What are “Liquidated Damages” in a Construction Contract?

March 24, 2023by Jeffrey Davis

Liquidated damages refer to a predetermined amount of money that a party agrees to pay if they breach a contract. In other words, it’s a pre-agreed sum of money that will be paid by the party that breaches the contract, which serves as compensation to the other party for the loss they suffer as a result of the breach.

Liquidated damages clauses are typically included in contracts to provide certainty and reduce the likelihood of costly litigation in the event of a breach. By including a liquidated damages clause, the parties are agreeing in advance on the amount of damages that will be payable in the event of a breach, which can provide a degree of certainty and predictability for both parties.

For example, in a construction contract, the contractor may agree to pay the owner a certain amount of money for each day the project is delayed beyond the agreed-upon completion date. This pre-agreed amount would serve as liquidated damages and compensate the owner for any losses they may incur due to the delay.

It’s important to note that the liquidated damages clause must be reasonable and reflect a genuine pre-estimate of the loss that the non-breaching party is likely to suffer as a result of the breach. If the liquidated damages clause is deemed to be a penalty, it may be unenforceable.