Virginia Public Bodies Cannot Avoid Delay Damages With Limited Markup Provisions

12/06/2010

Increasingly over the years, public bodies have sought to use express markup provisions as the limited extent of their liability for delay damages; however, the Virginia Supreme Court has rejected that approach as contrary to Virginia’s statutory prohibition of delay damage waivers for public projects in Virginia Code Sec. 2.2-4335.

That code section voids any provision purporting to require a contractor to waive, release or extinguish rights to recover costs or damages for unreasonable delay in performing a public construction project if the delay was caused by the public body. Liquidated damages agreements are excepted from this provision, and in Martin Bros. Contractors, Inc. v. VMI, 277 Va. 586, 675 S.E.2d 183 (2009), the school argued the contract provision limited delay recover to the agreed percentage markup was such a permissible liquidation.

The Virginia Supreme Court disagreed, noting that the markup was for administration, but not delay impacts of themselves, and that the markup provision sought to operate as an absolute bar to the recovery of the contractor’s delay expenses, and therefore was void and unenforceable. This can be good news for contractors whose delay costs exceed such an agreed markup; however, they must be able to prove the delay, and its cost, rather than relying upon any agreed formula.

Even despite this case holding, I have heard of several agencies trying to enforce a similar limiting percentage markup. If, however, your delay costs exceed the agreed percentage, you’ll want to point out, respectfully of course, the error of their position.

Of note, the Martin Bros. case only applies to public projects subject to the Virginia Public Procurement Act, and in particular it would not apply to void such a percentage liquidating agreement in a commercial project; leaving for such commercial contracting parties the need to consider either requiring or accepting such a liquidating percentage provision.

As discussed in other posts about contract terms, it’s all about risk allocation versus dollars.

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