What Are Liquidated Damages?

Liquidated damages are an amount of money that contracting parties agree on as the amount of
damages one of them can recover if the party breaches the contract. Usually they apply to some
specific type of breach of the contract, not any breach of any promise anywhere in the contract.
In construction contracts, youll most often see liquidated damages apply when the contractor
breaches the contract by not finishing the work on time.
Why Have Liquidated Damages In A Construction Contract?
Some reasons for using liquidated damages:
-An owner knows that if the contractor finishes late, the owner needs only a calendar and their
fingers (or a calculator) to identify the amount of their damages.
-Contractors know from the outset how much "exposure" they have if they finish the work late.
They can use that information to prepare their schedules, deploy their forces, and schedule the
timing and sequence of subcontractor work. Moreover they also know how much they have at
risk.

Proving the amount of actual damages from late substantial completion is often very
difficult. You can avoid that difficulty by using liquidated damages as a substitute.
-Traditional Anglo-American contract law requires that damages be proved with reasonable
certainty. And courts deny damages that are too speculative. This makes proving damages
from late substantial completion very hard in most cases.
For example, imagine the project is a new auto dealership. The contractor substantially
completes the work 15 days late. The owner expected to open and operate the dealership
during those 15 days and earn profits selling cars to the public (yes, even in todays market
there are still some car buyers and profits to earn selling to them).
Among other things, the owner will claim as damages the profits they lost during those 15
idle days. But can the owner prove, with reasonable certainty, what their sales volume and
profit margin would have been during those 15 days? Can they prove their costs would be as
low as they claim? Can they prove that the cars, accessories, and related services they
offer at that location, during those particular 15 days, would have sold at the prices the
prices they? Can the owner prove that other factors outside their control, like bad weather,
would not have depressed sales during some of those 15 days?
Maybe the owner can prove these things, but its pretty speculative. And if the owners proof
is speculative the contractor will oppose saying its not reasonable certain. Agreeing in
advance on liquidated damages avoids trying to prove things that, at best, are speculation.

Using liquidated damages is usually less expensive than proving actual damages.
-Proving actual damages is not only difficult, its expensive. It usually involves a lot of time
and a lot of professionals fees and costs (e.g., lawyers, consultants, expert witnesses, travel,
deposition transcripts, document production and copying). If you overcome the difficulty
proving actual damages, youre still left with the cost of proving them. And to identify your
net recovery, you must deduct all of those fees and costs youve already spent from the
actual damages you actually collect. Keep in mind that the spending usually comes before
the collecting. And theres no guaranty that after successfully proving your actual damages

that youll ever collect any of them. With liquidated damages as a substitute, for actual
damages, you spend less on proving the amount of your damages.

But liquidated damages dont fit every situation. Sometimes even if they do fit, one side
wont agree to them or the parties cant agree on the amount.

If you do agree on liquidated damages, youll probably expect them to be enforced.

Whats the use of avoiding the time and expense of proving actual damages to just spend
it instead on disputes over getting liquidated damages enforced.

Principal Elements of Enforceable Liquidated Damages

In most cases, enforceable liquidated damages must have 5 principal elements (this varies from
state to state and country to country, so you and your lawyer must check applicable law very
closely):

Actual damages must be difficult to quantify.

The amount must be liquidated (i.e., agreed on and set in advance)

The amount must be reasonable

They must be compensation, not a penalty

They must be exclusive (i.e., the only remedy available)

1. Difficult To Quantify
Usually, before youre allowed to use liquidated damages, you must show that the actual
damages youd suffer are difficult to quantify. This requirement is honored more in the breach
than in reality. Damages are often difficult to quantify, especially damages for breach of a
construction contract. So, this element doesnt usually arouse much controversy.
2. Liquidated
The amount of liquidated damages in your contract must actually be liquidated. By liquidated, I
mean that in your contract you must set the amount of damages youll receive, or pay, if the
other party, or you, breaches a specific promise in the contract. Liquidated damages in
construction contracts are usually set in one of the following ways:

