Penalties or Liquidated damages in construction contracts

Provisions for Penalties, Liquidated Damages or delay damages (a monetary value representing the damage caused by the delay) are contained in most construction contracts.

Liquidated damages are not penalties, they are pre-determined damages set at the time that a contract is entered into, based on a calculation of the actual loss the client is likely to incur if the contractor fails to meet the completion date. They might include, rent on temporary accommodation, removal costs, extra running costs, finance costs and so on.

Penalty clauses on the other hand are specified sums of money that is applied in the event of a breach in contract and bears no reflection on the actual loss suffered by the Employer or Client.

Both of these deductions are imposed where the employer has specific deadlines or other requirements and will experience a loss of revenue, loss of use of the premises if the project is delivered late or have to pay additional supervision and administration costs relating to the late completion.

The contract document will specify the value of the LD’s, damages or penalties per day, per week or per month, or the extent of the penalties should specific requirements not be achieved.

LD’s or Penalties can be deducted from interim payment certificates as soon as they occur and can be objectively quantified. They are based on the difference between the time that the works were actually completed and the time according to the contract when they were supposed to be completed.