What are liquidated damages in a contract?

Liquidated damages in a contract refer to a specific, predetermined amount that a contractor agrees to pay if they fail to complete the work within the agreed-upon timeline. This is typically outlined in the contract to provide a clear expectation for both parties regarding the financial implications of delays. The purpose of liquidated damages is to compensate the project owner for the potential losses and inconveniences caused by such delays, which can be difficult to specify accurately.

This mechanism serves as a way to encourage timely performance and clarify repercussions, making it easier to resolve disputes if deadlines are not met. It is not simply a penalty or a subjective amount but instead is based on an understanding made at the outset of the project, aiming to provide a fair approach to managing project delivery timelines.