A damages rate is usually tested against the contractor’s preliminaries. The client does not pay those for a week the contractor is late. It pays interest on its facility, and that is the number the rate should be set against.
Pemberton Yard’s contract sets liquidated damages at 14,500 a week. A week of interest on the client’s own development facility, fully drawn at completion, is 34,640. The rate covers 41.9 per cent of the interest alone, and it stops covering the interest at any draw above 41.9 per cent of the facility. The book says the rate is short by 8,565 a week. On the client’s own figures it is short by 20,140.
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Chapter 10 calls the damages rate “under-liquidated on the client’s own numbers” and proves it by setting 14,500 beside the contractor’s time-related preliminaries of 23,065 a week. The conclusion is right and the comparison is the wrong one. Preliminaries for a week the contractor is late through its own fault are the contractor’s cost: the client does not pay them for that week. What the client does pay, every week the building is not handed over, is the interest on the money it borrowed to build it. The chapter adds that the shortfall is “wider still” once the debt at 7.9 per cent is counted, and stops there. The third case in the companion files puts the figure on it.
The appraisal sizes the development facility at 65 per cent of land, the contract sum and fees at 9.8 per cent of construction: 0.65 × (6,200,000 + 26,301,102 × 1.098), which is 22,801,097. At 7.9 per cent a year, a week of interest on it fully drawn is 22,801,097 × 0.079 / 52, or 34,640. The book’s appraisal charges finance at an average drawn share of 60 per cent over the term, and at that share a week costs 20,784.
| Benchmark for a week of delay | A week | Damages rate | Short by |
|---|---|---|---|
| Time-related preliminaries (the book’s comparison) | 23,065 | 14,500 | 8,565 |
| Interest at the average drawn share of 60 per cent | 20,784 | 14,500 | 6,284 |
| Interest with the facility fully drawn at completion | 34,640 | 14,500 | 20,140 |
| Draw at which a week’s interest equals the damages rate | 41.9 per cent |
The full draw is the one assumption the case adds, and it is marked ADDED wherever it appears. It is the natural reading: a late building is a finished building, and a finished building has drawn its construction loan. The 60 per cent average belongs to the whole term, when the early months carry little debt; it says nothing about the week after the completion date. Even on the average, though, the rate is short. The break-even draw of 41.9 per cent is simply 14,500 divided by 34,640, and a facility that has paid for a finished building is unlikely to be drawn that little on the day the building should have been handed over.
Preliminaries are the wrong benchmark twice over. They are not the client’s cost for a culpable week, and on this scheme they understate the client’s cost by 11,575 a week (34,640 less 23,065). A rate written to match the contractor’s site overheads will look generous in the tender review and still leave the client paying most of its own delay.
The contractor finished 14 weeks late and carried an extension of time for 11 of them, so 3 weeks sat at its risk. At the contract rate the client recovered 43,500, which is the liquidated damages line of the bridge. The same three weeks at a rate equal to the client’s own weekly cost would have recovered 103,920.
| At 14,500 a week | At the client’s 34,640 | |
|---|---|---|
| Weeks at the contractor’s risk | 3 | 3 |
| Damages recovered | 43,500 | 103,920 |
| Case A final account | 29,153,363 | 29,092,943 |
| Cap, 5 per cent of the contract sum | 1,315,055 | 1,315,055 |
| Weeks of contractor delay before the cap binds | 90.7 | 38.0 |
Sixty thousand is a rounding error against a gap of 2,852,261, and that is the chapter’s point about credits: nothing the client recovers at the end of a contract repairs what it lost at the start. The second line of the table is the more interesting one. At the contract rate the cap needs 90.7 weeks of culpable delay to bind, nearly the whole 94-week contract period, so as written it is decorative. At a rate that reflects the client’s loss it binds at 38.0 weeks. A cap only does work once the rate beneath it is honest.
