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Understanding liquidated damages in construction contracts

On Behalf of | Aug 8, 2022 | Construction Law |

When you engage a contractor in your construction project, you expect everything to go smoothly. However, it is advisable to anticipate any eventualities. The contractor may breach the contract, causing you financial losses.

To protect yourself, you need to include a liquidated damages clause in your contract. It specifies a predetermined amount of money the contractor will pay you as damages for failing to perform.

What are liquidated damages?

Liquidated damages are based on the actual loss you will incur if the contractor does not complete the project on time as specified by the contract. They include loss of rent or income, storage or rental costs and fees imposed by third parties. This can be beneficial to you as they remove your obligation to prove your losses when a delay occurs.

Liquidated damages are only enforceable if they are fair and not punitive: 

  • First, they must be based on a predetermined amount between you and the contractor.
  • Secondly, you must be able to calculate the actual losses.
  • Finally, the amount must be reasonable compensation for whatever is involved.

Otherwise, if the terms are unfair and the damages are excessive, it may be impossible to claim liquidated damages.

Preventing a construction loss takes foresight

A delayed project can cause you unplanned expenses. However, a liquidated damage clause can give you peace of mind and predictability of how things will go in recouping your losses.

It is crucial to get everything right in your construction contracts. Otherwise, it can leave you financially exposed should there be a contractor delay.

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