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A201®–2017, General Conditions of the Contract for Construction
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February 28, 2023
What Are Consequential Damages in Construction Contracts?
Waiver of consequential damages is a provision commonly found in construction contracts. For instance, Section 15.1.7 of the A201-2017 states:
The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract.
This mutual waiver includes:
- Owner’s Damages: Rental expenses, losses of use, income, profit, financing, business, reputation, employee productivity, or the loss of the services of such persons.
- Contractor’s Damages: Office expenses, personnel compensation, losses of financing, business, reputation, and loss of profit, except anticipated profit arising directly from the Work.
Given that these provisions are widespread in construction contracts, it’s important to understand what consequential damages are and how a waiver works.
The Importance of Waiver Provisions in Construction Contracts
Consequential damages, also known as special damages, are indirect losses incurred due to a breach of contract. They are not directly tied to the core work of the contract but may still result from the breach. Examples include:
- Lost profits or income
- Increased financing costs for the owner
- Loss of business opportunities for the contractor
One of the challenges with consequential damages is their unpredictability. These damages are often speculative, making them difficult to quantify. In some cases, they can be disproportionately large compared to the overall value of the contract.
A mutual waiver of consequential damages helps eliminate these uncertainties. By agreeing to waive such claims, both parties—contractor and owner—ensure they will not pursue consequential damages if a claim arises. However, the waiver does not prevent claims for direct damages like repair or replacement costs.
How Waiver Clauses Prevent Disputes Over Indirect Damages
Waivers of consequential damages offer a layer of protection for both contractors and owners. By waiving these claims, they prevent lengthy and costly disputes over indirect losses that are difficult to prove or quantify.
For example, if a project is delayed due to the contractor’s actions, the owner could face financial setbacks like lost income from the delayed project. Without a waiver, the owner might try to recover these lost profits, but such claims could be speculative and difficult to validate.
Real-Life Example of a Waiver of Consequential Damages in a Construction Project
Let’s say a construction project is delayed because the contractor fails to meet deadlines. The owner, relying on the completion of the project, suffers lost income from their business operations. Without a waiver of consequential damages, the owner could claim compensation for this lost income.
However, this income would be hard to quantify and could lead to excessive claims. If the contract includes a waiver provision, the owner cannot recover this lost income. But, if the contract also includes a liquidated damages provision, the owner could recover an agreed-upon amount of damages for the delay.
Liquidated Damages: An Alternative to Consequential Damages
Liquidated damages provide a clear, predetermined amount of compensation if certain contract terms are breached, such as delays in completion. Unlike consequential damages, which are indirect and difficult to calculate, liquidated damages offer certainty for both parties.
For example, in the case of delays, the parties might agree in advance that the contractor will pay a fixed amount per day the project is delayed. This helps both parties avoid disputes over vague claims like lost income or reputation damage.
Why Understanding Waiver Provisions Is Essential for Construction Professionals
Waiver clauses in construction contracts are essential tools for managing risk and avoiding costly, unpredictable legal claims. They help provide clarity and certainty, making it easier for both contractors and owners to understand their rights and responsibilities.
By including a waiver of consequential damages and a liquidated damages clause, construction contracts become more straightforward and manageable, reducing the potential for disputes over indirect losses and ensuring that both parties are protected under the terms of the agreement.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.