The damages line is the visible part. The larger part is the finance the static appraisal leaves out altogether. The appraisal charges interest over a fixed term of 2.4 years, and a building that completes 14 weeks late carries 14 more weeks of debt that the term does not see. Fully drawn, that is 14 × 34,640, or 484,962.
| Amount | |
|---|---|
| Interest on the fourteen late weeks, facility fully drawn | 484,962 |
| Damages recovered for the three culpable weeks | 43,500 |
| Damages had no extension been granted, all fourteen weeks | 203,000 |
| Case A profit on cost at the final account, as the appraisal prints it | 8.59 per cent |
| With the late weeks’ interest counted | 7.34 per cent |
Counting the interest takes delivered profit on cost from 8.59 to 7.34 per cent, another 1.25 points off a scheme underwritten at 17.40 and already well below its 15 per cent target. The book declares the omission and its direction; the case gives its size.
The non-obvious line is the third. Suppose the contract administrator had refused every extension and the client had recovered damages for all fourteen weeks: 203,000. That is still 41.9 per cent of the 484,962 of interest those weeks cost. The ratio does not depend on how many weeks are late or how many are excused. It is fixed the day the rate is typed into the contract, as 14,500 over 34,640, and no amount of vigour in administering the delay can move it.
The extension weeks are worse again for the client. Chapter 14 prices a week granted as an extension at 37,565 in the account: 23,065 of preliminaries paid to the contractor plus 14,500 of damages the client can no longer levy. The sensitivity table confirms it. Moving the extension from 0 to 11 weeks raises the movement from 2,439,045 to 2,852,261, which is 413,216, or 11 × 37,565. And the client’s own interest runs through those weeks on top, because a week excused to the contractor is still a week the building is not sold.
The damages rate is one of the few figures in a construction contract that the client writes alone, before signature, from its own information. The case’s conclusion is to write it from the appraisal rather than from the tender:
On Pemberton Yard the first three steps give 34,640 a week against the 14,500 in the contract. A rate is a pre-estimate of loss only while it is being set; once the building is late it is a number in a claim, and the arithmetic above is no longer available to anyone.
The case is Case_2_Damages_As_A_Pre_Estimate.xlsx inside Three_Cases.zip. On the sheet 1. The damages rate, cell C24 is the facility, C25 the week of interest fully drawn, C26 the week at the average draw, C27 the break-even draw, C29 the shortfall on the client’s cost and C30 the book’s comparison. Rows 32 to 38 carry the recovery and the cap, rows 40 to 42 the late weeks’ interest and the profit on cost, and C43 the cost of a granted week. The draw at completion in C22 is the one ADDED input: change it to your own facility’s profile and every row recomputes. The Checks sheet ties the case back to the book’s printed figures and reads ALL OK.
The underlying figures come from the four workbooks. In The_Bridge.xlsx, the Bridge sheet holds the preliminaries per week in C10, the weeks at the contractor’s risk in C11, the cap in C14 and the damages line in C29. In The_Appraisal.xlsx, the Appraisal sheet gives the facility’s debt base in C8 and the Case A profit and total cost at the final account in D20 and D18. The extension-of-time table on the Sensitivities sheet of Sensitivities.xlsx, rows 41 to 45, shows the damages line running from 203,000 at no extension to nothing at 16 weeks.
With the client's own weekly cost of delay, not the contractor's preliminaries. On Pemberton Yard a week of interest on the development facility, fully drawn at completion, is 34,640 against a damages rate of 14,500 and time-related preliminaries of 23,065.
At the damages rate divided by a week of interest on the full facility. For a 22,801,097 facility at 7.9 per cent, 14,500 over 34,640 is a draw of 41.9 per cent. Above that, the rate does not cover the interest alone.
On Pemberton Yard, fourteen late weeks of interest on the fully drawn facility come to 484,962. Counting them takes delivered profit on cost from 8.59 to 7.34 per cent, while damages recovered only 43,500.
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