Setting a simple fixed amount For example, if the contractor substantially completes
their work late, they owe P50,000 in liquidated damages to the owner, or, if theyre a
subcontractor, to the prime contractor. Thats simple and easy.
Setting by a formula For example, if the contractor substantially completes their work
late, they owe P1,000 for each day theyre late. If you use a formula, the simpler, the

better. The more complicated it gets, the better the odds a judge will say that you didnt
liquidate the amount of damages, and decline to enforce what you though was a liquidated
damages clause. My simplicity rule of thumb: if you need more than a copy of the contract,
a pricing index on the Internet, a calendar, and a primitive calculator, your formula isnt
simple enough
3. Reasonable
The amount of liquidated damages you set must be reasonable. Great, another lawyer telling
you that something must be reasonable. Thats sure is a lot of help. Thanks for nothing! I cant
give you an exact answer on what amount is reasonable and where it crosses the line into
unreasonable. But the following are some guiding principles will help you:

Your best estimate -

The amount you set should be your best and most realistic estimate of the damages youll
actually suffer if the other party breaches the applicable promise in your contract. You make this
estimate as of the time you enter into the contract. It doesnt need to be an exact prediction; it
just needs to be close.
Ask yourself: if the other party doesnt do what they promised, what kinds of damages
am I going to suffer? What kinds of costs will I have to pay? Whats the value of
opportunities Ill lose?

Prepare to defend the reasonableness of your estimate

If you have to enforce liquidated damages, odds are youll have to defend the
reasonableness of the amount to a hostile lawyer and a skeptical judge. Preparing to
defend your estimate does two important things:
-Keeps you from overestimating
-Gets you ready for litigation

4. Not a Penalty
Damages for breach of a contract must focus on compensating for the party who didnt breach
the contract (victim), not a punishing the party who breached the contract (breacher).

5.Exclusive

-In many places, to be enforceable liquidated damages must be the victims exclusive remedy if
the breacher breaches the applicable promise in the contract. The victim gets liquidated
damages, and only liquidated damages.

If the contract provides the victim with an alternate way to measure their damages, chances are
the liquidated damages will be unenforceable. A good example are cases about enforcement of
liquidated damages under residential real estate sales contracts. In many of these cases the
contract says that if the buyer breaches by failing to close, the seller may either (1) keep the
buyers earnest money deposit as liquidated damages, or (2) recover the sellers actual
damages, whichever is greater. Judges often decide these liquidated damages are
unenforceable. Though these cases dont involve construction, the logic on exclusivity applies
just the same.

But making liquidated damages your exclusive remedy puts you in a tough position. In addition
to ensuring that the amount is reasonable and not a penalty, you must also ensure that the
amount is enough to compensate you for the losses you think youll suffer if the other side
breaches the contract. If your estimate is too low, youll be under-compensated.

The exclusive element is like jumping off a roof into a swimming pool. Once you step-off, you
cant stop half-way down. So, before you take that step, look to make sure the water, and the
amount of damages set, are going to be deep enough when you land.

Gross vs. Net

Its also worth mentioning that when deciding whether the amount of liquidated damages is
enough, you must factor in the time and money savings from paying lower professionals fees and
costs in pursuing your damages. A gross amount you know will under-compensate you may still
yield a higher net by reducing your expenses for lawyers and damages experts, not to mention
the value of the time you save and the uncertainty, anxiety, and anguish you spare yourself.

