Liquidated damages, consequential damages, and why a low LD can be your friend

If a data center, hospital or plant opens late, the owner's losses can be enormous: lost revenue, lost tenants, penalties under its own contracts. If your subcontract leaves those losses uncapped and they're traced to your delay, a single late milestone can cost more than the whole job is worth.

Two clauses decide how much of that risk reaches you: liquidated damages and the waiver of consequential damages.

Liquidated damages: a known number

Liquidated damages (LDs) are a fixed amount, often per day, that the parties agree in advance will be paid for late completion, instead of proving actual losses.

In California, an LD clause in a business contract is presumed valid. Under Civil Code section 1671(b), it stands unless the party challenging it shows it was unreasonable under the circumstances when the contract was made. So you should assume an LD clause you sign will be enforced.

That sounds bad, but a reasonable LD can protect you. It replaces an unknown, potentially huge claim with a known daily number you can price and manage. That's the sense in which a low LD is your friend.

Consequential damages: the open-ended risk

Consequential damages are the indirect losses that flow from a breach: the owner's lost profits, lost rent, lost use of the facility, financing costs. Without a waiver, these can be claimed in addition to, or instead of, direct costs.

Many owner-GC contracts include a mutual waiver. The AIA A201-2017 general conditions, for example, contain one in section 15.1.7, under which the owner waives things like lost income and profit and loss of use, and the contractor waives its own indirect losses. The waiver doesn't stop the owner from collecting agreed liquidated damages.

The problem for subs: the GC may have that waiver from the owner, but the subcontract may not pass it down to you. Then the GC is protected from the owner's lost-revenue claim, and you're not protected from the GC's.

What to look for

• No consequential damages waiver, or a one-way waiver that only protects the GC.
• LDs passed down in full, so you owe the owner's daily rate even if you caused only part of the delay.
• No cap on LDs or on total liability.
• LDs "in addition to" actual damages, which defeats the purpose of agreeing a number.

What to ask for

• A mutual waiver of consequential damages that matches, or is at least as broad as, the one in the prime contract.
• LDs only for delay you actually caused, apportioned when several trades contribute.
• A cap on LDs, for example a percentage of your subcontract value, and an overall cap on your liability.
• LDs as the exclusive remedy for delay, so the GC can't collect both the LD and its actual losses for the same days.
• Time extensions handled properly, so that changes and owner delays push the date that LDs run from.

Don't count on insurance

General liability policies generally don't cover your contractual delay damages or LDs. If the exposure isn't capped in the contract, it usually sits on your balance sheet.

On fast-track, high-value jobs, the damages clauses can matter more than the price. Read them first.