Liquidated damages

The contract states an LD rate, for example a dollar amount per calendar day. If practical completion is reached after the date for practical completion, as extended by any extensions of time, the contractor owes LDs for each day of delay up to the date of practical completion.

The principal usually deducts LDs from progress payments or calls on security rather than invoicing them. Many contracts cap total LDs at a percentage of the contract sum. Once LDs apply, the principal generally cannot also claim general damages for the same delay.

For example, if the date for practical completion is 1 March, the superintendent grants a 10 day extension of time, and practical completion is certified on 21 March, the contractor is 10 days late and owes 10 days of LDs at the contract rate.

The rate should be a genuine pre-estimate of the loss the principal is likely to suffer from late completion, worked out when the contract is signed. Typical inputs are lost rent or revenue, extra finance and holding costs, extended consultant fees and alternative accommodation.

Australian law will not enforce an amount that operates as a penalty, meaning one out of all proportion to the legitimate interest it protects. In practice LD rates set on a reasonable basis are rarely struck down, so contractors should treat the stated rate as payable and price the risk at tender.

Principals should keep a record of how the rate was calculated. Contractors should check the rate at tender, push back on rates that look out of step with the project, and negotiate a cap where none is offered.

Both standards deal with liquidated damages in their time and progress clauses, with the rate stated in the annexure or contract particulars.

• AS 4000-1997. Clause 34, Time and progress.

• AS 2124-1992. Clause 35, Time for commencement and practical completion.

• Your contract. Check the rate, whether it is per calendar or working day, any cap, and what the contract says happens if the rate is left blank or stated as nil.

In standard Australian contracts the two terms often go in opposite directions. Liquidated damages are paid by the contractor to the principal for late completion. Delay damages, where the contract provides them, are paid by the principal to the contractor for each day of extension of time granted for certain causes, such as principal-caused delay.

Some people use delay damages loosely to mean LDs, so check which one a contract or conversation means.

• Not claiming EOTs. A missed EOT claim usually means paying LDs for delay you did not cause.

• Ignoring LDs in subcontracts. Head contractors often pass on LDs to subcontractors. Make sure the subcontract rate is proportionate and linked to the subcontractor's own completion date.

• Leaving the annexure blank. A blank or nil rate can have unexpected effects on what damages can be claimed. Fill it in deliberately.

• Paying LDs on a disputed EOT without reserving rights. If you dispute the assessment, say so in writing and keep pursuing the claim under the dispute resolution clause.