Liquidity Damage

Contractors often live and perform their contractual obligations under the fear of liquidated damages.  The threat of liquidated damages is a horrifying fact for the contractor; the affirmation of liquidated damages devours profits. Liquidated damages are basically damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach. Liquidated damages provisions are common in construction contracts; particularly on public projects and large privately funded projects. One of the key aspects of liquidity damage provisions is that it is essentially a contract remedy and is not a penalty to punish the contractor for some act. Liquidated damages are sometimes not imposed, if the contractor can show that the liquidated damages clause was included as punishment for failing to keep contract terms, instead of covering non-provable damages.

Sub-Contractor shall be responsible for carrying out the work as per the accepted construction programme. If the work is delayed beyond the agreed period as per the programme due to reasons attributable to the subcontractor, the subcontractor will be liable to pay liquidated damages. The rate of 0.5% of total contract value per week of delay will be deducted from any amount due to the agency subject to a maximum of 10% of the total value of the contract.”

Liquidated damages provisions are routinely enforced by the courts so long as the “liquidated” sum agreed to be a reasonable approximation of the expected loss, and not imposed as a penalty. In most contracts for every unexcused day delay caused by the contractor, the owner is generally due the liquidated amount for each calendar day the project that remains uncompleted after the final completion date stated in the contract. This liquidated damage amount is generally limited to a certain percentage of the total contract value as mutually agreed by both the parties at the time of entering into a contract. If the contractor facing liquidated damages can show that the other party was actually the cause of the delays, or that there were delays that were out of the control of the contractor, i.e. extraordinary bad weather or unforeseen conditions, the contractor may have the liquidated damages reduced or removed altogether.

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