Liquidated damages fix in advance what a contractor pays for each period of delay. The mechanism saves both parties from having to prove actual loss, which is expensive and uncertain, and it lets a contractor price the risk.
It only works where the rate can be shown to be a genuine attempt to estimate the loss that delay would cause. A figure chosen for its deterrent effect is a different thing, and a contractor advised well will say so.
Build it from the loss
The components are usually straightforward on a development scheme. Finance cost on the facility for the period of delay. Extended professional fees and site management the client carries. Additional insurance and security.
Then the revenue side: rent or interest foregone on completed units, holding costs on unsold stock, and any contractual penalties the client faces to a purchaser or a tenant.
Add them up, express them per week, and write down the calculation. The document does not need to be long. It needs to exist and to be dated before the contract is entered into.
Genuine pre estimate, not a ceiling on ambition
The rate must be an honest attempt to estimate loss at the time the contract is made, not a number selected to concentrate the contractor's mind. Whether an unexplained figure would be enforced is a legal question rather than a commercial one, and where the point is live it is one for solicitors.
What can be said commercially is that a client who cannot produce the calculation is in a weaker negotiating position the moment damages are levied, because the contractor's first move will be to challenge the rate.
The calculation therefore has two functions: it makes the rate defensible, and it tells the client what delay actually costs them, which is useful information independently of the contract.
Nil is a decision, not an omission
Where the rate is left blank or stated as nil, the position depends on the drafting and can amount to the client having no remedy for delay at all. That is occasionally intended and usually not.
If damages are genuinely not wanted, saying so explicitly is safer than leaving a gap. Where they are wanted, the entry has to be completed correctly, including the periods and the sections.
This is a routine checking point before execution and it is missed often enough to be worth stating.
Sections need their own rates
On a scheme with sectional completion, each section needs its own damages figure representing the loss caused by delay to that section. Applying one rate across every section regardless of what each earns is where the mechanism becomes vulnerable.
The arithmetic is straightforward: a section of ten units carries a smaller loss than one of eighty, and a commercial unit with a signed lease may carry a larger one than either.
Getting this right at tender is cheap. Retrofitting sections after contract, by agreement, is expensive and weakens the position on delay generally. The wider phasing issues are set out under complex phasing.
The cap and the trade
Contractors frequently negotiate a cap, expressed as a percentage of the contract sum. That is a normal commercial trade: the client gets a lower price or a bid at all, and accepts a limit on recovery.
The point to understand is what happens above the cap. Once liquidated damages are exhausted, the client generally has no further recovery for that delay, however long it continues, unless the contract says otherwise.
A cap set low relative to a long programme therefore removes the incentive it was supposed to create at exactly the point the client needs it most. Whether that trade is worth making is a judgement, but it should be a conscious one.
Extension of time is the other half
Damages only bite where the contractor is not entitled to more time. Every extension of time granted removes a period of damages, and the two questions are decided together in practice.
That is why granting time and settling money as a single negotiated figure tends to favour whoever is under less pressure, and why they should be assessed separately on their own evidence.
Where a client deducts damages while time claims remain open, they are usually taking a position they will have to unwind. Doing the extension of time assessment first is slower and produces a deduction that holds.
What this means for you
Write the calculation down before the contract is executed, and keep it. It takes an afternoon and it is the difference between a rate you can levy and a rate you will end up arguing about.
Check the contract particulars before execution: the rate entered, the periods, the sections and the cap. Those four entries carry the whole mechanism and they are completed by somebody in a hurry more often than anybody would like. Our approach sits under tendering and procurement.
Setting damages on a scheme going to tender?
Tell us the programme, the funding and the end use. We will help build a rate that can be explained if it is ever tested.