Liquidated Damages

Some damages are hard to estimate at the beginning of a project, delay damages being one example. Therefore, some contracts liquidate, or quantify, those damages with a fixed periodic amount.

An example is:

“Contractor acknowledges that if it fails to achieve Final Completion of the entire Work by the Completion Date, Owner will incur substantial damages and the extent of such damages are incapable or very difficult of accurate measurement. Nonetheless, the parties agree that for each calendar day after the Completion Date that the Project has not achieved Final Completion, Contractor shall be liable to Owner in the amount of $1,000. This amount represents a good faith estimate by the parties as to the actual future damages that would occur as a result of late completion and it is not a penalty.”

In the absence of a liquidated damage provision, a party is likely liable for the other party’s actual damages, which may be significant. These damages could also include consequential damages if they are not otherwise waived. As such, having a liquidated damage provision can sometimes mitigate risk, especially if coupled with a low per diem, a grace period when no liquidated damages are imposed, a waiver of consequential damages, and a cap on damages.

An example is:

“If the Contractor fails to achieve Substantial Completion within 30 calendar days after the Substantial Completion Date, the parties acknowledge and agree that the actual damage to the Owner for the delay will be impossible to determine, and in lieu thereof, the Contractor shall pay to the Owner, liquidated delay damages in the amount of $100 per day for each calendar day of delay thereafter, but not as a penalty. Notwithstanding, the total liquidated damages shall not exceed $10,000, and the parties further waive all claims for consequential, special, and indirect damages from one another.”

Alternatively, if you are liable for actual or liquidated damages and have no damage cap, then passing those obligations downstream to your subcontractors is important so you can mitigate your risk.

We hope this helps you understand the construction contracting process a little better. If you have questions about your contract, send us an email or give us a call (https://www.thelienzone.com/contact/). And make sure to check out our other free tools (https://www.thelienzone.com/tools)and our weekly podcast (https://www.thelienzonepodcast.com/).