Liquidated damages do not always have to be paid

On Behalf of | Mar 7, 2023 | Firm News

Construction companies in Pennsylvania and around the country usually do everything they can to ensure their projects are completed on time. They do this to improve their reputations and increase their chances of winning future contracts, and they also work at a brisk pace to avoid paying liquidated damages. These are damages contractors have to pay when building projects run behind schedule, and they usually increase every day until the work has been completed.

The substantial completion date

Liquidated damages begin to accrue when work continues past what is called the substantial completion date. This is the date that work has progressed to the point where the owner can occupy the building. Finishing touches like painting and tending to minor imperfections can continue past the substantial completion date, but the building must be ready for occupancy on that on or before date. If it is not, the contractor will likely be required to pay liquidated damages every day until the owner can move in.

Litigation over liquidated damages

Disputes over liquidated damages sometimes lead to civil litigation. When judges are called upon to decide these matters, they usually rule in favor of owners as long as the liquidated damages provision is reasonable. If the judge determines that liquidated damages are excessive or being used to coerce or punish the contractor, the contract could be unenforceable. Judges may also rule in favor of the contractor if construction is delayed because the owner made changes to the building plans after work had already started.

A carrot, not a stick

Liquidated damages insulate building owners from the costs they would face if a construction project is not completed in time, but they should be a carrot rather than a stick. If liquidated damages are unreasonable or used to punish or coerce contractors, the construction contract’s liquidated damages clause could be unenforceable.