Liquidated damages are a sum of money, agreed in the contract before work starts, that a contractor owes the owner for each day or week a project runs past its agreed completion date. Because the amount is fixed in advance as a genuine estimate of the owner's likely loss, the owner doesn't have to prove actual losses in court to recover it, and the contractor knows the cost of a late finish going in.
A worked example
A contract sets liquidated damages at $1,500 per calendar day for late completion, with Substantial Completion due on 1 June. The contractor finishes on 13 June, 12 days late. The owner withholds 12 × $1,500 = $18,000 from the final payment, without having to show what those 12 days actually cost in lost rent or extended financing. The rate applies regardless of the owner's real loss: if actual losses turn out lower, the contractor still owes the full $18,000, and most contracts also cap total liquidated damages at a fixed sum or a percentage of the contract price.
Where liquidated damages show up in a cost report
A liquidated damages deduction is typically shown as a reduction against the final payment or Final Account, kept separate from the ordinary cost breakdown, since it's a contractual deduction for late finish rather than an operating cost. Contractors tracking Cost-to-Complete alongside the programme can see a growing liquidated damages exposure building before the deduction is actually applied.
Related terms: Substantial Completion, Performance Bond, Retention">Retention, Final Account.
Planyard keeps the contract and its completion date attached to the project record and flags dates that fall outside what the contract allows, though it doesn't calculate a liquidated damages amount itself. See construction contract management software.
FAQs
How are liquidated damages calculated?
The contract states a daily or weekly rate that the parties agreed on before signing, intended as a genuine estimate of the owner's likely losses from a late finish, such as lost rent or extended financing costs. That rate is then multiplied by the number of days late.
Can liquidated damages be disputed?
Yes. A contractor can challenge a liquidated damages clause as an unenforceable penalty if the rate was never a genuine pre-estimate of loss, for example if it was set punitively high rather than to compensate the owner fairly. A court that finds a rate excessive can strike it out, which may leave the owner needing to prove actual losses instead.