Waiver of Consequential Damages

Waiver of Consequential Damages

A waiver of consequential damages is contained in many construction agreements. Others simply state a liquidated amount for project delay. As far as innovative approaches go, the AIA calls for the owner and the contractor to each waive what would otherwise be, in reality, consequential damages which would normally flow from the breach by either party.

In the AIA approach, the contractor waives his home office overhead, which is often characterized as an indirect cost in the construction. It is not a direct cost, such as labor, materials and/or equipment, but typically includes the cost of accounting and payroll services, general insurance, the salaries of upper level management and marketing costs. The home office overhead is the actual dollar amount that is an essential part of the contractor's cost of doing business. Thus, he is giving up something in return for that which the owner waives. When dealing with the home office overhead, the standard, or formula, which is generally accepted in calculating this loss, is the Eichleay Formula.

The owner, under the AIA approach, waives claims for all potential economic loss associated with project delay. This would include extended construction interest and fees for extending the construction, increased interest on both the construction and permanent financing, extra licensing costs, lost revenues, and others.

In discussing damages, one must take into consideration that the non-breaching party is only entitled to that which he bargained for in the first instance. The non-breaching party is not entitled to be compensated in a manner which would put him in a better position had the breach not occurred. In this particular instance, this would be known as "betterment" and is not permitted.