Key Takeaways

  • Liquidated damages in construction contracts provide a pre-agreed compensation for project delays.
  • To be enforceable, these damages must be a reasonable forecast of expected losses and not a penalty.
  • Calculation should be based on quantifiable losses such as lost rental income, additional supervision costs, or project financing implications.
  • Public and private contracts may approach liquidated damages differently, especially regarding enforcement and mutual obligations.
  • Effective documentation and early agreement on calculation methods are key to avoiding disputes.

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:

  1. If the clause was reasonable.
  2. How the damages were established.
  3. 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.

Avoiding Disputes Over Liquidated Damages

To reduce the risk of legal disputes:

  • Document Calculations: Keep records of how the daily rate was calculated. Include estimated costs from finance, legal, and operations teams.
  • Define “Substantial Completion” Clearly: Misunderstandings over what constitutes "completion" can trigger or delay the start of the penalty period.
  • Use Delay Logs and Notices: Maintain clear logs of project progress and send formal notices when delays occur.
  • Allow for Excusable Delays: Include carve-outs for weather, labor strikes, or material shortages to distinguish between excusable and non-excusable delays.

If disputes arise, courts will look at how both parties behaved before and during the project, especially whether the delay could have been avoided or mitigated.

Public vs. Private Contracts: Key Differences

In public contracts (e.g., federal, state, municipal projects), liquidated damages are typically non-negotiable and strictly enforced. These contracts often include standardized rates published by agencies, such as the U.S. General Services Administration or state DOTs.

Private construction contracts allow more flexibility but also require more negotiation. In private-sector deals:

  • The owner may tailor the clause to business-specific losses.
  • Enforcement often depends on documentation, prior communication, and proportionality.
  • Courts may scrutinize the clause more closely, especially if the project owner has greater control over the scheduling or coordination.

Whether public or private, contractors should carefully review the terms and consider the potential financial impact of delays before signing.

Best Practices for Enforceable Liquidated Damages Clauses

To ensure enforceability, liquidated damages clauses must meet specific legal criteria:

  1. Forecasting Losses Must Be Reasonable: The agreed-upon damages should reflect a reasonable estimate of actual losses at the time the contract was signed.
  2. Difficulties in Precise Calculation: The actual damages must be inherently difficult to determine with certainty.
  3. No Punitive Intent: The clause must aim to compensate, not punish. Excessive daily penalties can render the clause void as an unenforceable penalty.
  4. Mutuality in Subcontracts: Ensure similar clauses are included in subcontractor agreements. Without them, general contractors may bear the full liability, even if the delay was caused by a subcontractor.

Courts will also consider whether the party seeking enforcement contributed to the delay, or failed to mitigate losses—both of which may invalidate a claim for liquidated damages.

Common Methods for Estimating Damages

When determining how to calculate liquidated damages in construction, owners and contractors must estimate potential losses that would reasonably result from delays. Common bases for estimating these damages include:

  • Lost Rent or Income: For commercial or rental properties, lost rental income due to late project completion is often a primary component.
  • Extended Project Supervision Costs: Owners may incur extra costs for administrative staff, engineers, or project managers during the delay period.
  • Additional Financing Costs: Delays may lead to extended interest payments or refinancing needs if the project is debt-financed.
  • Loss of Use or Opportunity: This could include lost business revenue, missed seasonal openings, or inability to meet a client’s occupancy date.

The estimated daily cost is then incorporated into the contract as the daily liquidated damages rate. Importantly, the number must be defensible—based on calculations or historical data—not arbitrarily selected.

Frequently Asked Questions

1. What are liquidated damages in construction contracts? Liquidated damages are pre-agreed sums specified in a contract that a contractor must pay if a project is delayed beyond the scheduled completion date.

2. How do you calculate liquidated damages in construction? Calculate by estimating the daily financial impact of a delay—such as lost income or extra supervision—and set that amount as the daily penalty in the contract.

3. Are liquidated damages always enforceable? No. They are enforceable only if they are a reasonable estimate of loss and not punitive. Courts may strike them down if deemed excessive or unfair.

4. Can subcontractors be held liable for liquidated damages? Only if their contract includes a corresponding clause. Without one, the general contractor typically bears responsibility, even if a subcontractor caused the delay.

5. Do public and private projects handle liquidated damages differently? Yes. Public contracts often include fixed rates and strict enforcement, while private contracts allow more negotiation but may require more supporting documentation.

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