than two and a half months behind schedule.4 The jury awarded not only a certain amount of cost overruns to the developer, but also $252,088 for interest on the developer’s financing loan incurred during the project’s delay.5 The court found that interest on money borrowed to finance a construction project, accruing while the project is delayed by an architect’s supplying incomplete designs, was a proper measure of damages in the case.6
In Miami Heart Institute, Inc. v. Heery Architects and Engineers, Inc., the United States District Court for the Southern District of Florida awarded lost rental value as delay damages.7 The case involved a claim for breach of contract by the hospital owner against the architectural firm that designed a new hospital building.8 One of the old hospital buildings was demolished so that a new hospital building could be built in its place.9 Patients were transferred to other older buildings on the hospital’s campus while the construction proceeded.10 The new hospital building was scheduled to be completed in November 1983, but was not actually completed until September 1984 due to errors and omissions in the architectural plans and specifications.11 The court found that the proper measure of damages for the hospital’s loss of use of the new hospital building was the difference in the reasonable rental value of the new hospital building and the older hospital buildings that remained in service during the construction.12
In McDevitt & Street Company v. Department of General Services, the Court of Appeal of Florida examined the recommended order of a hearing officer, awarding a general contractor damages for delays and cost overruns allegedly caused by the State’s architect in the construction of a building at a university.13 The hearing officer found that the general contractor was entitled to the average daily cost of the construction for the number of days that the project was delayed due to the actions or inactions of the architect.14 However, the general contractor argued they were entitled to the difference between the sum the general contractor had budgeted for labor costs plus change orders for extra work and the sum they had actually expended for direct labor costs.15 Although the court remanded the case back to the trial court for determination as to whether the amounts actually were reasonable and whether the excess direct labor costs were attributable to the general contractor or the architect’s delays, they approved of the methods for calculating delay damages generally.16
As these cases show, delay damages are a very real and significant risk for design professionals. Engineers should consider the possibility of such delay damages both prior to accepting work and during ongoing services. One way to address the possibility of such damages is to include language in the engineer’s contract, prohibiting the recovery of such damages. Courts have found such clauses waiving delay damages to be enforceable.17 As such, the inclusion of such clauses can be an effective way to reduce the engineer’s potential liability.
Additionally, engineers should consider the possibility of delay damages while performing their services, and act in a way that minimizes delay damages where possible. Engineers may be able to expedite certain services when they recognize the impending threat of delay damages.
Further, engineers should be careful to accurately estimate completion time and be cautious when representing the completeness of plans. It is generally more difficult to adjust or correct issues or expectations after the fact than it would be to be realistic in the first instance or request extensions.
Finally, engineers should make it clear that where the timeframes involved depend on plan check and review by municipalities, they cannot guarantee completion or permitting by a certain date.
1 Skidmore, Owings & Merrill v. Intrawest I Ltd. P’Ship, No. 35195-8-I, 1997 Wash. App. LEXIS 1505, *2-3, 4-5, 13 (Wash. Ct. App. 1997).
2 Id. at *5.
3 Id. at *3-4.
4 Id. at *4-5.
5 Id. at *5-6.
6 Id. at *12-13.
7 Miami Heart Institute, Inc. v. Heery Architects & Eng’rs, Inc., 765 F.Supp. 1083, 1086 (S.D. Fla. 1991) (applying Florida law).
8 Id. at 1084.
9 Id.
10 Id.
11 Id.
12 Id. at 1086.
13 McDevitt & Street Company v. Dept. of General Servs., 377 So.2d 191, 192 (Fla. Ct. App. 1979)
14 Id.
15 Id.
16 Id.
17See e.g., Bates & Rogers Constr. Corp v. Greeley & Hanson, 486 N.E.2d 902, 904, 907 (Ill. 1985) (enforcing a contractual provision waiving delay damages); Atlantic City Assocs., LLC v. Carter & Burgess Consultants, Inc., 453 Fed. App’x 174, 178-80 (3d Cir. 2011) (applying New Jersey law) (enforcing a contractual provision waving consequential damages and finding that the subject delay damage constituted consequential damages and were thus not recoverable).
