Liquidated Damages Construction: Everything You Need to Know
Liquidated damages construction are a method of sharing risk between property owners and the contractors that they use.3 min read
Liquidated damages construction are a method of sharing risk between property owners and the contractors that they use. When a contract is breached, these damages will be awarded to make up for the monetary loss.
Introduction to Construction Contracts and Liquidated Damages
One of the biggest risks of construction projects is that they won't be completed on time, which is why owners try to make sure that their contractors share some of the risks for a missed deadline. Almost every construction contract will include liquidated damages, which is a method for compensating one of the contracted parties when the other party fails to fulfill their contractual obligations.
It's important to understand that there is a big difference between general damages and liquidated damages. The amount of liquidated damages is fixed and will be negotiated by the parties entering a contract. On the other hand, general damages are calculated and awarded by courts during a lawsuit.
When used in a construction contract, liquidated damages are charged when a contractor fails to meet a deadline and can be taken from the money that the contractor is owed for their work. Using a liquidated damage provision is the easiest way for an owner to calculate the losses that they can recover if a project is not completed on time.
These damages will be charged on a daily basis until the project is finished. Liquidated damages are a fact of life when it comes to construction contracts. Generally, both parties will need to agree to the amount of liquidated damages for them to be included in a contract. In almost every case, liquidated damages will be specified for a precise type of breach of contract. This means they cannot be used for any guarantee in the contract and only apply to the guarantee that is listed.
In terms of construction contracts, liquidated damages will usually apply to a failure to meet a project deadline. There are several reasons that owners request that construction contracts include liquidated damages. However, the most important is allowing the owner to recoup their losses if a project is not completed on time. They also allow the owner needing to file a lawsuit to pursue damages such as:
- Lost financing cost
- Missed opportunities for sales
- Lost rent
It can be very hard for owners to prove these damages, meaning they may not be able to obtain compensation during a court case.
Liquidated Damages Law
When liquidated damages are applied, it can easily cause a disagreement between contractors and owners. Eventually, these disagreements may result in a lawsuit where the court will need to decide whether the damages can be enforced. When including liquidated damages in a construction contract, it's important to consider the possibility of litigation and whether or not the described damages are legally enforceable.
For liquidated damages to be legal, they need to be a reasonable amount, meaning they should reflect an anticipated loss that is based in reality. If the damages described in the contract are larger than what would be reasonable, they are unenforceable. Owners cannot use liquidated damages to punish a contractor for breach of contract. These damages are only to be used for compensation, nothing more.
The daily liquidated damages cannot be determined based on an amount the owner believes would force the contractor to finish the project by the contractual deadline. This would constitute a penalty. Instead, the amount of damages must be calculated on what the owner anticipated they would lose if the project was finished late, and these calculations must be reasonable.
States such as Massachusetts will refuse to enforce liquidated damages and other remedies that function as penalties. Because liquidated damages are compensatory, substantial completion and final completion must be considered before these damages can be charged.
Liquidated damages are calculated based on what the owner would lose if the project was not completed on time (final completion) and the owner was prevented from using the project as it was intended. However, if the project is substantially completed, meaning the owner can make use of the project beneficially, then they may not be able to assess liquidated damages.
If it is found that the daily charges being levied against the contractor exceed what the owner has actually lost from the late project completion, the liquidated charges won't be imposed.
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