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Liquidated damages in construction contracts

Many Florida construction contracts are written to provide for some form of liquidated damages. Liquidated damages are intended to be a legitimate estimate of certain losses that one party could suffer in case of a breach of contract. Specifically, liquidated damages cover the type of losses that are not easily quantified elsewhere. In terms of a construction project, these damages are typically included in a contract to provide a form of damages when a project is delayed.

Not intended as a penalty

Liquidated damages are not intended to serve as a punishment or penalty for lateness but a genuine estimate, derived in advance, of the costs suffered as a result of a late construction project. If they are instead designed as a penalty, they are not enforceable in court; instead, a court would order a different amount of damages tied to actual losses suffered as a result of one party’s breach.

Liquidated damages must be reasonable

Because liquidated damages are established in advance, they might not be exactly precise. However, the standard a court hearing a construction dispute will use in assessing the validity of a clause is whether they are reasonable. If a party wants to argue that they are instead intended to exact a penalty, they have the burden of showing that the damages amount is excessive and unreasonable. Again, owners may still pursue actual losses even if liquidated damages are excluded.

It is also important that contracts with liquidated damages contain provisions for time extensions without such damages being assessed. There are factors outside the contractor’s control that can lead to delays, like requests from the owner or permit denials, and these cannot trigger liquidated damages. In addition, liquidated damages must also run from a specific deadline determined in advance. Contractors may wish to carefully review proposed contracts in advance to determine whether the proposed damages amounts are reasonable before signing on to a project.