A construction project can become more expensive when work does not finish as planned. Contractors and owners may include a liquidated damages clause in the contract to address certain losses before a dispute arises. Understanding this provision can help both sides know what the contract requires.
How liquidated damages work
Liquidated damages are an amount that the parties agree to in advance for a specific type of breach. Construction contracts often use these provisions when a financial loss would be difficult to calculate after a breach.
For example, a contract may require a contractor to pay a set amount for each day a project remains unfinished after the agreed completion date. The clause should reflect a reasonable estimate of the expected loss rather than punish the contractor.
The reason for the delay can also matter. A contractor may have rights under the contract when circumstances outside the contractor’s control affect the schedule.
When a clause may be enforceable
New Jersey courts generally look at whether the amount makes sense in relation to the harm the breach could cause. Courts can consider the circumstances surrounding the agreement and the losses involved. A provision that imposes an excessive amount as punishment may not hold up.
For construction companies, the wording and purpose of the clause matter. A contractor should understand when the payment applies, how the amount is calculated and whether the contract provides exceptions.
For public construction projects, New Jersey law also permits certain contracts to include liquidated damages. Those contracts can contain specific rules concerning delays and the contractor’s remedies. Reviewing the clause carefully can help avoid disputes later.
What contractors should check
Before signing a construction contract, contractors should pay attention to:
- The event that triggers liquidated damages
- The amount charged and how it accumulates
- Any stated exceptions or extensions
- Provisions addressing owner-caused delays
- How the contract defines substantial completion
These details can affect the financial impact of a delay.
A liquidated damages clause can provide greater certainty when a construction project encounters a breach. However, New Jersey law does not automatically enforce every amount written into a contract. The provision must remain reasonable in light of the circumstances. Understanding the clause before signing can help contractors and owners better assess their contractual obligations.
