In recent decades, construction agreements have continuously evolved and been refined to allocate and distribute risks better between employers and contractors.
Time-related risks are among the critical challenges in construction projects, with delays and disruptions potentially leading to significant financial impacts to employers and contractors and, in many cases, costly dispute resolution processes.
To enhance certainty in agreements and ensure fair and clear compensation for both parties when dealing with project delays, many construction contracts have incorporated liquidated damages (LDs) clauses, which became a standard practice in the industry, especially in time-sensitive projects. But what are liquidated damages?
In short, Liquidated damages (LDs) are predetermined amounts of compensation set in a construction agreement to be paid by a party if it fails to meet its contractual obligations (e.g. reaching project completion by a specific date).
In this article, we will review in depth what LDs are, understand their benefits, and how to claim liquidated damages under a contract, visit some real examples, and many other apsects around the topic.
Construction projects are well-known for their evolving and dynamic nature: changes of scope through variation orders, external factors causing disruptions (e.g. weather, supplier delays, latent conditions, etc), and many other unexpected events that can adversely impact project progression.
As such, industry professionals have created contractual mechanisms to allow for pre-agreed flexibility and fair compensation for both parties executing the contract, such as clauses related to variation claims/requests, variation orders, extension of time, early warning notices, etc (for more information, check articles in the suggested reading section below).
When dealing with delay compensation, including the liquidated damages clause is widespread in construction contracts. Liquidated damages are a pre-defined compensation sum (typically per day – e.g. $50k/day) that the contractor becomes liable to pay the owner/employer if it fails to reach project completion on the pre-agreed dates.
The Delay and Disruption Protocol by the Society of Construction law defines liquidated damages as “ a fixed sum, usually per week or per day, written into the contract as being payable by the Contractor in the event that the works are not completed by the contract completion date (original or extended) “.
