Liquidated damages

Why they're used

The cost of a late building, such as lost rent, extra staff or a delayed opening, is hard to prove. A daily rate set in advance avoids that fight, and it tells the contractor exactly what a late finish will cost.

A reasonable estimate, not a penalty

• California (Civil Code § 1671): the clause is generally valid unless the challenger shows it was unreasonable when the contract was made. In consumer purchases of goods or services, and home leases, it's void unless actual damages would be impracticable or extremely difficult to fix.
• Federal jobs (FAR 11.501 and 52.211-12): use them only when timing really matters and damages are hard to estimate; the rate must be "a reasonable forecast of just compensation," charged for each calendar day of delay until the work is completed or accepted.

Other states apply their own tests. A figure picked to punish rather than compensate is a penalty, and courts generally won't enforce it.

An example

A school renovation must be ready for the first day of classes, and the contract sets liquidated damages at $750 a calendar day. The contractor reaches substantial completion four days late, so $3,000 comes off the final payment, unless approved time extensions cover the delay.

The term appears in SignMaster's hotel group booking contract template, where the cancellation charge is stated "as liquidated damages and not a penalty."