Liquidated Damages: Review of Current State of the Practice

Abstract

Liquidated damages (LDs) are contractually specified damages that provide restitution for additional owner costs incurred from contractor delayed completion. Established legal precedence requires owners to specify rates that are a good faith pre-estimate of actual anticipated damages. Additionally, the Federal Highway Administration provides guidance to state highway agencies (SHAs) in developing these rates. In reviewing current practices, SHAs were surveyed about individual LD practices utilized. Survey results are divided into three categories for discussion purposes: (1) contractual practices; (2) estimating practices; and (3) administrative practices. All SHAs chose to recover damages through a contractual LD clause although implementation varies. SHA estimating practices are generally not detailed and tend to place rates at the low end of actual damages. Few SHAs verify estimated rates with actual project cost experiences. Administrative practices have field personnel administering the primary element of the LD clause, contract time. These practices also reveal a high priority on contract closeout, sometimes sacrificing LD amounts due by contractors under contract. Few states have experienced legal challenges regarding their LDs provision.