Liquidated Damages: A Contractor’s Boogeyman

Contractors often live and perform their contractual obligations under the specter of liquidated damages. The threat of liquidated damages causes sleepless nights; the assertion of liquidated damages devours profits.  Liquidated damages provisions are common in construction contracts; particularly on public projects and large privately funded projects.  Subcontractors should take note that, even if your contract does not contain a liquidated damages provision, you may be subject to liquidated damages by virtue of a flow down provision incorporating obligations and contract terms between your contracting partner and the owner of the project. 

Just what are liquidated damages, and why are they so frightening?  “Liquidated damages” is a term of art used in construction industry parlance to describe a specific sum a party to a contract agrees to pay if it fails to timely perform its obligations under the contract.  Typically, liquidated damages are expressed by a set dollar amount per day for each day that the contractor fails to complete its work on a project.  This dollar amount is to be arrived at in good faith as an estimate made in advance of the actual damages that the project owner will likely incur as a result of the contractor’s breach.  Contractors that sign contracts containing liquidated damages provisions perform under justifiable trepidation until their work is completed inasmuch as the courts of Pennsylvania have consistently upheld such provisions.  Liquidated damages provisions are routinely enforced by the courts so long as the “liquidated” sum agreed to is a reasonable approximation of the expected loss, and not imposed as a penalty. 

If a court case arises and it includes a dispute over liquidated damages, the party asserting the liquidated damages has the burden of showing that the other party failed to timely substantially complete its contractual obligations, and that the period for which liquidated damages has been assessed is proper.  Once the party claiming liquidated damages has met its initial burden, the burden will then shift to the contractor who must then show that any delays in the substantial completion of its work were excusable and that it should be relieved of the assessment of liquidated damages.  If the contractor facing liquidated damages can show that the other party was actually the cause for 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. 

Contractors should be vigilant in their documentation of delays and all conditions that impede their ability to complete their work.  Contractors should provide timely written notices of these conditions as this documentation will assist the contractor in refuting any future claims or backcharges from project owners for liquidated damages. 

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Harrisburg Magazine Readers' Choice 2011