Liquidated Damages in Construction Contracts
Liquidated damages (LDs) are among the most common — and misunderstood — provisions in construction contracts. They appear throughout the contractual chain: between principals and head contractors, head contractors and subcontractors, and even further downstream.
In theory, LDs are meant to bring certainty to the consequences of delay. In practice, they’re often a breeding ground for confusion, mismanagement, and costly disputes. From mismatched start dates to missing extension of time (EOT) claims, the effectiveness of an LD clause almost always depends on the administration behind it.
This article explains what liquidated damages are, when they’re valid, when they fail, and the traps that catch out even experienced construction professionals.
What Are Liquidated Damages?
Liquidated damages are a pre-agreed sum payable for breach of a time-related obligation — most commonly, delay in completing work or achieving practical completion.
They are intended to compensate the non-defaulting party for the commercial consequences of delay without requiring proof of actual loss. That might include costs such as extended supervision, site overheads, lost revenue, or disruption to downstream works.
Unlike general law damages, which must be proven after the fact, liquidated damages fix an agreed rate at the outset. They operate as contractual compensation, not punishment.
Because LDs can appear anywhere in the contracting hierarchy, the same clause that protects one party often exposes another. A head contractor facing $10,000 per day in upstream LDs might impose $5,000 per day downstream — aiming to share the risk, though not always evenly.
When Are Liquidated Damages Valid?
An LD clause is enforceable if the amount represents a genuine pre-estimate of the likely loss arising from delay at the time the contract is made.
The principle is straightforward: liquidated damages must be proportionate and commercially reasonable, not extravagant or punitive.
Courts recognise that commercial parties are free to allocate risk as they see fit. As long as the rate is rational in the context of the project and the parties’ experience, it will usually stand — even if the actual loss turns out to be higher or lower than expected.
The key question is not whether the rate reflects the loss suffered in hindsight, but whether it was a genuine attempt to forecast likely loss when the contract was formed.
When Are Liquidated Damages Invalid (the Penalty Trap)
A liquidated damages clause may be unenforceable as a penalty if its purpose is to punish, deter, or coerce performance rather than to compensate for delay.
The law distinguishes between clauses that protect a party’s legitimate commercial interest (valid) and clauses that impose an arbitrary or excessive burden to discourage breach (invalid).
A clause may be penal if:
The rate is out of all proportion to the likely loss or risk being protected.
It applies automatically regardless of cause or fault.
It imposes a consequence that serves no legitimate commercial purpose.
In reality, courts rarely interfere with LD clauses in commercial construction contracts. Where both parties are experienced and the clause has been consciously agreed, it will almost always be enforced. The bar for establishing a penalty is high — but it’s not impossible.
Practical Traps
Even when a clause is legally valid, it can fail in practice if the contractual machinery behind it isn’t properly managed. Common problems include:
Unclear start dates
The “Date for Commencement” in the contract often bears no resemblance to the actual date of possession or site access. If the baseline is wrong, the “Date for Practical Completion” — and the entire LD mechanism — becomes uncertain.
No EOTs claimed
Contractors and subcontractors often fail to submit EOT claims within the strict contractual timeframes. Once the window closes, the LD clock keeps ticking — even where the delay wasn’t their fault.
Delays caused by the other party
If the contract doesn’t allow extensions for delays caused by the other party, the prevention principle may render LDs unenforceable. A party can’t hold the other liable for delay it caused itself.
Schedule says “nil” or “N/A”
This is one of the most common — and misunderstood — drafting traps. If the contract schedule lists the liquidated damages rate as “nil”, courts have often interpreted that to mean no damages at all are recoverable for delay, whether liquidated or general. In other words, the parties are taken to have agreed that delay damages are not payable in any form.
By contrast, where the schedule states “N/A” (not applicable), it can suggest that the liquidated damages regime simply doesn’t apply — leaving open the potential for general law damages for delay, unless the contract expressly excludes them.
