Direct and Liquidated Damages in Construction Claims (2024)

FAQs

What are direct damages in construction? ›

Direct damages in a construction contract refer to the losses or costs that directly result from a breach of the contract by the contractor. These damages are typically quantifiable and intended to compensate the non-breaching party for the actual harm or loss caused by the breach.

For example, a liquidated damages clause might state that a contractor will owe the owner $500 per day for every day past the project deadline that substantial completion is not achieved. This contractual solution can be advantageous for both parties.

Liquidated damages, also known as liquidated and ascertained damages (LADs), are a contractual agreement on damages that are designed to cover costs when a project runs past the agreed completion date. LADs are common in construction, as they provide some certainty for both parties regarding the consequences of delay.

Direct damages, on the other hand, are those damages that are a direct and immediate loss caused by a breach and compensate for that loss. Examples of direct damages include costs to repair faulty work or additional work, as well as resulting general conditions expenses and project delay costs.

What are liquidated damages in construction? Liquidated damages are funds covering the costs for each day the project continues past the agreed-upon date of completion. These funds are typically deducted from what the owner owes the contractor for the work — eating into already thin profit margins.

states, “a provision for liquidated damages will be regarded as valid, and not a penalty when three conditions are met: (1) the damages to be anticipated from the breach are uncertain in amount or difficult to prove, (2) there was an intent by the parties to liquidate them in advance, and (3) the amount stipulated is a ...

In my experience, a good way to avoid back and forth while negotiating liquidated damages is to set caps or thresholds on liquidated damages to limit exposure. Establishing a maximum amount can also provide a sense of security for both parties while addressing concerns about excessive penalties.

For a liquidated damages clause to be upheld, two conditions must be met. The amount of the damages identified must roughly approximate the damages likely to fall upon the party seeking the benefit of the term as assessed at the time when the agreement of contract was entered into.

To avoid this, it is crucial to establish clear and realistic timelines during the contract negotiation stage. Setting achievable milestones and allowing sufficient time for each phase of the project can help mitigate the risk of delays and subsequent imposition of liquidated damages.

What is the maximum amount of liquidated damages? ›

The total amount of liquidated damages shall not exceed ten percent (10%) of the amount of the contract.

Liquidated damages is an amount equal to at least one tenth (1/10) of one (1) percent of the cost of the unperformed portion of the works for every day of delay.

(b) Liquidated damages are not punitive and are not negative performance incentives (see 16.402-2).

In the context of construction claims, direct damages would include costs to repair or replace defective or damaged work and any additional costs incurred to complete a project in the event the Contractor failed to complete the work properly or in a timely manner.

As discussed above, liquidated damages provisions are enforceable only if the damages are difficult to estimate, which makes it challenging to set an amount in the contract.

Direct losses refer to the physical or structural impact caused by the disaster such as the destruction of infrastructure caused by the force of high winds, flooding or ground shaking. Indirect effects are the subsequent or secondary results of the initial destruction, such as business interruption losses.

Direct damage is physical damage to property, as distinguished from time element loss, such as business interruption or extra expense, that results from the inability to use the damaged property.

Direct damages, also known as actual damages, are those damages which are the necessary and usual result of the defendant's wrongful act; they flow naturally and necessarily from the wrong.

For instance, the cost of raw materials for a construction project is a direct variable cost. Indirect variable costs impact the entire business but are not directly tied to a specific project or product. For example, utility costs (electricity, water) in a construction company's office are indirect variable costs.