Liquidated damages (LDs) are a standard fixture in construction contracts, designed to compensate the principal for delay without needing to prove actual loss. But in practice, LDs can create major financial risk for builders—especially when they are excessive, uncapped, or poorly defined.
A common issue arises when LDs are paired with tight practical completion dates and limited extension of time (EOT) rights. A single delay event—often outside the builder’s control—can trigger cascading losses at thousands of dollars per day.
Here’s what builders should watch for:
- Excessive daily rates: These often exceed the principal’s real-world losses, particularly on residential or mid-size commercial projects.
- No cap on liability: Unlimited exposure to LDs can wipe out profit margins and place a builder in breach of insurance covenants.
- Unclear milestone definitions: If “practical completion” isn’t clearly defined, the principal may delay certification to extend LD periods.
Strategies to reduce risk:
- Negotiate a reasonable LD rate—ideally aligned to the client’s real holding costs.
- Introduce a cap on LDs, such as 5–10% of the contract sum.
- Clarify what triggers practical completion, and who determines it.
- Ensure robust EOT provisions—including entitlements for delays outside your control (e.g., latent conditions, access delays, industrial action).
Liquidated damages are meant to bring certainty, not punishment. Builders who take the time to understand and negotiate these clauses can protect themselves from disproportionate liability—and still remain competitive in the tender process.