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Mon 17th Jan, 2022 Industry News

In construction, the adage “Time is Money!” rings true for all parties involved on a project.  This includes an owner of a project that wants a project completed on time, i.e., by a substantial completion date.   While substantial completion is often defined as when an owner can use a project for its intended purpose, this intended purpose typically equates to beneficial occupancy (in new construction) and other factors as identified in the contract.

The best mechanism for an owner to reinforce time and the substantial completion date is through a liquidated damages provision (also known as an LD provision) that includes a daily monetary rate for each day of delay to the substantial completion date.

A liquidated damages provision is not designed, and should NEVER be designed, to serve as a penalty because then it would be unenforceable.  Instead, it should be designed to reasonably compensate an owner for delay to the substantial completion date that cannot be ascertained with any reasonable degree of certainty at the time the contract is being negotiated and executed.  (Liquidated damages are MUCH easier to prove than actual damages an owner may incur down the road.)  As an owner, you don’t really want to assess liquidated damages because that means the project is not substantially completed on time.  And, in reality, a timely completed and performing project should always be better and more profitable than a late and underperforming project.   However, without the liquidated damages provision, there isn’t a great way to hold a contractor’s feet to the fire with respect to the substantial completion date.

There are numerous ways to equitably craft a liquidated damages provision if it is a negotiated provision (like in private projects).  It can be based on project phases or milestones. It can be based on one substantial completion date.  It can include a grace period.  It can include gradual increases in the daily rate based on certain time periods associated with delay.  It can be capped at a certain amount to cap the exposure.  The bottom line is that it is a risk that gets factored into the contract and substantial completion date to emphasize timely completion.

Many construction contracts will contain a mutual waiver of consequential damages provision.  This provision may include specific examples of consequential damages.  In other words, regardless of whether such examples truly constitute consequential damages, these damages examples are contractually mutually waived by the parties.  Two examples commonly include loss of use damages and increased  or additional financing damages.  These two examples are categories that do go hand-in-hand with an untimely project.  For instance, if a project is late, the owner cannot use the project by the substantial completion date and will have increased and/or additional financing costs.  Without a liquidated damages provision, and with a mutual waiver of consequential damages provision, an owner may be sh*t out of luck with recovering delay damages for a delayed project because primary actual delay damages they could prove have been waived.  (Thus, there is nothing holding the contractor’s feet to the fire regarding the substantial completion date.)  Hence, if you are going to negotiate having no liquidated damages provision, be mindful of the mutual waiver of consequential damages provision and what you may be conceding.

This is important: simply because there is a liquidated damages provision does not mean a contractor should unilaterally be exposed to liquidated damages for a delayed project.  There may be legitimate excusable delay that needs to get factored in including excusable compensable delay meaning the contractor is owed its own delay damages.  There could be concurrent delay that needs to get factored in.  While an owner may not accept a contractor’s request for additional time or claimed excusable or concurrent delay, this does not mean a contractor is just going to cave when it comes to an owner’s assessment and withholding of sums associated with liquidated damages.  Most contractors are not going to unless it is irrefutable that the delay to substantial completion was caused by them (more specifically, a trade).

A contractor agreeing to a liquidated damages provision needs to make sure that it flows the risk downstream to trades that may cause the delay.  A contractor still needs to prove the trade caused the delay, but the contractor must flow-down that risk.  If a trade is unwilling to assume that risk, that needs to be considered by the contractor.  In any event, the contractor cannot agree that the trade is not liable for any delay because the risk the contractor has assumed is not transferred to a trade that may cause that risk meaning there is nothing that holds that trade’s feet to the fire.

A liquidated damages provision is neither uncommon nor unreasonable.  It is a risk, oftentimes negotiated on private jobs but maybe not the case on public jobs, that is factored in at the onset of any project.  It is a risk that cannot be overlooked but is the risk designed to best maximize the emphasis on time is of the essence as to the substantial completion date.

By David M. Adelstein