Liquidated Damages Calculation: Everything You Need to Know
Liquidated damages calculation can be extremely difficult, especially because it can be hard to prevent future losses and it must be reasonable. 3 min read
2. How to Calculate Liquidated Damages
Liquidated damages calculation can be extremely difficult, especially because it can be hard to prevent future losses. However, for these damages to be upheld in court, the calculations must be reasonable.
Basics of Liquidated Damages
When there is a breach of contract, it will often result in losses to one party. Unfortunately, calculating damages resulting from a broken contract can be exceedingly difficult. Including a liquidated damages clause in a contract can help with this problem. However, it's important to make sure that the damages awarded by the clause do not function as a penalty.
Courts will determine if the clause can be enforced and can also decide if the liquidated damages constitute a penalty. Although there is no hard and fast rule about what makes a liquidated damage clause a penalty, courts in Florida will examine three factors when determining if a clause can be enforced:
- If the clause was reasonable.
- How the damages were established.
- The intent of the contracted parties.
If the breach of contract did not actually impact the project, liquidated damages will not be awarded. To make sure this clause is enforceable, you should be sure to include a large number of details. When a liquidated damages clause is included in a contractor agreement, it's vital that a similar clause is added to all subcontractor agreements.
It has been determined in court cases that when the subcontractor's agreement did not have a liquidated damages clause but the contractor's agreement did, the subcontractor could not be held liable for a breach of contract, even if it were their actions that caused the breach. However, it may be possible to sue the contractor for actual damages if the subcontractor caused the delay.
While having a liquidated damages clause in a contract is certainly important, the presence of this clause will not guarantee that damages can be recovered. For example, depending on the circumstances surrounding the breach, the court may decide that enforcing the damages would be unconscionable.
Unreasonable damages will also not be enforced. Courts considerable damages unreasonable when their amount isn't proportional to the actual losses suffered by the injured party.
How to Calculate Liquidated Damages
In the construction industry, time is just as valuable as money. When writing a construction contract, the time frame for project completion is one of the most important issues to be negotiated. If an owner is forced to wait for a late project to be completed, they stand to lose a great deal of money and opportunity.
Contractors can also lose money when a project is finished on time, as they will need to cover the cost of personnel and field offices much longer than anticipated. Because of the highly competitive nature of the construction marketplace, neither contractors or owners can afford a late project.
Generally, owners will try to make sure that contractors will assume a portion of the risk associated with a project that isn't completed on time. The easiest way to transfer this risk is by adding a liquidated damages clause to the construction contract. The contract will define these damages, and when the clause is activated, the damages will be taken from the money the contractor is owed on a daily basis. Funds will continue to be withdrawn until the project has been finished.
This means that liquidated damages are the simplest solution for project owners to calculate the losses they will be able to recover if a construction project is not completed on time. For a liquidated damages provision to be added to a contract, both parties must agree. The most important factor in this provision is the daily amount the contractor agrees to pay to the owner if the project is finished late.
Public agencies almost always include a liquidated damages provision in their public works contracts. A fixed amount will be charged for every day the contractor has not substantially completed the project. These damages are a good way to make sure that the contractor follows the project schedule that has been defined in the contract. Public agencies will use these damages to make sure they are compensated for additional costs resulting from a late project completion.
When calculating damages, the owner must estimate the cost of a late project in good faith, and they should fully document how the damages were calculated.
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