ConstructionPro Week, Volume: Construction Advisor Today - Issue: 69 - 08/19/2010

Liquidated Damages: Prudent Project Administration or Simply a Blunt Instrument

Liquidated damages come in many forms. With construction contracts, one thinks of a daily assessment against the contractor for late completion of the project. But any time actual damages will be difficult to measure precisely and the parties estimate those damages, at the time of contract formation, the resulting stipulated amount will be enforceable.

A recent Minnesota case illustrates how liquidated damages can be misused, resulting in an unenforceable penalty. A private construction contract, apparently drafted by the contractor, said that if the owner terminated the agreement for any reason whatsoever, the owner would owe the contractor a “consulting fee” of 20 percent of the contract price. This was not a prediction of foreseeable damages. It was penalty designed to provide the contractor with a tactical advantage.


How do you view liquidated damages? In your experience, are they usually arrived at in good faith, a useful way to expedite project administration and resolve disputes? Or are liquidated damages frequently a sword, a tactical device wielded to the advantage of one party with little regard for the actual damages that party might incur. As always, I welcome your comments.


Featured in next week's Construction Claims Advisor . . .

  • Pay-If-Paid Clause Enforced Against Subcontractor
  • Contractor’s Reading of Specification Did Not Support Extra Work Claim
  • AIA Reciprocal Waiver Applied to Insurance Purchased after Completion


Bruce Jervis, Editor
Construction Claims Advisor



When working for a City/County what kind of "Damages" might they come up with other than you did not finish on time? How would you dispute the "Damages"?

The Owner should always provide a breakdown of proposed liquidated damages to the Contractor before contract signature.
The proposed damages must be based on fact or they will be construed as a Penalty and not enforced.
The Government Authority I work for will charge for-
Extended lease/rental costs
Extended Financial Costs
Projection on extended Consultant Professional Fees
Any other definable costs.
A recent case I have been involved in is where a contractor went into liquidation on a Government project and Government terminated. Government then presented a claim to the liquidators which involved the agreed liquidated damages for the projected period before a new contractor can re-start. Until recently this was always seen in UK courts as not admissable but a recent UK judgment allowed damages in a termination - Hall &Shivers V Van der Heiden. The outcome should be interesting in our current case.


UK law/practice may be different than US. My understanding of US case law is LD's need to be based on reasonable expectation of potential cost impacts to Owner at time of bid. Owner has no obligation to present the workup to bidders, but Owner does need to have contemporaneous documentation of the workup for LD. Actual damages do not have to be proven after the fact to be equal to or greater than pre-determined LDs, but the basis (contemporaneous workup)may come into question. If the daily amount of LD is upheld the only challenge is likely to be the number of days of delayed completion.


If the Owner inserts a liquidated damage clause in the contract, is the Owner also obligated to insert a incentive clause also in order to make the contract fair and balanced. I always questioned the legality of the Owner insisting on liquidated damages for the Contractor for primarily exceeding the allotted contruction time and having an unfair advantage. Please advise.


LDs are generally included in the contract by the owner. In case of delay due to the fault of contractor owner has legal right to charge this money from the contractor. This amount is generally calculating $/day, and will be deducting from the due payment from the contractor $/day x # of days delayed. This predicted amount should be reasonable, it should not be a penalty to the contractor. In the event of issuing substantial completion certificate (taking over certificate or practical completion certificate) contractor will be released from this liability under standard forms of contracts.


I have included LDs on some projects. Especially when the completion date was critical. I have also included LDs when I needed to make sure our project didn't suddenly become a contractor's least important project.


Don't tell anybody, but on 4 of our last 5 projects with LDs I talked the owner into waiving the LDs when the contractor ran over the deadline. The one project where we did enforce them was because the contractor would not committ enough workers to the project. On the other 4, it was clear that the contractors were doing a good job and would be finished shortly after the deadline.

As a GC, we would prefer to have a known contracted amount for LD's vs. the owner calculating actual damages after the fact. The LD amount represents another item of risk that must be considered in the bid amount.


Owner does not have provide an incentive for early completion. The phrase 'time is of the essense' and the nature of mutual agreement to the LD at time of contract formation make LD enforceable without a commensurate bonus incentive. Some would argue that penalty/bonus clauses are more effective for purpose of managing on-time completion, and they do have their place. But penalty and bonus amounts need to be equal. Courts are very adverse to one-sided penalty clauses. That is why there is a reasonableness standard for the calculation of LDs.


The obvious reason for LD's is that actual damages can often be difficult to determine. It can be a problem for the owner as well. On a recent project, where the Gc did run over, the Owner had to pay for 175 new staff members to sit around and incurred payroll, taxes and other HR costs, all the while missing the opportunity for the revenue that would have offset these costs. The LD's ended up being about 2/3 of the actual daily cost and the owner suffered far greater burden that had been anticipated. 
On the flip side, there are some GC's that will elect to incur the LD, which may be substantially lower than the daily cost of additional resources. However, for larger GC's their reputation is important even if the money is not. On the aforementioned project, we negotiated a settlement that added the time to the contract, thereby allowing the GC to claim that they had finished "on time"; and then credited an amount back to the Owner to compensate them for the actual costs. While this may be unusual, it worked on this case.
Personally, as an agency CM, I would like to see incentice clauses built into contracts, but realize that virtually all public contracts are extremely limited and cannot exploit potential creativity. I would also like to see the "low bid" delivery method banned, since that often provides an incentive for entities to underallocate resources to get the job done, which makes LD's come into play. It would be in the best interest of the public to enact a best value / negotiated method, or at least "Closest to the Mean" method.




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