(1) Don’t agree to liquidated damages without a waiver of consequential damages.
Liquidated damages and consequential damages provisions should be considered together when negotiating a construction contract. Liquidated damages are a measure of compensation which, at the time of contracting, the parties agree will represent damages in case of breach, whereas consequential damages are damages those that flow indirectly from a breach of contract. Both types of damages can compensate an owner for contractor delays in performance. If liquidated damages are included in a contract, the contract should also include a waiver of consequential damages to make clear that liquidated damages are the owner’s sole remedy for delay damages. Most AIA owner/contractor agreements, like the example from A101TM-2017 below, include a prompt where the parties can include liquidated damages. Likewise, the A201 TM-2017, General Conditions of the Contract for Construction includes a waiver of consequential damages provision at Section 15.1.7.
A101-2017, Standard form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sum
§ 4.5 Liquidated damages, if any:
(Insert terms and conditions for liquidated damages, if any.)
A201-2017, General Conditions of the Contract for Construction
§ 15.1.7 Waiver of Claims for Consequential Damages
The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes
.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit, except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.7 shall be deemed to preclude assessment of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.