In construction contracts, what does the term "liquidated damages" refer to?

The term "liquidated damages" specifically refers to pre-determined damages for delay in project completion. In construction contracts, it is common for parties to agree in advance on a specific amount of money that will be paid for each day that the project is delayed beyond the completion date stipulated in the contract. This is designed to provide a clear financial consequence for failure to meet deadlines and helps to mitigate disputes that may arise over the actual damages incurred due to delays.

By establishing liquidated damages in the contract, both parties have a mutual understanding of the penalties for non-compliance with the specified timeline, which encourages timely project completion. It's important to note that the agreed-upon amount must be reasonable and not punitive; otherwise, it may not be enforceable in court. Hence, when construction contracts include a clause for liquidated damages, they provide a structured response to potential delays, ensuring that contractors take deadlines seriously and that project owners have a means of recourse if those deadlines are not met.