Member Communication Experience

Understanding Liquidated Damages

in Construction
Written by: InEight Blog Editors

Delays in the construction business are common for

construction projects. For some projects, excessive setbacks
can have a ripple effect downstream, such as increased project
costs, incidental damages, missed business opportunities, or
a late start for other dependent activities. Sometimes these
delays are unavoidable. Other times, they may be due to
the contractor’s oversight. In these instances, delays to the
substantial completion date could be determined to be a
breach of contract. This is where liquidated damages come
in. Although no one wants to be in a situation to have to deal
with them, it’s important to understand what they are, how
they are calculated, and what you can do to mitigate their
occurrence in the first place.

WHAT IS THE LAW OF LIQUIDATED DAMAGES IN In construction, the liquidated amount of damages is the
CONSTRUCTION agreed-upon compensation owed to one party (most often the
client) when the other party (often the contractor) doesn’t meet
According to Cornell Law School, liquidated damages include a
the timeline requirements. Liquidated damages are based on a
variety of actual damages, but they usually appear in a contract
forecast of estimated real costs and losses the first party would
as a clause or section. Broadly, parties to a contract use
likely incur. This is set forth in a liquidated damages clause
liquidated damages when actual damages are hard to prove.
within the construction contract before the project begins.
Suburban Magnesium Foundry, Inc. states, “a provision for
QUALIFYING FACTORS FOR LIQUIDATED DAMAGES
liquidated damages will be regarded as valid, and not a
penalty when three conditions are met: (1) the damages to For an owner to qualify for liquidated damages, some legal and
be anticipated from the breach are uncertain in amount or process requirements must be met. Liquidated damages are
difficult to prove, (2) there was an intent by the parties to established to compensate for losses resulting from a delay in
liquidate them in advance, and (3) the amount stipulated is a a project’s substantial completion date. Liquidated damages
reasonable one, not greatly disproportionate to the presumable are not meant to punish the contractor and cannot be used as
loss or injury.” a coercive measure.

| 1 cmaanet.org
Before a liquidated damages clause can be enacted, both These damages costs are deducted from the contractor’s
parties must agree upon the daily cost of delays. Once the project price, which could affect their return on investment.
project is substantially complete, the liquidated amount stops To help head off the potential of litigating a dispute in court,
accruing. both sides arrive at a mutually agreeable set of terms when
the damages clause is being written up before the project even
THE BENEFITS OF A LIQUIDATED DAMAGES CLAUSE
starts, and both assign acceptable levels of responsibility.
Why is a liquidated damages clause in the contract? Because a
AVOIDING OR REDUCING THEIR IMPACT
liquidated damages clause provides security and predictability
to construction projects. It’s a great way to hold contractors By taking steps to reduce their occurrence altogether or to
accountable without penalizing them and helps to ensure your at least mitigate their degree of severity, you can create a
project is substantially completed on time without incidental proactive risk-avoidance blueprint that aims to better preserve
damages. Setting an agreed-upon amount in damages gives your ROI and your peace of mind.
both parties an opportunity to settle on a reasonable amount.
There is comprehensive estimating software that can help take
If the liquidated damages clause is breached, the owner can the guesswork out of your project bids and ongoing estimates
determine the damages without the long and costly process with real-world forecasting scenario capabilities that provide
of proving actual damages. In this way, it acts as a form of insights into a true picture of your progress.
insurance for the owner. Contractors can use the liquidated
And that comes in handy when those clauses are first being
damages clause to calculate the risk involved in delaying a
drawn up. You’ll not only gain the level of control you need
project and may limit the damage claims from the owner.
to head off costly mistakes that could lead to a liquidated
The main benefits of a liquidated damages clause include: damages claim needing to be filed, but you’ll also gain greater
» Increased security and assurance for the owner that every certainty that the project can be constructed within the
effort will be made to complete the project on time established budget and timeline.

» Reduced risk for contractors breaching the contract by Nobody wants a situation that could trigger liquidated
negotiating for realistic timelines, especially when backed damages to claim to begin with. That’s where the second way
by historical benchmarks to mitigate this risk comes in. It’s through using construction
» Preferable over a lengthy and costly litigation process to technology. There are several different kinds of software —
calculate actual damages each designed to carry out specific business functions — that
can give you more insight into and control over a range of
There is no one-size-fits-all way to calculate liquidated
factors that can help prevent damage claims.
damages in construction since no two projects are identical.
That means project delays have different costs for different ESTIMATING SOFTWARE ESTABLISHES REALISTIC
projects. SCHEDULES ON WHICH TO BASE LIQUIDATED DAMAGES

