USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
7.4 Management of Schedule-Related Risk Schedule-related risk is a significant issue for con - struction. However, there are various ways to mitigate the risk. Construction agreements typically contain liquidated damages provisions in which the owner may receive stipulated compensation if the project is not com - pleted by the date called for, together with additional costs and expenses that have been incurred by the owner as a result of the delay. The general contractor may however seek such protections from its subcon - tractors. Parties may also build in stipulated rights to extend timeframes under certain circumstances with or with - out additional compensation. For example, if certain unforeseen site conditions occur (eg, bad weather or “labour strikes”, or even pervasive illness delaying construction, such as COVID-19), the contractor may have the right to extend its deadlines. The parties can also avoid delays through regular communication, during which they devise contingen - cy plans, such as reallocating resources and adjusting schedules, or even modifying the scope of the work. 7.5 Additional Forms of Security to Guarantee a Contractor’s Performance The following are typical examples of additional secu - rity provided by contractors. Performance or Completion Bonds These are a form of surety bond that guarantees that the contractor will complete its contractual obliga - tions, including the completion of the project. If the contractor fails to do so, the surety company will cover additional costs required for the developer to
shared-risk, shared-reward agreement, which requires a high degree of trust and collaboration between all of the parties involved. 7.3 Management of Construction Risk Various devices can be used to manage and mitigate construction risk in a project, all of which may be sub - ject to various legal limitations and exclusions. Exam - ples are as follows. Contractual Indemnification This provides for one party to defend, indemnify and hold harmless the other party from certain losses or damages; for example, a contractor may be contrac - tually bound to indemnify the owner from personal injury suits brought by workers and subcontractors related to the contractor’s negligence. Warranties These are promises made by one party to the oth - er party regarding the quality or performance of the workmanship and materials used in the construction; for example, a contractor may warrant that its work will be free from certain defects and maintain a certain quality for a period of time following the completion of the work. Limitations of Liability These provisions limit the amount of damages that one party can recover from another party; for exam - ple, the contractor’s liability for the owners lost profits or business interruption may be limited to a defined amount or paid in a certain manner. Damage Waivers These typically provide for one or both parties to waive their right to recover certain types of damages arising from a breach of contract or other event. In construc - tion contracts, damage waivers most commonly take the form of a mutual waiver of consequential damages – such as lost profits or business interruption – agreed upfront by both parties. This limits each party’s expo - sure to direct damages only, providing greater cost certainty for both sides.
finish the project. A Letter of Credit
This is a financial instrument issued by a bank that guarantees payment to the project owner if the con - tractor fails in its performance. In the event of a default, the owner may draw upon the letter of credit to pay for the project’s completion, as needed.
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