What “liquidated damages” means

On Behalf of | Aug 11, 2021 | Construction Law |

Residents and businesses of Austin and other areas of Texas may want to learn more about what the term “liquidated damages” means. It is a term that is often included in construction contracts.

According to LEVELSET this clause is set at the beginning of a contract and receives agreement by all those involved. It is legally written into the contract in case there is a breach by either party.

Formula for liquidated damages

Usually written with the following formula, liquidated damages make take this form:
Total Contract Price – (X amount of $ per day) x (number of days late)

In other words, a particular dollar amount is multiplied by the number of days late. That amount is then taken out of the contract price.

Why have this clause?

It allows both parties to know what will happen in the event of a breach of contract or the fact that the project is late. They can settle on a number through negotiation, right at the beginning of a contract.

Without a liquidated damages clause, for the owner, proving damages can be costly and time-consuming. For the contractor, with this clause, they may analyze the risk involved and adjust their schedule appropriately. It also gives the contractor knowledge of the limits of claims by the owner.

Liquidated damages may be difficult to enforce

Many states have rules governing the use of these clauses in construction law contracts. Usually, the liquidated damages must be reasonable at the time of the contract.

Courts look at the following:

  • Amount must receive agreement in advance
  • Actual damages are difficult to quantify
  • Amount must be reasonable
  • Amount must not be a penalty, but compensation
  • Must be the only remedy for the specified contract breach

What does liquidated damages do? It adds more predictability and security to a construction contract. However, be aware that enforcement is at the discretion of the judge.