Liquidated Damages

Liquidated damages (LDs) are a pre-agreed financial penalty written into a construction contract - typically a fixed daily or weekly sum payable by the contractor when they fail to achieve practical completion by the agreed contract date. Rather than requiring the client to prove actual financial loss after the fact, the LD rate is calculated and agreed at tender stage to represent a genuine pre-estimate of the loss the client would suffer from the delay.

Why Liquidated Damages Are Used

LDs give both parties certainty upfront. The client knows exactly how much compensation they can recover if the project overruns, without needing to pursue the contractor through litigation for general (unliquidated) damages. The contractor knows their maximum daily exposure before they sign, which allows them to assess the risk of a project and build appropriate programme contingency.

If no LD clause exists - or if it is unenforceable - the client must quantify and prove their actual financial loss through litigation. That can include loss of rent, financing costs, storage costs, and third-party fees. A properly drafted LD clause removes that uncertainty for both sides.

LD clauses appear in most formal construction contracts, including JCT (Joint Contracts Tribunal) and NEC (New Engineering Contract) forms. The agreed rate is recorded in the contract particulars or schedule of contract information, and it must reflect a genuine calculation of likely loss - not an arbitrary penalty. Courts in England and Wales are generally reluctant to strike down LD clauses agreed freely between commercial parties of similar standing.

How Liquidated Damages Work in Practice

LDs become payable when the contractor fails to achieve practical completion by the contract completion date. The client - or their contract administrator - must issue a certificate of non-completion in writing, and the agreed daily or weekly rate then begins to accrue. The client can deduct this amount from sums otherwise due to the contractor.

Before a client can legitimately deduct LDs, certain conditions apply. Any extension of time (EOT) the contractor is entitled to must be granted first, and the correct contractual notices must be issued in the right sequence. If a delay was caused by the employer - through late design information, additional instructed works, or access issues - the contractor may be entitled to an EOT that removes or reduces LD liability for that period.

If an EOT is granted after a certificate of non-completion has already been issued, the original certificate is cancelled and a new one must be issued before LDs can recommence. Missing this step - as in the case of Octoesse LLP v Trak Special Projects Ltd [2016] - can result in the employer losing their right to deduct LDs entirely, even where the contractor was genuinely late.

Extension of Time and Protecting Your Position

Managing EOT notices is the practical defence against unfair LD deductions. A contractor who experiences a legitimate delay but fails to issue the required written notice within the contractual timeframe may lose their EOT entitlement entirely - leaving the contract completion date unchanged and LDs accruing even though the employer contributed to the delay.

Keep a contemporaneous delay log, issue notices promptly when relevant events occur, and record all instructions received in writing. Contractors who manage this process rigorously are in a much stronger position to challenge or negotiate LD deductions.