What Is Liquidated Damages In Construction Contract?
What Is Liquidated Damages In Construction Contract?
Liquidated damages in construction contracts are a predetermined amount of money agreed upon between the contractor and the client, payable by the contractor to the client in the event that they fail to complete any part of their contractual obligations.
This amount is often included in the contract as an incentive for contractors to ensure timely completion of their work, and provides financial security for clients in case something goes wrong.
It helps protect both sides from excessive losses and avoids any disputes arising from non-fulfillment of contractual obligations.
Why Include Liquidated Damages In A Construction Contract?
Including liquidated damages in a construction contract is essential to ensure that the contractor’s performance obligations are met.
The amount of liquidated damages should be stipulated in advance, allowing for a clear understanding amongst all parties as to what is expected.
This helps to reduce delays and costs associated with late delivery or breach of contract.
Additionally, it acts as a deterrent – often if the risk of loss is greater than the potential revenue from an agreement, then this encourages contractors to ensure they meet their contractual obligations on time.
Furthermore, any disputes over late delivery and cost overruns can be resolved quickly rather than needing lengthy Tribunal hearings or legal proceedings where both parties incur considerable costs and time.
How Are Liquidated Damages Calculated In Construction Contracts?
Liquidated damages in construction contracts are calculated based on the estimated costs of delays caused by a contractor and is typically stated as an agreed-upon sum in the contract.
These damages become due if the contractor does not complete the project within their agreed upon timeline or fails to fulfill any other contractual obligations.
The calculation of such damages involves taking into account several factors, including the expected duration of the project, potential monetary penalties that may be incurred due to delays, and potential legal fees associated with delay disputes.
It also takes into consideration any lost profits that may have been incurred by the other party leading up to and following a breach of contract.
Each contractor must therefore assess their own financial situation when determining an appropriate amount for liquidated damages in case of a breach.
What If The Liquidated Damages Are Not A Genuine Pre-Estimate?
If the liquidated damages are not a genuine pre-estimate, it means that the amount of damages has been calculated to be more than what is expected and required and this could result in one party being unfairly compensated.
This could potentially leave one side vulnerable to exploitation and adversely impact their legal rights as the contract may have been drafted without sufficient consideration for potential losses or damages.
It could also lead to costly disputes if either side disagrees with the amount that has been stated as liquidated damages.
How To Draft A Liquidated Damages Clause?
Drafting a liquidated damages clause requires careful consideration of both parties’ needs and interests.
Both parties should agree in advance on the amount of damages that will be assessed if one party fails to meet their obligations, taking into account any possible defenses or excuses for nonperformance.
A reasonable estimate of actual economic damages should also be taken into account, as well as any relevant legal precedents or other applicable laws.
It is important to include language stating that the liquidated damages are not intended to be a penalty and that they reflect fair and reasonable compensation.
Additionally, it is advisable to include language requiring mutual agreement before any amendment or waiver of the clause can take effect.
