A major City of Edmonton construction project is behind schedule and the general contractor will have to pay thousands of dollars per day in late-payments.
Beginning in June, Acciona/Pacer Joint Venture, the general contractor on the new Walterdale Bridge will start paying the city $10,000 per day.
By the time the bridge opens a year from now, the bill could add up to more than $5 million.
"Penalties – more properly termed liquidated damages – on major projects such as the bridge can be as much as $10,000 to $15,000 per day," said Byron Nicholson, director of special projects in the City of Edmonton transportation services’ roads design and construction branch.
The opening date for the new bridge over the North Saskatchewan River at 105th Street had been pushed back a full year, from fall 2015 to fall 2016.
The steel needed to build the bridge is constructed in South Korea and was delivered to Edmonton months behind schedule.
According to Acciona/Pacer Joint Venture, it is unable to meet project milestones without the steel on site. The contract states that the construction schedule and steel delivery, including penalties for schedule delays, are risks that are borne by the contractor.
Speaking in general terms, and not referring specifically to the Edmonton bridge delays, Marc MacEwing, a lawyer with Shapiro Hankinson and Knutson Law Corporation in Vancouver, said it isn’t standard practice for construction contracts to contain provisions imposing liquidated damages for delays or providing a bonus for early completion.
"The standard practice is that a date is identified in the contract for substantial completion," MacEwing said.
"If the contractor doesn’t achieve that date, as reasonably adjusted for delays beyond the contractor’s control, then he is in breach of contract and is potentially liable for damages to the owner that a court would find reasonably flow from that breach."
He said that a liquidated damages clause is sometimes added to a standard owner-contractor contract, with or without a corresponding bonus provision.
"That could happen if a project has a particular sensitivity to time, in order to add some focus and extra incentive to the project," MacEwing said.
"The amount of the liquidated damages will be specified in the contract, usually at a daily rate."
Bill Preston, a lawyer with Robertson Stromberg LLP in Saskatoon, said the use of liquidated damages/penalty clauses in the construction industry has waxed and waned.
"They originated in the oil patch in Alberta, where there are large, complex and expensive projects that need to follow a tight schedule," he said.
On projects worth more than $1 million, Preston said a standard penalty clause is about $10,000 per day.
"Penalty clauses were once popular, but they are used less frequently now, at least in Saskatchewan," Preston said.
"I estimate that fewer than 15 per cent of construction projects have penalty clauses in them."
One of the drawbacks of the clauses is that owners can enforce them only by going to court
"Most owners prefer to use a procurement model that assures competent site leadership – general contractor, designer and major subcontractors, usually mechanical and electrical – that can’t be changed," Preston said.
Instead of penalty clauses, owners are also turning to integrated agreements.
"An integrated agreement is when an owner sits down with site leadership and works out a deal whereby direct costs are paid during construction," Preston said. .
"And they’ll work out an agreement by which a generous margin – about 15 per cent – goes into a risk pool."
He said integrated agreements have been a success.
"It means that everyone must get along well so that they don’t lose their profit," Preston said.
"It sets up an economic dynamic that encourages everyone to co-operate."
He said the flip side of penalty payments – bonus clauses – are seldom used.
"Fewer than 10 per cent of construction contracts have bonus clauses," he said.
"They are sometimes used in private, non-governmental contracts, where there is lots of innovation and therefore some uncertainty about construction schedules."
Preston said the only function of a bonus clause is to obtain completion of a project on schedule.
"They really aren’t effective if the construction schedule isn’t being met," he said.
"On-time completion is driven by the trades, not the general contractor."
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