Check liquidated damages for a cap and a comparison
Before you sign, multiply the weekly liquidated damages rate by a realistic worst-case delay and compare it with your margin. If the answer is more than the job earns and there is no cap, that clause matters more than anything else you negotiate.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
Why it matters
The weekly rate looks small on the page. People read it as a number, not as a multiple. Nobody signs a clause saying the delay risk is bigger than the profit. They sign one that says £4,000 a week, and never do the sum. Without a cap, a long overrun from a chain of events you only partly control can eat the margin and then the contract sum. Setting the rate against your margin turns the clause from a legal point into a commercial one. And a commercial point is something your estimator and your board can weigh.
How to do it
- Multiply the weekly rate by a realistic worst-case delay for this kind of job, not the best case.
- Set the result beside the expected margin, and write both numbers on your contract review summary.
- Make a cap the first thing you negotiate where there is none and the risk is bigger than your margin. Ask for it as a percentage of the contract sum.
- Record the agreed rate and cap in the working summary, so the site team knows what a week costs.
Example
Illustrative example. The scenario and figures are invented.
The facts
A cladding subcontractor tenders £1,600,000 for a package with a 40-week programme at an 8 per cent margin. The subcontract sets liquidated damages at £7,500 a week with no cap.
What happens
- The estimator multiplies £7,500 by a worst case of 20 weeks: £150,000.
- The margin on the job is £128,000, so a bad delay would wipe it out and cost £22,000 more.
- The subcontractor asks for a cap of 10 per cent of the contract sum, £160,000, and settles at 7.5 per cent, £120,000.
Exposure against margin
| Item | Amount |
|---|---|
| Margin at 8 per cent | £128,000 |
| Worst case delay, 20 weeks at £7,500 | £150,000 |
| Agreed cap at 7.5 per cent | £120,000 |
The outcome
The worst case now sits inside the margin. The subcontractor knows before signing that no delay can cost more than £120,000, which is a number it can carry and plan around.
To have this set up for you, see our Delay Damages Prevention service.