Observations:

Glazovs Theorem of Symmetrical Damages The greater the symmetry between the
amount liquidated damages set in your contract and (b) the damages you actually suffer, the
better your odds the liquidated damages will be considered reasonable and not a penalty.
The less symmetry, the more suspicion that theyre unreasonable and punitive. So, when
setting the amount of liquidated damages, aim for perfect symmetry..
Top and bottom brackets - A lot of the difficulty in deciding on whether to use
liquidated damages is you yourself deciding on the amount and then reaching agreement

with the other side. It helps me to try and set a range for the amount between two
brackets. The principal elements I mentioned above set those brackets.
o The reasonable and not a penalty elements set the top bracket. I know enforceable
liquidated damages cant go above this amount.
o The exclusive element sets the bottom bracket. I know that effective liquidated
damages cant go below this amount.
I find that putting liquidated damages within these brackets focuses my own thoughts, as well as
the negotiations over whether to use liquidated damages, and where to set them.

Setoff rights - If youre paying money to the other party to your contract, consider
language in your contract that allows you to setoff and withhold liquidated damages from
money you owe them.

Conclusion
Liquidated damages can save time and money. Proving how much actual damages is
often uncertain, contentious, time consuming, and expensive. Using liquidated damages you
might avoid each, or some, of these problems, either when proving your own damages, or
limiting the damage claims of your opponent

If youre going to use liquidated damages, keep the four (4) principal elements of
enforceable liquidated damages in mind. Better yet, put language in your contract that
affirms them. In your contract, have each party:
o Affirm that actual damages will be difficult to quantify
o Agree on setting the liquidated damages amount as a fixed sum, or using
a simple formula
o Affirm that:
The amount is reasonable. Identify the kinds of loss the victim will suffer if
another party breaches the contract. Say that the liquidated damages are
intended to compensate the victim for these and other injuries they suffer
They have chosen the amount understanding, and intending, that liquidated
damages will compensate the victim, not coerce or punish the breacher
Liquidated damages will be the victims exclusive compensation if the
applicable type of breach occurs
If you are the likely victim, consider language allowing you to setoff liquidated damages
against payments to the breacher

The PROJECT CLOSEOUT Phase is the last phase in the project lifecycle.
-Closeout begins when the user accepts the project deliverables and the project oversight
authority
concludes that the project has meet the goals established.
-The major focus of project closeout is administrative closure and logistics.
-Project closeout is critical, yet for one reason or another, it's an area that's often left loose at the
ends - with the potential for disastrous consequences.
-Professionals who closeout properly create significant benefits for themselves, their organization
and for others - better success prospects for future projects, increased employee motivation,
better customer relations, improved attractiveness to repeat and new business and so on...
A good closeout process includes:
Verify Scope
- Review all test data against the approved specification
- Identify & resolve any discrepancies
- Validate all supporting documents
- Verify all deliverables are available
- Assess customer satisfaction
Closeout Contracts
- Ensure that all open issues are resolved with the customer

- Return or destroy all customer's proprietary documents at the customer's direction

- Help the customer conduct an audit of completed scope
- When the customer is happy, receive final payments
Closeout Administration
- Return all personnel loaned to project
- Complete personnel performance evaluations
Conduct a Lessons Learned Review
- Conduct a survey
- Hold the lessons learned meeting
Build a Project History File
- Document planned & actual schedule duration and include data on past similar completed
projects
- Document planned & actual labor costs and include past data
- Document all approved changes to PM plan
- Document all meetings minutes
- Document all problems
- Document subcontractor performance records
- Document customer satisfaction records
- Document project reviews
Create the Final Project report
- Describe the overall success of the project
- Describe organization on the project
- Describe recommended changes for other similar projects
- Describe techniques used to get results
- Describe project strengths & weaknesses
- Describe project team recommendations
Celebrate Success
- Involve everyone on the project
- Gather outside the working environment
- Recognize outstanding performers
- Express appreciation to all project participants
http://www.constructionlawtoday.com/2009/04/liquidated-damages-in-construction-contractspart-1-what-are-liquidated-damages-and-why-have-them/
http://www.constructionlawtoday.com/2009/05/liquidated-damages-in-construction-contractspart-2-enforcing-liquidated-damages/
https://www.vita.virginia.gov/uploadedfiles/vita_main_public/unmanaged/library/cpmg-sec5.pdf