Construction workers are usually hired to perform a specific job and more importantly in a specific period of time. However, there are many occasions when general contractors have multiple projects and a finite number of workers. Invariably, this leads to many projects being delayed. Employers have added liquidated damages provisions to contracts that enable them to impose reasonable fines for each day, week or month a contractor is behind schedule.
Liquidated damages provisions in contracts are generally binding unless they are unreasonably punitive in nature. This means that if the fine for late work is egregious or so disproportionate to the work being done it will not be upheld in court.
Employers of contractors that are seeking to prevent undue delay have a strong incentive to incorporate a liquidated damages provision in their contracts. It is important to determine what the right amount of periodic losses (by each day, week, or month) when a contractor falls behind, and assign that damage to the contractor. Each case is different and must be calculated on the situation an employer is faced with. Usually, the liquidated damages provision should compensate an employer for late work.
Contractors that believe a liquidated damages provision is punitive and unduly harsh have several options. These options include:
- Calculate amount of damages – This will enable a contractor to determine the amount of damages assessed versus the cost of completing the job. It might not be feasible to continue working if the penalties are excessive.
- Ask if employer intended liquidated damages to be punitive – If an employer intended the damages to be punitive it will not be valid in court.
An experienced business attorney might be able to assist a contractor or employer regarding liquidated damages provisions. Employers can use an attorney to construct reasonable damages provisions that are not punitive but compensatory. In contrast, contractors have an incentive to not enter agreements that might have liquidated damages.