What are liquidated damages in construction contracts?

Liquidated damages are a commonly used provision in construction contracts that specify a set amount of money that a contractor agrees to pay the owner if the project is not completed on time. This predetermined sum is established during the contract negotiation phase and is intended to compensate the owner for potential losses resulting from delays. The concept is rooted in the difficulty of calculating actual damages incurred due to delays, making it pragmatic to agree on a certain amount upfront.

The purpose of liquidated damages is to provide a clear consequence for not meeting the agreed-upon timeline, ensuring that the contractor is motivated to complete the project on schedule while also providing financial protection to the owner. This is distinct from other financial aspects of a contract, such as additional charges for overtime work, incentives for early completion, or penalties for substandard workmanship, as these do not directly address the issue of delay in project completion.