Delays in completing construction projects can lead to significant financial losses, strained relationships between contractors and project owners, and potential legal disputes. Building contracts will specify a contractual completion date by which the contractor must finish the works to achieve practical completion.
Typically, these contracts also include provisions for liquidated and ascertained damages (LADs) which are penalties incurred by the contractor for completing the works after the specified completion date.
What are Liquidated Damages?
Liquidated damages are pre-agreed, fixed sums payable if the defaulting party (the contractor) breaches the contract, typically by failing to complete the works on time. Unlike claiming for general damages for breach of contract, a court does not need to decide the appropriate level of payment with LADs. LADs allow the employer to recover liquidated damages in an agreed amount from the contractor without needing to prove the loss or damage suffered. This provides certainty for both parties regarding the contractor’s financial liability in case of delays. This clause benefits the employer and ensures clarity about the contractor’s risk and financial liability in the case of a delay.
Extension of Time (EOT)
However, it should be noted that most construction projects include an extension of time (EOT) mechanism, allowing contractors to formally request an adjustment to the completion date due to delays caused by events outside their control. Once all time-bar, personnel, and information provisions are satisfied, the contractor may be granted extension of time by the employer to enable the completion of the work within a specified period after the original completion date without incurring liquidated damages.
Under JCT contracts, events that entitle the contractor to an extension of time are called ‘relevant events’, while those entitling the contractor to loss and expense are known as ‘relevant matters’. In contrast, under NEC contracts, events that entitle the contractor to both time and money are referred to as ‘compensation events’. Additionally, there are ‘neutral’ events, where neither party is at fault. In such cases the contractor is entitled to time but no additional compensation for remaining on-site for longer than planned.
Extension of Time Events are specific to each contract but may include, among others, the following:
- Adverse weather conditions
- Changes in the scope of work by the employer
- Delays caused by the employer or other stakeholders
- Licensing delays
- Riots, civil commotion, terrorism
- Force majeure events, e.g. natural disasters
- Insured Events (without Contractor Negligence) e.g. fire, flood
Why developers cannot rely on LADs
In the event of an Extension of Time (EOT), the employer will not be able to claim Liquidated and Ascertained Damages (LADs) as the delay was beyond the contractor’s control, such as in the case of a natural disaster. Any costs, including future income streams payable to funders or debt servicing, resulting from the project delay will be the responsibility of the developer. This is where Delay in Completion insurance becomes crucial to the viability of the project.
Delay in Completion insurance
To mitigate these risks, Delay in Completion insurance (often referred to as DSU / Delay in Start Up insurance or Non-Completion insurance) can be purchased to provide financial protection for the project owner / employer / funder if the project is delayed beyond the scheduled completion date.
This insurance covers the financial impact incurred due to delays that are not the fault of the project owner, contractor, or a particular party i.e., insured events such as fire on site, flood, escape of water prior to practical completion. The cover triggers at the expected practical completion date and can cover revenue streams including loss of rent, alternative accommodation (key for a student accommodation schemes) and additional debt servicing costs.
Delay in Completion insurance covers the financial risks and losses caused by external delays (not necessarily the fault of the contractor). As noted above, in certain instances the contactor will be granted an extension of time under the terms and conditions of the chosen contract, and no LADs will be recoverable.
Like most insurance policies, Delay in Completion insurance has specific limits on the amount of cover / compensation it will provide, and the policyholder must carefully consider the expected project duration and potential delay risks when purchasing cover. The indemnity period is a key consideration and is often too short to provide the level of cover required. For example, a 12-month indemnity period would be insufficient for a 24-month scheme.
It is important to note that certain causes of delay may be excluded from the policy, such as planning delays, delayed materials, lack of resource, contractor insolvency / financial mismanagement and design related issues. Your team at Griffiths & Armour will discuss any exclusions with you, as understanding the exclusions in a Delay in Completion insurance policy is crucial for both contractors and project owners.
The policyholder should be aware of when the insurance will and will not respond and how relying solely on LADs will provide insufficient protection. Delay in Completion insurance is usually added to a contract works policy and it is key to consider the insurable interest of the parties involved. The contractor cannot add this coverage to their annual policy on behalf of the employer as it is not their financial exposure at risk.
We welcome the opportunity to advise on this area of insurance, ensuring the selection of appropriate coverage while effectively managing risks and minimizing financial losses wherever possible. For further information and support, please get in touch.
