Liquidated damages clause: what it means, a typical example, and what to ask for
A liquidated damages (LD) clause fixes, in advance, a daily amount you pay the builder for every day you finish late. The rate matters, but the bigger question is whether there is a cap on the total, because an uncapped LD clause has no ceiling at all.
A typical builder version
If the Subcontractor fails to reach Practical Completion by the Date for Practical Completion, the Subcontractor must pay the Contractor liquidated damages at the rate stated in Item 14 of the Subcontract Particulars for every day after the Date for Practical Completion up to and including the Date of Practical Completion. The Contractor may deduct liquidated damages from any moneys due to the Subcontractor.
Illustrative wording of the kind found in builder-authored subcontracts, not taken from any one contract.
What it means for you
Every late day costs the daily rate in the particulars, with no limit on the total, and the builder can take it straight out of your payments. Six weeks at $1,500 a day is $63,000.
- No cap on the total liquidated damages.
- LDs in addition to general damages for the same delay, rather than instead of them.
- A rate set to match the head contract rather than your package.
What market looks like
A daily rate proportionate to your package, a cap on the total of 5 to 10 per cent of the subcontract sum, and LDs as the builder's only remedy for delay. Australian courts will strike an LD clause down as a penalty only where the amount is out of all proportion to the builder's legitimate interests, which is rare, so the cap has to be negotiated.
What to ask for
"The Subcontractor's total liability for liquidated damages must not exceed 5% of the Subcontract Sum, and liquidated damages are the Contractor's sole remedy for the Subcontractor's failure to reach Practical Completion on time."
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Common questions
What does LD mean in a construction contract?
LD stands for liquidated damages: a fixed daily amount, agreed in the contract, payable for every day the work is finished late.
Are liquidated damages a penalty?
Rarely, in Australian law. An LD amount is only unenforceable as a penalty if it is out of all proportion to the builder's legitimate interests. In practice the protection is a cap you negotiate before signing.
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General information, not legal advice. Example wording is illustrative. Check any clause you rely on against your full contract and your state's Security of Payment Act. Written by Mat Kennedy, The Construction Contracts Co.