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, 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.
