Liquidated damages for late completion of a project are sometimes referred to as a “penalty.” This is inaccurate. While liquidated damages may feel like a penalty to a contractor, they cannot be punitive in nature. To be enforceable, liquidated damages must reflect the costs, reasonably foreseeable at the time of contract formation, that the project owner will incur if the project is not completed by the scheduled deadline.

The calculation of the daily rate of liquidated damages is one of the great mysteries of construction contracting. It is also the subject of extensive litigation. In a recent federal case, a contractor challenged the enforceability of a clause calling for liquidated damages of $551 per day. The bulk of the costs that went into that rate were the salaries and benefits of the project owner’s administrative personnel.

The contractor argued that these were phantom costs. The owner’s administrative personnel would have received their salaries and benefits regardless of the status of this particular contract. But, the Court of Federal Claims upheld the liquidated damages rate, noting that contractors recover their extended administrative overhead costs when they are delayed by the project owner.

Other cases this week involved a fast-tracked project that proceeded without a written contract and a contractor’s claim against a consulting engineer. Although the written contract had never been signed on the fast-tracked project, there was an enforceable oral agreement. And, the engineer was protected by language in the construction contract.