The Role of Liquidated Damages in Construction Contracts

Documents about Liquidated damages with pen and glasses

In California’s construction industry, delays can quickly lead to mounting costs and disrupted schedules. To manage this risk, many contracts include liquidated damages clauses. These provisions establish a pre-agreed financial penalty for delayed completion. These clauses serve as a safeguard for owners and a performance motivator for contractors, but they must be carefully crafted to be enforceable under California law.

At Plumtree & Brunner, LLP, our California construction attorneys can help you appropriately handle liquidated damages clauses in construction contracts. We help you navigate California’s complex constructions laws and protect your legal rights.   

What Are Liquidated Damages?

Liquidated damages are a fixed monetary amount specified in a contract, payable by the contractor if certain performance deadlines—usually substantial completion—are missed. Instead of calculating actual losses after a delay occurs, the parties agree upfront on a reasonable estimate of those potential losses.

This approach:

  • Streamlines dispute resolution
  • Clarifies financial expectations
  • Reduces the burden of proving actual damages in court

Importantly, liquidated damages are compensatory, not punitive. If the amount is found to be excessive or punitive, California courts may invalidate the clause entirely.

Legal Standards Under California Law

California Civil Code §1671 governs the enforceability of liquidated damages clauses. The law distinguishes between contracts for non-consumer purposes (such as commercial construction) and consumer transactions:

  • In non-consumer contracts, such as most construction agreements, liquidated damages are enforceable unless they are found to be unreasonable under the circumstances existing at the time the contract was made.
  • Courts consider factors including the difficulty of estimating damages and the relationship between the liquidated amount and anticipated harm.

If the clause meets these criteria, it is typically upheld. Otherwise, it may be deemed an unenforceable penalty.

Common Use in California Construction Contracts

Liquidated damages provisions are particularly prevalent in:

  • Public works contracts
  • Commercial real estate developments
  • Infrastructure projects with hard deadlines

For example, a public contract for a highway expansion may include a clause requiring $5,000 per day in liquidated damages for late completion, reflecting anticipated costs such as traffic disruption, extended lane closures, and funding delays.

Drafting a Legally Sound Clause

To ensure enforceability, legal counsel and project stakeholders should focus on:

  • Reasonable estimation: Use historical data and project-specific factors to calculate a fair daily rate.
  • Clear benchmarks: Define “substantial completion” or “final completion” precisely.
  • Force majeure exceptions: Exclude delays caused by events beyond the contractor’s control, such as natural disasters or government shutdowns.
  • Notice and documentation: Outline procedures for notifying the contractor of delays and calculating charges.

Including supporting documentation, such as budgetary impact projections and timeline risk analyses, can help validate the chosen amount.

Implications for Contractors

Liquidated damages create pressure to meet deadlines but also introduce risk. Contractors should:

  • Carefully assess the schedule before signing
  • Document causes of delay during construction
  • Negotiate caps or limits to total liquidated damages
  • Request reciprocal incentives for early completion (e.g., performance bonuses)

Proper scheduling, project controls, and communication with owners are key to avoiding liquidated damages disputes.

construction worker and contractor

Owner Considerations

For property owners and developers, liquidated damages provide:

  • A defined remedy without litigation
  • Leverage in enforcing schedules
  • Accountability for contractors

However, improper enforcement can lead to contractor pushback and court challenges. Owners should be prepared to demonstrate that:

  • Delays were not excused
  • Costs associated with the delay were reasonably anticipated
  • Damages align with the clause’s original purpose

Learn More About Dealing with Liquidate Damages Clauses in Construction Contracts

Liquidated damages clauses are powerful tools in California construction contracts, but only when drafted and executed properly. By anticipating potential losses and agreeing on remedies upfront, both parties can reduce uncertainty and foster accountability. Whether you are an owner building a commercial facility or a contractor bidding on a public infrastructure job, understanding the role and legal nuances of liquidated damages is essential for successful project outcomes.Our team at Plumtree & Bruner, LLP can assist with liquidated damages issues in your construction contracts. Contact us today for a consultation.