Liquidated damages are monies that contracting parties agree on as the amount of damages the contractor pays to the client for breaching the contract by not finishing the work on time. They are not punitive but aim to compensate the client for anticipated losses caused by the delay.
It’s a genuine pre-estimate of the probable loss that would be suffered from the late completion of a contract.
Liquidated damages must not be a penalty. They are considered to be a penalty if they are oppressive or excessive in relation to the conceivable loss the owner would suffer from late completion.
If liquidated damages are found to be a penalty, a court will compensate the owner based on its actual losses and not what was initially estimated.
However, numerous events beyond the control of the contractor can interfere with the completion of the contract within the specified time. As such, a contract with a liquidated damages clause must include provisions for extending the completion date in order for the clause to be enforceable.
Understanding Liquidated Damages
Liquidated damages are not penalties but pre-agreed compensation for delays caused by the contractor. As someone who may deal with construction contracts, this means:
1. If you’re the contractor, your priority is to avoid paying LDs by delivering projects on time and managing risks effectively.
2. If you’re the client, LDs protect you from losses if the contractor fails to meet deadlines, ensuring the project’s financial and operational viability.
Owning Liquidated Damages as a Contractor
1. Plan Like a Pro
• Master the Work Program: Your ability to hit milestones directly affects LDs. Break down activities into detailed timelines and identify the critical path.
• Build Contingencies: Life is unpredictable. Factor in possible delays like weather or supplier issues, and create buffer time.
2. Track and Monitor Progress
• Conduct regular site checks and progress reviews. Treat delays like small fires—put them out before they spread.
• If things go off-track, immediately mobilize more resources or reschedule non-critical activities to stay on target.
3. Communicate Delays Early
• If delays are unavoidable, be proactive. Notify the client promptly and provide a solid justification (e.g., a client delay, unexpected site conditions).
• Back your request for an Extension of Time (EOT) with documented evidence like logs, schedules, or correspondence.
4. Know Your Contract Inside Out
• Every LD clause has specifics: the daily rate, caps, and exceptions. Familiarize yourself with these so you can defend your position when necessary.
• Push for fair clauses during negotiations—ensure LD rates reflect actual losses, not penalties.
Owning Liquidated Damages as a Client
1. Draft Clear, Enforceable Clauses
• Work with your team to draft an LD clause that’s realistic and enforceable. The rate should reflect your actual or anticipated losses from delays.
• For example, if the delay causes loss of rental income or increased financing costs, calculate these into the daily LD amount.
2. Hold the Contractor Accountable
• Monitor progress closely and document delays meticulously. Use site reports, photographs, and meeting minutes as evidence.
• Notify the contractor of delays promptly and warn them of potential LDs to push them to act.
3. Recover LDs Effectively
• If the project delays are the contractor’s fault, deduct the LDs from their interim or final payments. Ensure the contract allows this.
• Avoid disputes by keeping everything well-documented, from delay notices to correspondence.
Managing Delays: A Balanced Approach
In reality, delays happen. It’s how you handle them that defines the outcome:
• For Contractors: Adopt a problem-solving mindset. If the client contributes to delays, assert your rights to an EOT with clear evidence. Be collaborative to minimize disputes.
• For Clients: While LDs protect your interests, they shouldn’t be a weapon. If the delay has valid reasons (e.g., force majeure), work with the contractor to find a solution.
Real-World Action Plan for You
1. Review and Negotiate Contracts Carefully
Every LD clause is unique. Ensure you understand the obligations and protections for your role, whether as a contractor or client. Push for balanced terms during negotiations.
2. Stay Ahead of Delays
Anticipate potential roadblocks in your projects. Whether it’s material shortages or client changes, address issues early before they cascade into delays.
3. Master Documentation
Keep a detailed record of everything—progress, delays, notices, approvals. This is your ammunition whether you’re claiming an EOT or enforcing LDs.
4. Learn from Every Project
After each project, review what caused delays (if any) and how LDs were managed. Use these lessons to improve your processes for the next project.
By owning the process, you not only protect yourself from financial losses (as a client) or liabilities (as a contractor) but also position yourself as a professional who understands the business side of construction.