Q: Our firm is administrating a contract on behalf of an owner and an issue has arisen regarding liquidated damages. Essentially, the contractor has not reached substantial completion, but the owner is using part of the facility. The project is not finished. Is it appropriate to assess liquidated damages where the owner occupies the facility before the contractor reaches substantial completion?

A: Generally speaking, just because an owner occupies a new facility before a tardy contractor reaches substantial completion, it does not necessarily exempt the contractor from paying liquidated damages. As always, a careful review of the contract is needed to determine the appropriateness of assessing liquidated damages. Oftentimes, the project engineer has the authority to determine when substantial completion had been achieved. If that is the case, then the project engineer needs to make the appropriate determination.

The project engineer in this case should anticipate that the contractor will argue that liquidated damages are a penalty and not true liquidated damages because the owner has occupied and is using the facility. The point of liquidated damage is to settle the cost of a possible future breach before the construction work begins. Liquidated damages are especially helpful when calculating actual damages would be difficult. Liquidated damages are often characterized as punitive damages because punitive damages are typically not allowed in construction contracts. Liquidated damages have to be reasonable at the time of contracting.

Owners do not necessarily waive their right to enforce liquidated damage provisions by occupying the facility. However, it is unfair to assess full liquidated damages against a contractor who has achieved substantial completion and has only minor repairs, adjustments, or finishing work to complete. The assessment of liquid damages would be more appropriate in the case where the owner occupies the facility, but the items to be finished go beyond the mere trivial finish or punchlist items.

Q: The American Recovery and Reinvestment Act of 2009 (ARRA) is beginning to take effect on projects my firm may be interested in pursuing. Are there specific rules and regulations we should be aware of with regard to the ARRA?

A: On Feb. 17, 2009, President Obama signed the ARRA (also known as the Recovery Act or the Stimulus Act), including a number of provisions to be implemented in federal government contracts. Many of the new rules apply only to federal procurement contracts funded with Stimulus money. The listing of the rules and regulations is too comprehensive for this column. However, readers should be aware of certain major requirements, rules, and reporting.

New regulations will be included in federal contracts receiving stimulus funds and will require certain reporting. They will be included in Government-Wide Acquisition Contracts (GWACs), Multi-Agency Contracts (MACs), Federal Supply Schedule (FSS) contracts, or agency indefinite-delivery, indefinite-quantity (ID/IQ) contracts that will be funded with Recovery Act funds. Information on the Recovery Act may be found on the Recovery Act website (www.recovery.gov). Those interested may also want to check with the government website www.federalreporting.gov

There are also new audit rules and rules authorizing the Controller General and Government Accountability Office to interview prime contractor personnel and interview subcontractor personnel. In addition, there are protections for state, local, and government contract whistleblowers. Also, those receiving stimulus funds must now post a notice of their employees’ rights and remedies relating to whistleblower protections. The whistleblower clause must be included in all stimulus-funded contracts and subcontracts. Additionally, there are Buy-American requirements.

Essentially, there is a mix of new reporting obligations. The increased oversight is significant in terms of compliance being imposed upon government contractors, which can expose those contracting with the government to new liability risks. These requirements are still evolving and further changes are still possible when the final rules are issued. It is of paramount importance that those contracting with the government in relationship to any Recovery Act project become familiar with the new reporting and oversight requirements.

Michael J. Baker, Esq., is a partner in the Cerritos, Calif.-based law firm of Atkinson, Andelson, Loya, Ruud & Romo. He is an expert in design and construction contracts, mediation, and litigation. Please send him your legal questions via e-mail at mbaker@gostructural.com.

The answers to the questions provided herein, although intended to be accurate, authoritative, and informational, may or may not accurately reflect the law in your jurisdiction or where you do business. In providing answers to these questions, it should be recognized that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional licensed in your jurisdiction should be sought. The information provided herein is for informational and hypothetical purposes only.