#7 - The Price of Delay

Delay is easily the most common reason for unpleasant discussions between the Contractor and the Company. Delay is relatively easy to identify, it normally only requires a look at the calendar, and it may have far reaching consequences for the Customer's project. Delay can cost you, a lot. However, when you negotiate the contract you normally only take a short look at the liquidated damages and in most cases, you only make sure that the percentage is more or less in line with industry practice (meaning what you had in you last couple of contracts). Here's a tip - there are many roads to Rome. If you only rely on a low percentage, you may as well fly first class. Comfortable in the short term, but it may put a strain on your finances in the long term.

The first thing you need to do is to take one step back and take a hard look at your scheduling. Proper and realistic scheduling is the most important tool for avoiding delay. Unfortunately, it is also difficult as customers often have high and sometimes unrealistic demands. Competition is fierce and it's easy to get entangled in a race, which may end up in a race to the bottom. Here's some actions that may be helpful. Make sure that you have sufficient float in your contract. Float is simply the total extra time beyond what you actually need. Contingency is another word for it. Stress-test your schedule by doing a proper risk evaluation of your schedule, involving resources outside Business Development.

So, now you have done your homework and are ready to start negotiations. Start by taking a look at the definition of delay and how your responsibilities are worded. You should of course only be liable for your responsibilities under the contract and for what you can control. Well, then you need make sure that the contract is clear on the allocation of responsibilities. Normally not too complicated, but have you remembered to check who is responsible for interface, who is responsible for Company Designated Sub-Contractors and for Company Provided Items? When it comes to the actual definition of delay it is generally a good idea to state clearly that you are not liable for any delay caused by the Company.

While you are at it, take a look at the definition of and wording surrounding the delivery date. It is normally a hard obligation with a hard deadline. But, have you considered whether the project is of a nature which could justify a softer obligation, something along the lines of "best endeavor"? If that is not possible, it is not unheard of to agree on a grace period before the consequences kick in. Lastly, especially if you are contracting under English law, please do try to avoid such wording as "time is of the essence". I'll explain that to you on a later occasion.

OK, now we know who is responsible for what and you may have been able to reduce your risk significantly already. But it doesn't stop there. We need to talk about consequences. Firstly, if you manage to include that liability should only apply if there are actual consequences for the Company you have come a long way. Secondly, remember to clearly define the consequences. There should basically be three consequences on the table. Liquidated damages, actual damages and termination. And it works like this. You should agree on either liquidated damages or actual damages. There are pros and cons with both alternatives, but you should not accept a combination of the two. Termination is normally unavoidable, but it should only kick in after the agreed maximum of liquidated damages has been reached. The cap on liquidated damages is of course also important in order to stop them from accruing. If not, you may very well end up paying your customer to take delivery of your goods. Whatever consequences you agree to, please do remember to clearly state the agreed consequences are the Company's sole remedy for delay.

Then we arrive where we started, and where most normally stop. Negotiating the percentage related to liquidated damages. There is no definite answer to how low or how high this should be. It depends. But you should of course aim as low as possible. However, there is another factor in this calculation that is often forgotten, one that can have a profound impact on your liability. And that is percentage of what? Normally you will find that the percentage is calculated based on the "contract price". That may be fine, for smaller and uncomplicated one-off deliveries. But what if the deliveries are complex, staged and involve several call-offs? What if you are negotiating a frame agreement? Long story short - you should think twice before you accept a calculation based on percentage of the contract price as such. It should rather be based on the relevant PO, the relevant line item or similar fragment of the contract. This will save you money and probably also make you sleep better at night.