What are Liquidated Damages in Construction Contracts

In contract administration there are certain clauses that consultants, engineers,quantity surveyors,project managers and contractors should know.This doesn’t mean that it is enough knowing the technical term.It is important to understand the how to apply liquidated damages in construction contracts and how to prevent LD imposed on your project.

Liquidated Damages or LD is another important term discussed in construction contracts. Sometimes contractors misunderstand liquidated damages as a penalty for not completing the construction project within the stipulated time fame. However liquidated damages are not a penalty imposed on contractor.

Have you ever experienced liquidated damages imposed on your projects?

In this post I try to cover some of the details related to Liquidated damages including scenario to deduct liquidated damages from the contractor, reasons to deduct liquidated damages and employer’s rights for damages when the contractor does not complete the project as mentioned in the contract agreement.

Let’s discuss!

What are Liquidated Damages in Construction Contracts?

Liquidated Damages are pre-determined damages mentioned in the construction contract agreement. Both parties to the contract agree to this amount as the amount to recover if the contract is breached. Usually Liquidated Damages are recovered by the Employer if the contractor fails to substantially complete the work within the stipulated time for completion.

If clarify further,Liquidated Damages are a genuine pre-estimation of the loss which can be caused due to contractor’s failure to complete the project timely.

Are Liquidated Damages penalties?

Liquidated Damages are not any penalties which is imposed on contractors. It is a pre-determined amount to cover the possible loss that Employer has to face if the contractor doesn’t complete his work within the time for completion stated in the contract. At the time of signing the agreement, both contractor and employer knows the amount of Liquidated damages if the work is not completed substantially.This amount can be per day or per week.

By signing the contract agreement, contractor agrees on the amount of Liquidated Damages that Employer can recover if the contractor fails to deliver the project within the Time for Completion.

Due to Liquidated Damages clause contractor knows that he has to complete the project without delay.This is beneficial to the employer as he will not lose money from a dragged project.

How to determine the amount of Liquidated Damages?

While recovering of Liquidated damages occur at the completion of work scope in full or as a phase, the amount of liquidated damages are pre-set amounts depending on the size and nature of the project.

Amount of Liquidated Damages are determined based on the possible loss incur to the Employer if the contractor fails to complete the project on time.

Possible losses for the Employer due to a late project

Possible losses to the client include rental cost, loss of possible income if the project completed on time, extra running costs, temporary accommodation costs etc depending on the nature of the project scope.

Once these costs are identified, Liquidated Damages per day or per week is calculated. This is the amount mentioned in any construction contract as Liquidated Damages for the project. The amount can be per day or per week and it can be recovered if practical completion is not achieved for the whole project or a phase depending on the type of contract.

The amount of Liquidated Damages and the recovery period of it vary from project to project (or from contract to contract)

How to Deduct Liquidated Damages

If the contractor fails to meet the practical completion by the mentioned project completion date, Employer is entitled to recover the Liquidated Damages from the contractor. It is necessary to understand that Contractor shall allow the Employer to recover the liquidated damages.Also the LD amount will be calculated at the rate mentioned in the contract agreement for the actual period of delay.

However such recovery of Liquidated damages by the employer does not relieve the contractor from his liabilities and obligations under the contract. Still, the contractor shall complete the project with accepted quality as per the contract.

So far I have experience in few projects that employer recovered liquidated damages from the contractor due to the delay in completion. These amounts are adjusted in the Final Account.

However,as a contractor you can check the possibility of EOT claims to avoid deduction of Liquidated Damages if you foresee any delay in completion.

Extension of Time during Delay period

If the delay to the contract is due to a valid reason that contractor is not responsible, then the contractor has the right to request for Extension of Time. (EOT Claim) According to the construction contracts, there are several reasons that cause delay of the project and which are beyond contractor’s control.

Some of such causes of project delay include Force Majeure, adverse weather conditions, industrial actions, instruction for a variation, Employer’s failure to give possession of site on time etc. If the project delay is due to such reasons that entitle the contractor to claim Extension of Time and if the Architect/Contract Administrator or the person authorized approve the extension of time then such time period is added to the total project period.

Read more on Force Majeure Clause.

This allows contractor to complete the work scope without any delay. However the contractor should apply in writing following the clauses in contract agreement when he finds the grounds for EOT claims.

Benefits of Liquidated Damages in Construction Contracts

Sometimes contractors think that LD imposed on them doesn’t have any advantage.However Liquidated Damages clause serves many benefits to the parties to the contract.

Liquidated damages save both time and money. Although liquidated damages seems like beneficial for the Employer to recover his loss, this is a pre-determined rate which both parties agree at the time of signing the contract. Therefore both contractor and employer do not need to calculate the loss and damages if the project is delayed by 1 day.

However if the delay of the project is due to a reason that is beyond the contractor, he can claim EOT. Sometimes these reasons and scenario can create environment for disputes.

In short below are some of the benefits of LD clause in construction contract.

• It does not require any proof as the amount is pre-determined.
• Employer can simply deduct LD under the contract when there is a delay.
• Both parties agree in advance to the amount of LD.Therefore contractor has a good idea of his liability.

Tips for the contractors

If you are a Main contractor and work with subcontractors to complete the project, then it is necessary to sign your contract agreement with the sub-contractor with necessary clauses.

In the event that the delay is due to sub contracted work and if Liquidated Damages are mentioned in your sub-contractor agreement, then you can recover some part of liquidated damages from the sub-contractor depending on the project and contractual situation.

In this way you can recover part of your LD from the sub contractor who created the delay.However this should be according to your contract.

Let me know your experience with LD.Use below comment section to share your experience.