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Liquidated damages in construction contracts

On Behalf of | Aug 25, 2021 | Blog |

Contractors in Minnesota and around the country are sometimes asked to sign contracts that require them to pay liquidated damages if they do not complete projects on time. These provisions usually allow the party that hired the contractor to deduct a specific amount from the balance owed for every day the project continues past an agreed-upon deadline. Liquidated damages are permitted under the law as long as they compensate the party collecting them for actual or anticipated losses, but they cannot be used to punish or coerce contractors.

Substantially complete

Contractors are often required to pay liquidated damages when a project is not substantially complete by an agreed-upon date. A project is considered substantially complete when major building work is finished and the structure is ready to be occupied even if workers are still adding finishing touches.

Delay and fault

Contractors may initiate business litigation to recover liquidated damages if money is deducted for days after a project was substantially completed or for delays that were not their fault. This could happen if the nature of the project is changed after work has begun or the contract has a force majeure clause and materials are delayed because of an act of God. In these situations, contractors could act proactively by asking the court to change the day when liquidated damages begin.

Due diligence

Contractors operate in a competitive market and often work with tight margins, and liquidated damages could mean the difference between making a profit and losing money. Before signing a contact with a liquidated damages provision, it may be wise to have the paperwork checked by an attorney with business law experience.