When Properly Drafted, Liquidated Damages Provisions Reduce Risk

Utilized properly, liquidated damages provisions strengthen construction agreements because they provide a degree of certainty. Additional certainty lowers risk and allows the contractor to reduce contingency reserves which, in turn, reduce project costs while protecting the builder's profitability. Too often, however, liquidated damages provisions are misunderstood, poorly drafted, and can be the genesis for costly disputes. This article will provide practical advice about liquidated damages provisions.

According to legal precedent, liquidated damages provisions are supposed to be used only where actual delay damages are difficult to determine at the time of contract execution. That is almost always true for construction projects. The benefit for contractors is that liquidated damages quantify the contractor's potential exposure to delay damages at contract execution. This improves the prime contractor's ability to mitigate the risk through contingency reserves