Key Takeaways

  • Liquidated damages in construction contracts are pre-agreed amounts paid for project delays.
  • Courts only enforce liquidated damages if they are a reasonable forecast of expected losses, not penalties.
  • Substantial completion can impact a party’s ability to claim damages.
  • Clauses should be supported by records showing how the rate was calculated.
  • Public construction contracts often use liquidated damages due to difficulty quantifying real-time losses.

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.

Purpose and Function of Liquidated Damages Clauses

Liquidated damages in construction contracts are designed to protect the project owner from financial losses if a contractor fails to complete the work on time. These clauses establish a daily rate of compensation the contractor must pay for each day of delay beyond the agreed-upon completion date. This pre-set amount simplifies damage recovery, eliminating the need for owners to prove actual losses in court, which can be complex and uncertain.

Such provisions also serve as a risk allocation tool. Owners gain predictability in potential compensation, while contractors understand the financial consequences of delay. The clause is especially important in public works projects, where timely delivery may affect public access or funding schedules​​.

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.

Supporting Documentation and Best Practices

To improve enforceability and reduce disputes, contractors and owners should:

  • Document Calculations: Maintain pre-contract records showing how the liquidated damages rate was calculated, including estimates for lost rental income, financing costs, or business disruption.
  • Review Comparable Projects: Use data from similar completed projects to support the reasonableness of the daily rate.
  • Define Substantial vs. Final Completion: Clarify these terms in the contract to avoid ambiguity about when damages begin or cease.
  • Integrate with Scheduling Provisions: Align liquidated damages clauses with project milestones and delay notice provisions for consistency.

Including such documentation strengthens the legal validity of the clause and provides transparency if a dispute arises​​.Factors That Affect Enforceability

To ensure enforceability, liquidated damages clauses must satisfy the following:

  • Reasonable Estimate at Contract Formation: The daily rate must reflect a reasonable forecast of the owner's anticipated loss, not a figure intended to penalize the contractor.
  • Actual Difficulty in Estimating Damages: Damages must be difficult to estimate accurately at the time the contract is signed. This justifies using a fixed amount.
  • No Punitive Intent: Courts will strike down clauses that act as penalties rather than compensation mechanisms.

Courts may void a liquidated damages clause if:

  • The actual damages are readily ascertainable.
  • The stipulated amount is excessive in relation to the probable loss.
  • Substantial completion occurs and the owner derives use from the project, reducing justification for further penalties​​.

Frequently Asked Questions

1. What are liquidated damages in construction contracts? They are predetermined amounts the contractor must pay for project delays, intended to compensate the owner for losses without requiring litigation.

2. When are liquidated damages enforceable? They are enforceable if the amount is a reasonable estimate of likely losses, not a penalty, and actual damages are hard to measure.

3. Can an owner claim liquidated damages after substantial completion? Often no. If the owner can use the project as intended, courts may limit or deny liquidated damages beyond that point.

4. How are liquidated damages calculated? They are typically based on projected financial losses per day of delay, such as lost revenue or financing costs.

5. What makes a liquidated damages clause unenforceable? A clause is unenforceable if it imposes excessive penalties, is not based on real estimates, or if actual damages are easy to determine.

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