As all quantity surveyors will be aware, understanding, interpreting, or even drafting construction contracts is a huge part of the job. Contracts often run into hundreds of clauses, each setting out obligations from one party to another. One clause you’ve probably come across is liquidated damages, or LDs for short (or Liquidated and Ascertained Damages, LADs in the UK),. But what exactly are liquidated damages? Why are they used? And what issues can arise when enforcing them? Let’s take a closer look.
What Are Liquidated Damages?
Simply put, liquidated damages are a contractual clause that sets out a pre-agreed amount of money payable if a contractor breaches the contract.
In construction, LDs usually relate to time, specifically, the contractor not completing a project by the agreed completion date.
Example:
- A client hires a contractor to build a new car park for £100,000.
- Both parties agree that if the car park is late, the employer could lose profits — so they set liquidated damages at £1,000 per day.
- The project overruns by five days.
- The client enforces the LD clause: £1,000 × 5 days = £5,000.
- Final payment to the contractor: £95,000 (instead of £100,000).
This straightforward mechanism is what makes liquidated damages attractive to clients.
Why Are LDs Used?
From the client’s perspective
- Predictability: LDs provide a clear formula for calculating damages without needing to prove actual losses, which can be complex and time-consuming.
- Security: They act as a form of insurance, reducing the risk of financial loss from delays.
- Negotiation upfront: By agreeing a figure in advance, both parties settle on what they consider a fair and reasonable outcome.
From the contractor’s perspective
- Risk management: Contractors can assess the potential exposure to damages before committing to a project.
- Limitations on claims: LDs cap the client’s entitlement to damages, preventing excessive or open-ended claims if delays occur.
- Clarity: Everyone knows the consequences of a delay from the outset.
Potential Problems with Liquidated Damages
While the theory sounds straightforward, enforcing LDs in practice can be far more complicated.
- Reasonableness: The agreed figure must reflect a genuine pre-estimate of loss. If it looks disproportionate, courts may rule it unenforceable.
- Not a penalty: LDs are meant to compensate the client, not punish the contractor. If deemed punitive, they won’t hold up in court.
- Difficult to quantify: Estimating potential losses in advance can be tricky, especially on complex projects.
- Court costs: Legal disputes over LDs can end up costing more than the damages themselves.
Key Takeaways
Liquidated damages can be a valuable tool in construction contracts, offering clients a sense of security and giving contractors clarity around risk. However, for LDs to be enforceable, the value must be reasonable, accurate, and based on genuine loss.
Simply inserting an inflated or arbitrary figure is a recipe for disputes, and in many cases, contractors who challenge an unrealistic LD clause in court are likely to win.
