Contract practice: What you should know
This week we’re looking at the core competency Contract Practice (T017). The competency covers a wide range of issues around contracts and how they are used in the construction industry. A candidate is expected to have a good understanding of this side of the business and for quantity surveyors in particular this is at level 3. It is not uncommon to get asked specific questions in relation to contract practice, so candidates need to have a good working knowledge of all key issues relating to contracts and how they work.
Here we focus on one of those issues, Liquidated and Ascertained Damages, and the type of questions that an APC assessor could potentially ask, what are they, what is their purpose, how do they work etc.
Liquidated and Ascertained Damages is an issue that quantity surveyors deal with regularly. So you will be expected to understand and respond in detail.
Often candidates are not asked about Liquidated and Ascertained damages directly. It is more common that candidates will be asked about a recent project they have been involved in and how they developed the contract strategy, why did they recommend a particular form of contract etc. As this discussion develops, you may get asked a question such as:
So the completion date was a key issue for the client in developing the contract strategy. What mechanisms exist under the form of contract you recommended to protect the clients’ position with regards to the completion date?
One of the issues you would be expected to highlight in your answer would be the Liquidated and Ascertained damages clause.
You should then be ready for a follow up question along the lines of:
Can you clarify what Liquidated and Ascertained Damages are?
Here you will need to demonstrate that you understand what Liquidated and Ascertained damages are, including:
• Genuine pre-estimate of a clients loss should the completion date be missed.
• Cost usually expressed per week or part thereof and identified in the contract.
• Damages cannot be construed as a ‘penalty’.
As we have previously identified competency at level 2 is generally focussed on having an application of knowledge and understanding – ‘doing’.
From a Quantity Surveying perspective this means demonstrating a working knowledge of the development and operation of Liquidated and Ascertained Damages clauses. Taking the level 1 questions a little further to level 2 candidates may well be asked questions along the following lines:
How did you actually set about advising the client on the level of liquidated and ascertained damages to insert into the contract? What issues did you take account of?
Here you will need to describe the process of developing a figure to insert into the contract and the method of calculating the damages - including issues such as:
• Loss of rent or other income
• Additional fees
• Fines from statutory bodies
• Costs imposed by other parties on the client
• Costs incurred by the client as a consequence of not having the building available (storage, rent of other premises, abortive costs etc)
• Any other costs that justifiably the client will incur if they do not have the building on the agreed date.
It may be worthwhile again clarifying that the figure cannot be construed by the courts as a penalty and thus the client needs to be realistic in what he identifies as potential costs. Demonstrate that you will question and interrogate the reason and logic behind each of the costs in order to ensure you are comfortable that they should be included.
What is the implication of inserting ‘nil’ in the appendix against the Liquidated and Ascertained Damages clause? What is the implication of leaving them blank?
Answering these questions will allow you to demonstrate that you understand how the clause operates and implications of ensuring that the contract is completed correctly.
Placing ‘nil’ against the Liquidated and Ascertained Damages clause effectively means there are no damages and the client is not entitled to deduct anything if the contract over-runs. If this is not what was intended then the client is clearly in a difficult position here, and the contractor will almost certainly argue that he took this into account when pricing the works.
If Liquidated and Ascertained Damages are left blank then the client can pursue unliquidated damages if they wish to do so, but would need to do this through the courts.
Level 3 knowledge is generally focussed on the provision of reasoned advice and depth of technical knowledge – ‘advising’.
You would therefore be expected to be able to draw upon practical experience of operating Liquidated and Ascertained Damages clauses in order to clearly demonstrate experience in advising clients in such matters.
Can the client still deduct Liquidated and Ascertained Damages even if he does not actually incur the loss identified in the initial calculation?
In essence yes – providing the calculation is not deemed a penalty and is a genuine pre-estimate.
What is the effect of an extension of time from a contractors point of view?
An extension of time serves a number of purposes as far as contractors are concerned, but in the context of this question it removes the liability for Liquidated and Ascertained Damages against the original completion date and sets them against a new completion date.
Can a quantity surveyor deduct Liquidated and Ascertained Damages from the valuation due to the contractor?
No – the QS, along with the other project team members can advise the client of the situation with regards to Liquidated and Ascertained Damages, but cannot actually deduct them. This is the clients responsibility.
Can you explain a bit more about unliquidated damages – what are they and how are they pursued?
As we have previously identified unliquidated damages tend to be something that are pursued through the courts and generally are demonstrated through the client proving actual loss in a specific set of circumstances.
Coming across a situation where unliquidated damages are claimed is not too common, but if candidates can demonstrate an awareness and understanding of the term, this will stand them in good stead during the assessment.
By Alasdair Thompson, divisional director responsible for Western Business Unit, Franklin + Andrews
Building's advice is intended as guidance only and should not replace study.