Drafting Liquidated Damages Provisions in Construction Contracts: Limiting Owner's Remedies, Establishing Damages Caps

Few concepts in the construction industry are as universally and fundamentally misunderstood as liquidated damages. Counsel must understand the basic definition of a legally enforceable liquidated damages clause. Liquidated damages are a reasonable projection of actual damages likely to be sustained in the event of a delay, particularly when the actual damages would be difficult to determine. When both parties sign a contract with a liquidated damages clause, they accept the reasonableness of the liquidated damages.

Construction counsel should consider that the goal of a proper liquidated damages clause is to limit damages to a fixed and predetermined amount. The clause should expressly state that recovering liquidated damages is the owner's sole and exclusive remedy in the event of such a delay. Best practices dictate the use of a liquidated damages clause in conjunction with a mutual waiver of consequential damages.

Liquidated damages clauses should expressly define the event of delay that triggers the ability of the owner to assess liquidated damages against the contractor and negotiate a cap on liquidated damages, ideally tied, in some measure, to the contractor's anticipated profit on the contract. Construction counsel for contractors should consider a survival clause in the event of termination so that an owner anticipating far greater, actual delay damages than is provided for in the clause may seek to avoid the limitations of the clause by terminating the contractor.

While it seems counterintuitive, the liquidated damages provision in the prime contract should not likely be cut and pasted into all subcontracts. Counsel should consider prime and subcontractor relationships and needs and craft separate liquidated damages provisions in subcontracts that address those specific concerns.

Listen as our expert panel discusses best practices for drafting and negotiating a liquidated damages provision in a construction agreement. The panel will address the practical considerations of what should be included.