What Are Liquidated Damages in Construction Contracts?

March 8, 2024

Liquidated damages clauses are commonly included in construction contracts as a way to define risk and make the project more manageable. The provisions often manifest as a set fee per unit of time in the event of a missed schedule milestone such as Substantial Completion. While these provisions offer benefits to both parties, they are not without risks.

Contractors are often reluctant to accept liquidated damage provision and seek to remove them from their contract agreements. However, this is not necessarily a good idea as proving actual delay costs through the traditional dispute resolution process can be difficult and costly for owners and contractors alike.

The key to successfully establishing a liquidated damages (LD) clause is that it must be based on a reasonable estimate of the owner’s probable losses, rather than an attempt to penalize a contractor. This determination must adhere to strict court requirements in order for the LD provisions to hold up in court. Otherwise, a judge could invalidate the provision altogether.

MJD Solicitors regularly deals with disputes relating to the use of LDs and we are aware that there is much misinformation about them. Many misunderstandings surround the way in which they are calculated. In order for a LD provision to be enforced, it must be clearly set out in the contract and the calculation method must be clearly articulated and documented. The provision must also be ‘commercially justifiable’. If the amount is not deemed reasonable and fair, it will be unenforceable.

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