BACKGROUND

A crucial and often contentious element for any transportation construction contract is the identification and allocation of potential damages and liabilities among the parties. Contractual provisions can derail negotiations if too rigid or leave the public entity with unnecessary risk exposure if not carefully drafted. Consequential damages are often restricted in construction contracts to limit the state department of transportation's (DOT) exposure to potential liability. Parties seek to limit liability by including a clause to preclude recovery of consequential damages, i.e., losses “fairly and reasonably” arising from the breach of the contract. Research is needed on the legal issues associated with consequential damages provisions in construction contracts. This study should take into account the contract value as well as the type of project.

For purposes of this study, consequential damages are defined as damages that can be proven to have occurred because of the failure of one party to meet a contractual obligation. They go beyond the contract itself and into the actions that flow from the failure to fulfill. Consequential damages occur when the contractor breaches a contract and is liable for all foreseeable losses incurred by the owner. They also go beyond the express terms and conditions of the contract itself and into the actions that flow from the breach. Some examples include any profits, rents, financing costs, or business opportunities that are lost.

OBJECTIVE

The objective of this research is to produce a legal research digest that will provide trends among major transportation construction contracts as they relate to consequential damages, and create an elemental framework for inclusion in construction contracts.

At a minimum, the research should also address the following topics:

• Various approaches to consequential damages used in major transportation contracts;
• State restrictions on consequential damages and the impact of those restrictions on potential recoveries;
• Contractual language for consequential damage provisions that may limit and/or waive potential damages or theories of recovery;
• Whether DOTs are implementing consequential damages in the absence of state restriction;
• Trends among major transportation construction contracts; and
• Elemental framework for future contracts.

The final digest should include:

• A summary of consequential damage provisions;
• Relevant statutes;
• Contract provisions;
• A discussion on whether limitations are based on a percentage of the contract value, a lump sum or other measure;
• Whether the recovery varies with project duration or delay;
• Whether there are caps associated with the maximum recovery amount;
• Whether caps are used at all or in a particular combination;
• How consequential damages are framed in construction contracts;
• How wording for these contractual provisions may influence recovery options; and
• Additional considerations when including clauses in a construction contract to limit risk to the public entity or allocate risks among the parties.

This study may include other modes of transportation in addition to highways.

Status: Completed. Published as NCHRP LRD 88.