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Timing, as people say, is everything, and the success of a development project often hinges on when it will be complete. Whether it’s a new business, a new school or some other project, delay can be disastrous for an owner. Here are five tips to reduce the risks of project delay.

1. Avoid terms that shift delay risk

The American Institute of Architects contract forms and others contain waivers of consequential damages or other terms that shift the risk of project delay onto the owner. Many people will argue that “consequential damages” include the owner’s damages for loss of use of the project, although some will argue that waivers of consequential damages are unenforceable in Oregon under ORS 30.140. Depending, then, on how the waiver is interpreted, an owner may be waiving the right to hold the contractor responsible for delay – even if the contractor is 100 percent at fault. If possible, an owner should resist risk-shifting terms.

2. Consider liquidated damages

To allocate risk between the owner and contractor, one alternative is for the parties to negotiate liquidated damages for delay. Liquidated damages allow both parties to know the risk of delay before construction begins, which addresses one of the common reasons given by contractors for a consequential damages waiver.

Negotiating liquidated damages, however, can be tricky. The amount should be a reasonable estimate of the actual damages that the owner would incur from the delay. Remember, though, that liquidated damages are by definition “liquidated” (i.e., settled). So, absent contract language to the contrary, the owner cannot seek delay damages that exceed the negotiated liquidated damages.

But, if done properly, liquidated damages present a way for both the owner and the contractor to feel comfortable with a project’s delay risk.

3. Be clear about what “completion” means

Construction contracts usually define “substantial completion” and “final completion.” Substantial completion, for example, is often defined as when the project can be used for its intended purposes. For some projects, though, a basic completion definition won’t cut it.

When drafting the contract, the owner should consider what hoops need to be jumped through so that the project can be used. Are there special lender or tax credit requirements? Does specialized equipment need to be commissioned and tested? Does the contract list all end-of-project deliverables (for example, waivers of claims from subcontractors, or as-built drawings)?

If it’s important for project completion, the contract should say so. If there’s no question about what “completion” means, it’s less likely there will be a dispute about what “delay” means.

4. Consider a performance bond

There’s no getting around it: Performance bonds are neither cheap nor a foolproof way to protect an owner from contractor default. However, if a contractor fails to perform, a performance bond can be helpful in getting a project back on track or compensating an owner for delay loss.

Remember, though, that bond terms vary wildly, and an owner’s rights under bonds will vary too. Some bond forms, for example, give only a short time to make a claim. Other bonds have difficult preconditions to making a claim. An owner who wants the contractor to acquire a bond should prepare an owner-friendly form and include it in the construction contract.

5. Keep a clean project record

Delay claims can be exceedingly complicated, and they often require a deep analysis of the project record to determine the causes of the delay. Maintaining a clean project record, therefore, can be critical to an owner successfully defending or asserting a delay claim. For example, an owner should approve changes in the work only through a carefully maintained system of change orders and change directives.

In another example, an owner should not let a contractor’s written statements about delay sit unanswered: If an owner doesn’t agree with the contractor’s perspective on why work wasn’t done on time, the owner should say so, in writing.

In another example, the owner should make sure the contractor submits, with each invoice, claims waivers for itself and its subcontractors, so the owner doesn’t have to worry about lingering delay claims. These and other record-keeping efforts are a headache, but if there’s a delay problem they could mean the difference between success and failure.

There’s no way to avoid all the risks of delay, but with careful contracting and project management, these risks can be reduced.

Stephen Kelly is an attorney in the construction and design practice group of Stoel Rives LLP. Contact him at 503-294-9448 or at [email protected].