Construction Management

Liquidated Damages in Construction Contracts

liquidated damages const

What are Liquidated Damages?

Liquidated damages are an amount of money agreed by the parties at the time of signing the contract which sets out the damages that can be recovered if a party breaches the contract. When the parties sign the contract, the amount is supposed to reflect the best estimate of actual damages. These usually apply to a specific type of breach and in construction, the failure to complete work on time is often the scenario.

A liquidated damages clause specifies a predetermined amount of cash or money that should  be paid as damages for failure to perform under an agreement or contract. The amount of the liquidated damages is supposed to be the parties’ best estimate at the time they sign the contract of the damages that would be caused by a breach.

The Purpose of Liquidated Damages

Liquidated damages provide certainty and avoid a dispute over the amount to be deducted for the infringement, as the right to be paid liquidated damages arises automatically in the event of a specified infringement. When liquidated damages are not agreed in advance, the normal recourse for the innocent party in the case of a breach of contract is the payment of general damages, i.e. a sum of compensation (to be determined by the Court) to be paid by the attacker to the innocent party.

The innocent party must be able to prove the loss in order to be successful in a case for general damages and that this loss is caused by the breach of contract. Care should be taken to ensure that liquidated damages do not amount to a penalty; a penalty is effectively a clause punishing a party for its contractual infringement. Instead of acting as a punishment, liquidated damages should provide an alternative to performing the contractual obligation in question.

Are Liquidated Damages penalties?

Liquidated Damages are not penalties placed on contractors. It is a guaranteed sum to compensate for the possible loss to be faced by the Employer if the contractor fails to complete his work within the time set out in the contract for completion. When the agreement is signed, both the contractor and the client are aware of the amount of liquidated liability if the work is not fully completed.

Through signing the contract agreement, the contractor agrees on the amount of Liquidated Damages that the Employer may recover if the contractor fails to deliver the project within the Time for Completion.

As of the Contractor’s Liquidated Damages clause, he understands he will complete the project without delay. This is advantageous to the contractor because he does not risk money on a dragged project.

How to determine the amount of Liquidated Damages?

Thus recovery of liquidated damages occurs in full or as a step upon completion of the job scope, the amount of liquidated loss is pre-set amounts depending on the size and complexity of the project.

When the contractor fails to complete the job on time, the amount of liquidated damages will be assessed on the basis of the potential loss to the employer.

Total Contract Price – [(X amount of $ per day) x (number of days late)]

Calculation Considerations

If you are the Principle, when calculating liquidated damages, you could consider including:

  • Additional rent payments, if you are renting a different property to the property where a Contractor is carrying out the works;
  • Insurance costs you would have paid specifically for the construction work and/or the project;
  • Specific project costs (e.g. administration or supervision staffing costs);
  • Storage costs specifically related to the delay. For example, if you need to relocate and store furniture or equipment during construction. This includes any new furniture that is awaiting delivery to the site once it has been constructed.
  • Lost net profits as a direct result of the delay. For example, if you are unable to operate your business during construction as a result of the delay; and
  • financing costs directly relevant to the project. For example, interest payable on a bank loan that you have taken out to fund the project.

It is a good idea to keep records of this calculation on any internal project file. This is in case the Contractor challenges the rate of liquidated damages

Liquidated Damages Benefit both Employers and Contractors

Sometimes contractors think the LD imposed on them has no advantage. Nevertheless, the clause on liquidated damages serves many advantages for contract parties.

Liquidated damage saves both time and money. Although liquidated damages appear to be beneficial to the Employer in recovering his loss, this is a predetermined rate agreed upon by both parties at the time the contract was signed. Therefore, the loss and damages need not be calculated by both contractor and employer if the project is delayed by 1 day.

However, if the delay in the project is due to a reason beyond the contractor ‘s control, EOT may be claimed. Sometimes these reasons and scenarios may create a dispute environment.

A well-negotiated liquidated damages figure could result in the contractor saving money when compared to general damages that may be awarded by a court, including the legal costs that the contractor will have needed to spend resolving the dispute.

Substantial Completion Date

Owners prefer liquidated damages clauses because they believe it protects them from project delays as well as the resulting inconvenience or monetary loss. The owner and contractor normally agree on a “substantial completion date” at the start of a project, which is when the completed project will be ready for use.

When a project is considered substantially completed, the meter for potential liquidated damages stops running as long as any remaining finishing touches do not preclude occupancy or use. The standard is not perfection, but that a project is substantially completed and ready to use.


When preparing a contract, employers (and their professional team) should seek to agree on the LDs clause with the contractor and state in the contract that the parties have agreed and have been on a mutual basis in their negotiation. Employers should identify their commercial interests and set them out in the contract.

Employers should determine that individual LD provisions will be more suitable for particular events/breaches, rather than a ‘catch-all’ sum or formula. Employers will also consider using different sums or rates depending on the extent and financial implications of the breach of the contractor.

See Also
Types of Bonds in Construction Contracts
Lump-Sum Contracts
Types of Contracts
Force majeure in construction