WHAT ARE THE MAJOR CAUSES OF LIQUIDATED Because contract liquidated damages negotiations occur
DAMAGE? during the estimating stage, estimating software is going to
have a direct impact on how those conversations roll out. Its
Some of the factors that may influence the liquidated damages
ability to automate the process of determining reality-based
costs include:
timelines, especially when backed by the historical project data
» Loss of revenue
it stores, can serve as validation when those talks begin.
» Storage costs
Take a look at that past data, with extra attention paid to
» Rental costs
your schedule performance index (SPI) metrics. How well did
» Equipment costs
schedules align with the projects’ original estimates? How
» Supply chain disruptions

| 2 cmaanet.org
often and for how long did any notable fluctuations occur? contingency plans that help you navigate through risks, so the
What impacted the schedule that you had no control over? Are project schedule endures the least amount of impact.
the causes of these fluctuations — both within and out of your
It puts more insight and control in the hands of the contractor
control — likely to surface during this project? How well did
to proactively reduce the likelihood of any damages claims.
contingency plans keep the projects on track?
REPORTING SOFTWARE PROVIDES VISIBILITY INTO
The timelines you set for the current project will depend
PROJECT PROGRESS AND DELAYS
on the answers to these questions and can be used to
set schedules based on realism rather than on ambitious One effective way contractors can ensure owners don’t hold
expectations. them accountable for unavoidable delays is to share access to
digital daily reports available through reporting software. This
CONNECTED ANALYTICS SOFTWARE TRACKS REAL-TIME
regular communication tool keeps them in the know about
SCHEDULE METRICS
their project’s progress. Owners can see how their requirements
Contractors are turning to metrics that track project are being met and the efforts undertaken to keep the project
performance in real-time, like earned value management (EVM) on schedule.
(which includes SPI), to help them keep a constant tab on their
This transparency can keep contractors from being held
projects. The most effective way to monitor them is through
responsible for project slowdowns or disruptions beyond their
connected analytics software. Because these metrics are
control. That’s one of the benefits of reporting software: reports
sensitive to internal and external risk factors as they occur, the
serve as documented proof of all circumstances that occurred
software can call attention to portions of the schedule that are
on the project, what was done to mitigate them, and the end
showing signs of skewing off course. Alerting you, this heads-
result — and may be used to defend against any contract
up about a schedule-impacting situation gives you some lead
liquidated damages claims.
time to determine the cause and ways to course-correct before
it worsens and becomes a contract liquidated damages claim. DOCUMENTATION SOFTWARE STREAMLINES THE PUNCH
LIST PROCESS
FORECASTING CAPABILITIES PROMOTE A PROACTIVE
APPROACH TO PREVENT LIQUIDATED DAMAGES Believe it or not, punch lists can be an efficient tool to reduce
contract liquidated damages claims. But there are a couple of
Though both the owner and contractor assume some level of
catches: First, they must be implemented at the beginning of
responsibility as agreed upon in a liquidated damages clause,
a project, not during the traditional project completion phase.
it’s common for the clause to be invoked when there’s an
Known as rolling punch lists, they’re completed throughout the
unintended oversight on the contractor’s part. So how can a
construction period. As issues are found, they’re documented
contractor keep from being on the receiving end? By taking
and resolved.
a proactive approach to prevent it from happening in the
beginning. And second, they should be digital. Cloud-based documentation
software allows contractors to use templates — standard or
When used as a planning tool, software with forecasting
customized — for these rolling punch lists. These templates are
capabilities takes on this preventive role, tapping into past
accessible out on the job site via a mobile device, making it
project data to determine likely what-if scenarios and then
faster and more efficient to catch errors and defects that could
predicting their potential impact on the current project’s
otherwise have turned into a painfully long to-do list resulting
construction schedule. Even real-time, unexpected events and
in costly rework. And that rework is one of those late-stage
necessary change orders benefit from this forecasting.
activities that can jeopardize the on-time completion of the
What makes this technology so well-suited for averting project, and potentially trigger the liquidated damages clause.
liquidated damages situations is its ability to suggest

| 3 cmaanet.org
COMMISSIONING SOFTWARE FOSTERS ONGOING
SYSTEMS EVALUATION

Commissioning has traditionally been the last activity to

complete just before handover. But like rolling punch lists,
cloud-based commissioning software, when launched as
construction begins, streamlines this system-evaluation
process.

Capital projects often have overlapping phases of construction

with multiple systems being installed within each. By relying
on software accessible on a mobile device and moving the
process up to the start of the project, it’s possible to do regular
documenting and testing much more quickly, accurately, and
efficiently. Logging any defects and malfunctions throughout
construction keeps them from becoming full-on repair
work that jeopardizes timely project completion — and risks
liquidated damages claims.

REDUCING THE RISK OF CONTRACT LIQUIDATED

DAMAGES WITH CONSTRUCTION TECHNOLOGY

Each type of software in its own way contributes to keeping

the damages clause from being invoked. Individually and
combined, they offer far more control over the processes and
workflows that otherwise might be headed for damage claims.

| 4 cmaanet.org
 About the Article

This article is republished from the InEight Behind the Build online blog.
InEight provides field-tested construction project management software for
the owners, contractors, engineers and architects who are building the world
around us. Customers worldwide rely on InEight for real-time insights that
help manage risk and keep projects on schedule and under budget across the
entire life cycle.

Any views and opinions expressed in this article may or may not reflect the
views and opinions of the Construction Management Association of America
(CMAA). By publishing this piece, CMAA is not expressing endorsement of the
individual, the article, or their association, organization, or company.

| 5 cmaanet.org