What are Liquidated Damages in Your Construction Contract?

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liquidated damages construction

Construction contracts often contain a clause concerning liquidated damages, which is the amount of money that can be recovered if one party breaches the contract. In most cases, these clauses will specify that liquidated damages apply to specific types of contract breach, for example, when the contractor fails to complete the work in a timely fashion.

Are Liquidated Damages Clauses Enforceable?

When properly drafted, a liquidated damages clause clearly states the penalty of late delivery and provides an incentive to the contractor to complete the work in a timely fashion. Since in most cases, the damages are withheld from the contractor’s final payment, it’s easier for the owner to enforce the clause. For contractors, the important protection is to define substantial completion in the contract so that you can prove you’ve met the deadline.

The contract should contain a clear definition of what substantial completion is, but in general, it refers to the point in construction in which the project is sufficiently complete so that the owner may occupy or use the project for the intended purpose. For home construction, for example, this is generally when the certificate of residency is issued. Contractors may still be working through a punch list of final items, but the project is complete.

Calculating Liquidated Damages

Without a liquidated damages clause, proving the actual amount of damages when a contractor is running behind can be difficult. It’s much easier to base the amount of the liquidated damages on a formula, for example, a fixed amount per day that the contractor is late, which is deducted from the contractor’s final payment. Based on this information, a contractor can create a schedule, ensure they include enough buffer to factor in weather and other unexpected problems, and deploy subcontractors.

In general, liquidated damages turn out to be less expensive for owners because proving actual damages can be expensive. Without a formula, liquidated damages would be calculated based on theoretical economic damages due to late completion. For a home, this might be a fairly straightforward calculation based on the family’s cost of staying in another residence and storing their possessions or any penalties they had to pay for not moving out in a timely fashion. For a business, this is often the lost profits that would have accrued if it had been able to open. This can be a little harder to prove, but certainly still possible to look at the sales volume a similar business has over the same period of time when it first opens.

Since construction contracts can differ from state to state, by project time, and even by who you’re working with, understanding the basics of your contracts and having an experienced construction lawyer available are both essential for businesses looking to move quickly on projects while still ensuring the contracts protect their best interests. If you want the management team at your company to be up to date on the most important parts of construction contracts and lien regulations, you may be eligible for a custom lien seminar given by one of our lien experts. Request a custom lien seminar for your company now and protect your right to get paid – on every project.

 

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This blog is for educational purposes only and not intended for legal advice.