Liquidated Damages Clause
(Private Project Construction Contract)

Summary

This liquidated damages clause may be included in a private project construction contract to provide for the payment of damages by the contractor to the owner in the event of project delays caused by the contractor. This clause contains practical guidance, drafting notes, and an alternate clause. Liquidated damages clauses enable parties to a construction contract to agree to a certain sum to be paid by a contractor as compensation for resulting financial damages to a project owner in the event of project delays. In the absence of such a clause, the responsible contractor is exposed to liability for all damages incurred by the owner as a result of the delay, which may include direct, actual damages, as well as indirect, consequential damages. Generally, liquidated damages are enforceable when project delays are not otherwise excused by the parties' contract, and where the amount is deemed a reasonable pre-contract estimate of actual damages, and not as an unreasonable 'penalty' intended to punish a contractor for breaching a contract. Liquidated damages are generally not recoverable after the contractor reaches substantial completion of its work (as defined in the contract) on a construction project, unless the contract specifies otherwise. By choosing either the default or the alternate clause, the parties can address liquidated damages in a contract for either a single or multiple-building private construction project. Carefully review applicable state law governing the parties' contract for challenges to enforcement of liquidated damage clauses, e.g., as a 'penalty,' as a form of alternative performance, as being an unreasonable pre-contract estimate of the owner's actual damages, due to concurrent delays by the project owner, or where enforcement is sought after the date of substantial completion of the contractor's work (i.e. through final completion of the project). For a list of key resources covering construction-related tasks for a first-year associate, see First Year Associate Resource Kit: Construction. For guidance on owner and contractor agreements, see Owner and Contractor Agreement Resource Kit. For a full listing of key content covering construction, see Construction Resource Kit. For a discussion of issues and tasks commonly encountered by in-house lawyers and counsel working on construction-related matters, see In-House Construction Resource Kit. For a list of key resources covering construction-related tasks for a junior associate, see Junior Associate Resource Kit: Construction. For more information on liquidated damage clause interpretation and enforcement, see Corbin on Contracts § 58.21, 11 Corbin on Contracts § 58.18, and Construction Law P 6.10 [2].