Ultimately, the effect of either entry depends on the contract as a whole and the parties’ intention. If the goal is to preserve the right to claim general damages despite a “nil” or “N/A” entry, the contract should say so expressly. Clarity here avoids one of the most avoidable — and expensive — sources of dispute in construction contracts.
Poor record keeping
Even the best LD clause is useless without accurate project records. Without dated correspondence, programs, and site diaries, it becomes impossible to establish when delays occurred, who caused them, or whether they’ve been accounted for through EOTs.
Dual Regimes and Sole Remedies
Whether a party can claim both liquidated and general damages depends entirely on how the contract is drafted.
Some contracts make LDs the sole remedy for delay — meaning the agreed rate is the only recoverable amount, even if the actual loss is greater. This provides commercial certainty and caps exposure.
Others preserve a dual regime, allowing the recovery of general damages if the LD clause is invalid, incomplete, or not triggered.
There’s no universal rule. The contract’s wording, structure, and risk allocation determine whether LDs replace or sit alongside general damages.
This distinction becomes particularly important down the chain. A head contractor capped upstream but fully exposed downstream may face a mismatch in liability that can’t be passed on.
Managing Time — The Foundation of Any LD Claim
Liquidated damages depend entirely on the management of time. Yet, time administration is often the weakest aspect of contract performance.
Common problems include:
The contract commencement date not matching the actual date of possession.
Delays not being notified in accordance with the time bar.
Programs not updated or agreed.
Practical completion being ambiguous or disputed.
When dates, programs, and records don’t align, the LD machinery can’t operate reliably. The clause might survive on paper, but it collapses in practice.
From the first day of a project, all parties should ensure:
The commencement date reflects actual possession.
The baseline program matches the contract milestones.
EOT procedures are followed precisely.
Variations, delays and extensions are properly documented.
The cost of getting this wrong is rarely immediate — it’s when LDs are claimed months later that the paper trail (or lack of one) becomes decisive.
Enforcement Trends — How Courts Treat LD Clauses
Recent judicial trends show a consistent approach: courts will generally enforce LD provisions between commercial parties if the clause is clear and the contract has been properly administered.
The guiding principle is freedom of contract — the law protects the bargain struck, not the wisdom of it.
Only where the clause is ambiguous, uncertain, or applied inconsistently will a court intervene. The focus is on interpretation and administration, not sympathy.
In short, LDs are usually enforced — unless you’ve undermined them yourself through poor contract management.
Practical Guidance for All Parties
For those imposing LDs (principals, head contractors, clients):
Draft clearly — specify the rate, trigger, and whether it’s the sole remedy.
Ensure that the start, completion and EOT mechanisms work logically.
Keep records of actual delay, correspondence, and project milestones.
Be realistic — a clause that’s clearly punitive is at risk of being struck down.
For those exposed to LDs (contractors, subcontractors, suppliers):
Understand exactly what you’re agreeing to — particularly if “nil” or “N/A” appears in the schedule.
Claim EOTs strictly in accordance with the contract.
Keep your programs current and aligned with your contractual obligations.
Review whether the LD rate is proportionate to your scope and risk.
Don’t rely on hindsight to argue penalties — focus on administration and documentation from the start.
Final Thoughts
Liquidated damages are meant to bring clarity, but in practice they’re one of the most common sources of uncertainty and dispute in construction contracts.
Their enforceability depends not only on the drafting, but on the accuracy of the project’s time management and record keeping. A technically sound LD clause can become unenforceable if the contract dates are wrong or the EOT process isn’t followed.
At Level Field Lawyers, we regularly advise contractors, subcontractors and principals on drafting, enforcing and challenging LD provisions. We’ve seen how an unclear start date or a forgotten EOT can turn a simple LD clause into a seven-figure dispute.
If you’re negotiating or disputing liquidated damages, get in touch — we can help you manage the risk before it turns into a claim.
