Publications + Presentations

Smart Summary

• Liquidated damages (LDs) are pre-agreed daily penalties for project delays, offering predictability but requiring careful drafting to avoid being deemed punitive.
• Owners benefit from LDs by avoiding the need to prove actual losses, but must base rates on realistic, documented estimates.
• Contractors and subcontractors should negotiate reasonable caps, ensure protection against delays outside their control, and maintain clear records.
• Legal enforceability hinges on LDs being a reasonable forecast of loss, not a punishment—vague or excessive clauses risk invalidation and costly disputes.

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In the often-chaotic world of construction, where delays are as common as coffee stains on blueprints, liquidated damages (LDs) clauses are a fact of life on larger projects. They protect owners while providing certainty for the project participants of the cost of delays to the owner that may be assessed for contractor-caused delays. That certainty, however, can also be a headache for contractors and a potential trap for the unwary subcontractor. 

LD provisions set a “per diem”—a predetermined daily dollar amount—for delays, with the goal of sidestepping the messy business of proving actual damages for delays. But their enforceability hinges on precision, reasonableness, and foresight. 

Here’s what owners, general contractors, and subcontractors need to know when negotiating LDs in the United States, along with some legal pointers to keep disputes from turning into courtroom brawls.

For Owners: Predictability at a Price

Owners want LDs because they transform the murky risk of delay into a tidy, per-day dollar figure—say, $1,000 for each day past substantial completion. This clarity spares owners the burden of quantifying and then fighting over losses like lost rent, profits, financing, and business costs in court. But beware: courts won’t enforce LDs that are determined to be penalties. 

To pass muster, the daily rate must reasonably forecast anticipated losses at contract signing, not a cudgel to bully contractors. Owners should document calculations—think rental income, profits expected (if any) from the completed project, loan interest, and operational disruptions—and avoid pie-in-the-sky figures. Also, clearly define “substantial completion” to avoid arguments over when the LD clock stops ticking.

For General Contractors: Known Risks, Hidden Dangers

General contractors face LDs as a sword hanging over their heads, but a well-negotiated clause can limit the sting. If you must accept it, and on many larger projects you do in Ohio, on public projects, the contracting entity legally must have them), push for a reasonable daily rate. $20-$25 per $100,000 of contract value may be fair, depending on the circumstances, and attempt to negotiate a cap on LDS to limit exposure.

Owners may not agree to a cap or a proposed limitation, but you won’t get it if you don’t ask.  

Contractors should also insist on extension-of-time provisions for excusable delays, such as owner-caused delays or force majeure events, ensuring LDs don’t accrue unfairly. Flow-down clauses in subcontracts can shift some of the LD risks to subcontractors, but only for delays they cause. 

Without clear contract language, contractors risk being squeezed between an owner demanding LDs and subcontractors dodging liability. Keep meticulous records of delays and change orders to escape blame where you are not the cause of the delay.

For Subcontractors: The Trickle-Down Trap

Subcontractors often inherit LDs via flow-down clauses, making them liable for delays caused by their work. The catch? They rarely control the project schedule and can be burned by upstream mismanagement. Subcontractors should scrutinize prime contracts for LD terms and attempt to negotiate liability limits, say, proportional to their scope or capped at their subcontract value. 

Ensure the contract specifies that LDs only apply if the owner assesses them against the general contractor, avoiding double-dipping. Subcontractors must also comply with notice requirements for delays or changes, as sloppy paperwork can sink defenses.

Legal Tips for Enforceability + Risk Assessment

While each state has its gloss on LDs (so consult a construction attorney in your state for specific advice on specific contracts and projects), for LDs to hold up in court, they generally must meet three criteria: 

1. damages must be hard to estimate at contract formation; 
2. the amount must be a reasonable estimate of probable loss; and 
3. the clause must intend compensation, not punishment. 

For owners, this means it’s a good idea to include contract language in the LD clause stating delay damages are “difficult to ascertain” and the LD rate is a “reasonable estimate.” Avoid arbitrary numbers, as courts in many jurisdictions have struck down LDs exceeding actual losses by wide margins. Document pre-contract calculations, referencing comparable projects or cost estimates, to bolster enforceability and consider tying the LD per diem to the contract value as is done in many public contracts. 

All parties should align LDs with project milestones, clarify triggers, and integrate with scheduling provisions for risk assessment. Owners and contractors might consider apportionment clauses for concurrent delays, ideally administered by a neutral third party, to fairly allocate blame. Subcontractors should try to ensure that any discretion the general contractor gives itself to apportion LDS is reasonable and subject to objection.

Parting Shot

LDs can be a double-edged sword—security for owners, exposure for contractors and subcontractors. Negotiate with care, document diligently, and draft with precision. 

Done right, LDs align incentives by setting clear financial stakes for timely completion, spurring contractors, subcontractors, and owners to prioritize schedules and allocate resources efficiently while incentivizing proper and timely notice and clarity of the costs of schedule impacts. Done wrong, vague or punitive LD clauses ignite disputes—think arbitration or litigation—where legal fees, expert expenses, and project disruptions can dwarf the damages at stake and potentially invalidate the entire clause.

Liquidated damages can be a powerful tool in construction contracts—but only when clearly defined and fairly applied. Careful drafting is essential to avoid disputes and ensure enforceability. If you're negotiating or reviewing a construction contract, connect with Eric Travers at etravers@keglerbrown.com or 614-462-5473 for practical, strategic legal support.