Liquidated damages are a common feature in construction contracts in Minnesota. They are typically intended to provide a measure of certainty and predictability to the construction process. Construction projects can be complex and tough, but it’s important to ensure that any liquidated damages clause is reasonable and not a penalty.
What are liquidated damages?
Put simply, liquidated damages are a pre-determined amount of money that is payable by one party to another in the event of a breach of contract. They can get awarded for any number of breaches, including delays or late completion.
For instance, a construction contract may state that in the event of late completion, the construction company owes $100 to their client for every day they are late. Therefore, if they’re 20 days past the deadline, then the construction company would owe $2,000 as liquidated damages.
The main purpose of liquidated damages is to provide certainty and allow construction companies and their clients to estimate the costs in the event of construction disputes.
Are they enforceable?
Enforcing liquidated damages can be difficult as the party seeking to rely on them needs to show that the clause is not a penalty but rather a genuine pre-estimate of the losses that they would likely suffer in the event of a breach.
In construction contracts, liquidated damages are more likely to be enforceable where the contract is for a specific project and not ongoing work. This is because it can be harder to estimate losses in an ongoing construction project.
When should construction companies be concerned?
It’s always a good idea for construction companies to seek advice before entering into construction contracts, especially when dealing with liquidated damages. There is a fine line between what might constitute liquidated damages and a penalty. Ultimately, it’s important for construction companies to be aware of the potential risks involved in any contract and take steps to mitigate these risks wherever possible.
Construction companies often get away with being late without any consequences. Thankfully, liquidated damages clauses are there to ensure that construction companies take their obligations seriously and not delay construction projects unnecessarily.