Liquidated damages/Delay damages in construction

Dec 1, 2021

Liquidated Damages in construction

The abbreviation “LD” stands for “Liquidated Damages.” Liquidated damage’s principal purpose is to protect the client from the Contractor’s time-related liabilities. If the Contractor breaches the contract, the client might request (deduct) a predetermined sum as “liquidated damages” or “delay damages” if the Contractor breaches the contract.

The principal of Liquidated Damages/ Delay Damages

Let us explain the Liquidated Damages principle to you. A daily sum will be defined in the contract as delay damages or liquidated damages. If the Contractor fails to meet the agreed completion date (and the Client does not grant an extension), the Contractor is obligated to pay this sum for each day the contract’s agreed completion date is surpassed. And contracts specify the maximum amount that clients might seek in delay damages. In most cases, this will represent 10% of the contract’s total value. This sum is not treated as a penalty because it is fixed and predetermined under the contract.

Several other elements should be included in a liquidated damages contract. In the contract, the completion date or time should be specified. In addition, the contract should describe the Employer’s takeover mechanism. Only from the date of the agreement’s designated completion day can the client impose delay damages (liquidated damages). Before billing the contractor, the agreed-upon date must have passed.

Related clauses in standard documents

FIDIC 1987 red book provides a clause for “Liquidated damages”, which is clause 47.1 (Liquidated Damages for Delay). But in FIDIC 1999 red book, it is defined as “delay damages”(clause number 8.7). And in FIDIC Red book 2017 it moves to clause number 8.8.

Furthermore, JCT 98 uses clause number 24 “Damages for non-completion” to cover against the Contractor’s obligation against the client.

Why this damages are critical? (client’s perspective)?

The majority of clients expect their projects to be completed within the agreed-upon time frame. One of our clients, for example, wished to open a new medical center. They’ve analyzed geographic data and found a suitable location for it. They then rented out a recently erected building in the neighborhood. However, that structure was not intended to be used as a medical facility (A medical centre needs particular requirements). As a result, the customer has met with the Landlord and hired a contractor to perform the necessary modifications.

In addition, the customer has arranged a deal with the building owner to get a grace period before they have to start paying their rent. With a rental exemption, the Landlord agrees to give four months to finish the work. As a result, the contactor bears sole liability. If the contractor fails to meet the deadline, the client may be forced to pay rent without receiving any compensation. Clients can utilize a liquidated damages (delay damages) provision to reduce their risk in these instances.

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