How Construction Contracts address the Financial Consequences of Delays, Emphasizing the Importance of Time in the Industry

Asad Ali

Wed, 30 Jul 2025

This article provides an overview of how construction contracts address the financial consequences of delays, emphasizing the importance of time in the industry. When projects overrun, both parties—employers and contractors—incur financial losses. To manage these risks, contracts often include provisions for liquidated damages, which are pre-agreed sums to cover losses from late completion.

Breaches of contract, such as missed deadlines or failure to meet standards, are common in construction. Contracts usually specify the consequences: contractors may owe liquidated damages for delays, while employers might need to compensate contractors if they cause delays.

The Text explains that liquidated damages must be a reasonable estimate of potential losses to be enforceable by courts. If deemed excessive or punitive, they may be classified as penalties, which are less likely to be upheld. The complexity of these issues is reflected in various legal cases that have shaped the principles governing liquidated damages.

The concept of a "genuine pre-estimate of loss" in liquidated damages is challenging, particularly for non-commercial projects where estimating precise losses is difficult. In Clydebank Engineering Co. v. Yzquierdo y Castaneda (1905), the court upheld that even when damages are hard to estimate, a pre-agreed sum can still be valid as liquidated damages, reinforcing that such sums are part of fair contract negotiations.

Liquidated damages are typically agreed upon by both parties as a fair sum, not necessarily a precise loss estimate, allowing the employer compensation and limiting the contractor's liability. These damages are usually the exclusive remedy for delays, preventing additional claims unless the actual loss is higher than the agreed amount. Extensions of time clauses are crucial as they protect both parties' interests; they cap the contractor’s liability and preserve the employer's right to claim damages if delays occur. If an employer-caused delay isn't covered by an extension clause, the right to claim liquidated damages may be lost, making it essential to draft these clauses carefully.

Overall, this section outlines how construction contracts deal with delays and the financial implications, focusing on the legal framework that ensures liquidated damages are fair and enforceable.