The document discusses the concept of liquidated damages in the construction industry, emphasizing the importance of defining completion times to avoid disputes over what constitutes a 'reasonable' delay. It explains that liquidated damages are predetermined compensation for losses incurred by clients due to delays, covering various costs related to project overruns. Additionally, it outlines factors for determining liquidated damages, the distinction between damages and penalties, and the benefits for both clients and contractors.

1. Liquidated
Damages
Erfan Ghassempour
Email: Ghassempour.erfan@yahoo.com
Twitter: @ErfanGhP
LinkedIn: ir.linkedin.com/in/ghassempour/

2. Principles
• In construction industry, time is “of the essence”. Contractor must complete
the works by the agreed time.
• By defining when the works are to be completed, the contractor cannot claim
that they should have a “reasonable” time to complete the works. Reasonable
time = Time at large
• If the time for completion is not defined, the contractor can say that time is
not “of the essence.” and is at large.
Risk 1: Contractor would argue that it should be given a “reasonable”
length of time to complete the works.
Risk 2: As one person’s definition of “reasonable” is different from
another’s, this makes it impossible to establish whether the contractor is
late in delivering the works. This, in turn, makes it impossible for the client
to claim damages for late delivery.

3. Principles
• By ensuring time is of the essence, the employer will be able to claim damages
from the contractor.

4. What is Liquidated Damages (LD)?
• Delay by contractor imposes damages to client.
• What happens when your construction project doesn't go according to
the agreed time? The client loses money (suffers damage) every day
that the project is delayed.
• The liquidated damages provision in the contract can move at least
some of client’s losses.
• These are the damages client can charge against the money he still
owes the contractor.
• LD is a pre-determined estimation of damages.

5. What type of damages does LD include?
 Temporary accommodation for staff unable to move into the new building
 Loss of rent
 Loss of revenue or profit
 Storage costs
 Rental costs
 Fees and fines imposed by third parties.
 Finance costs
 Additional project administration costs
 Damages and penalties to which the client may be liable
 Cost implications to third-party contracts
 Losses for tax or investment incentives

6. When LD is applicable?
• Generally in contracts: in the event that the contract is breached.
• In construction contracts: when contractor fails to achieve practical
completion (i.e. completing the works so they can handover the site
to the client).
So, in construction contracts, when a specific breach occurs.

7. • In some countries, LD should be based on a genuine calculation of
damages. Otherwise, it may be considered a penalty by the courts
and so will be unenforceable.
• In other countries, regardless of the amount of the LD, the court will
consider it valid.
LD vs Penalty
What to consider when determining LD amount in the
contract?

8. • Damage which is remote is not recoverable, even if there is clear causation
between the breach of contract and the damage.
• Two tests for remoteness:
1. If, at the time the contract was entered into, the parties ought reasonably to
have been able to foresee that the loss would be likely to occur, then the
damage is not too remote.
2. If, at the time the contract was entered into, the parties had actual knowledge
of special or unusual circumstances outside the ‘ordinary course of things’.
Remoteness
An important criterion for determining a genuine LD

9. Benefits of LD
• For the client:
Removes their obligation to prove actual
losses in the event of delay occurring.
• For the contractor:
They limit their liability to a known
amount in the event of delay.
It also allows the contractor to later make
commercial decisions in respect of:
a. accelerating by expending on
additional resources; or
b. hand over the project late and incur LD
if the project is running behind
schedule.

10. How to calculate and
determine LD amount in the
contract
• Usually a certain sum payable for
each day, or week or part of week
by which practical completion is
delayed.
• Other types are a straight lump
sum, a fixed percentage of the
contract sum

11. An example of calculating damages for
Additional Project Administration Costs
Description Monthly Cost (USD) Cost Per Day (USD)
Project Manager 20,000.00 667.00
Personal Assistant 8,000.00 267.00
Clerical Support 5,000.00 167.00
Others 7,000.00 233.00
Total 1,334.00

12. An example of calculation of direct costs for
renting an office to relocate the client’s staff
Description Cost Per Month
(USD)
Cost Per Day (USD)
Rental of Office 800,000.00 26,667.00
Total 26,667.00

13. Welp, that’s it folks! Thanks for
listening.