Liquidated Damages in Texas Construction Contracts: What They Are and How They Work
A delayed construction project can result in more than schedule pressure. Depending on the contract, each additional day may expose the contractor to a predetermined charge known as liquidated damages.
These provisions can significantly affect the profitability of a project. Understanding the clause before signing may make the difference between a successful project and facing substantial delay-related charges. This is Part 1 of our two-part series on liquidated damages in Texas construction.
Quick Answer: What Are Liquidated Damages?
Liquidated damages are an amount established in a contract as compensation for a specified breach, such as failing to complete a project by the contractual deadline.
In Texas, a liquidated damages provision may be enforceable when the potential harm was difficult to estimate when the contract was made and the amount was a reasonable forecast of compensation. A court may decline to enforce the provision if it operates as a penalty rather than compensation. See the Texas Supreme Court opinion in Atrium Medical Center, LP v. Houston Red C LLC.
There is no universal liquidated damages rate or percentage for Texas construction projects.
How Liquidated Damages Clauses Work
A construction contract liquidated damages clause usually identifies:
- The required completion date or project milestone
- The event that triggers liquidated damages
- The amount assessed for each day, week, or missed milestone
- Whether the amount is based on calendar days or working days
- Any maximum or cap on the total assessment
- When liquidated damages stop accruing
For example, a contract might state that the contractor will owe $1,000 for each calendar day the project remains incomplete after the adjusted completion date. If the project is completed 12 days late and no extension applies, the owner may seek $12,000 under the clause.
How Owners Calculate the Daily Rate
There is no standard construction liquidated damages formula that applies to every project. An owner may estimate anticipated losses associated with delayed completion, such as:
- Extended financing or construction-loan costs
- Additional project-management expenses
- Lost rental or operating income
- Extended inspection or professional-service costs
- Temporary facilities and administrative expenses
A contemporaneous record showing how the amount was determined may help demonstrate that the provision was intended to compensate the owner rather than punish the contractor. However, simply calling an amount “liquidated damages” does not automatically make it enforceable. Courts examine the substance and operation of the provision, not only the label placed on it.
Are Liquidated Damages Enforceable in Texas?
Texas courts generally respect the parties’ right to allocate risk through a contract. However, courts will not enforce a liquidated damages provision that amounts to an unlawful penalty.
In Atrium Medical Center, LP v. Houston Red C LLC, the Texas Supreme Court explained the two initial requirements for an enforceable liquidated damages provision:
- The harm caused by the breach must have been incapable of or difficult to estimate when the contract was formed.
- The stipulated amount must have been a reasonable forecast of just compensation.
The party seeking to enforce the provision bears the burden of establishing those requirements. They are evaluated based on the circumstances existing when the parties entered into the contract.
The “Unbridgeable Discrepancy” Analysis
The inquiry may not end with the circumstances existing when the contract was signed. A party challenging the provision may also argue that there is an “unbridgeable discrepancy” between the liquidated amount and the actual damages measured at the time of the breach. The party challenging the clause bears the burden on that issue.
This does not mean liquidated damages must equal the owner’s actual losses exactly. However, a substantial and unjustified difference between the contractual amount and the loss caused by the delay may support an argument that the provision operates as a penalty.
What Happens if a Court Finds the Clause Unenforceable?
If a liquidated damages provision is found to be an unenforceable penalty, the owner may not be able to collect the stipulated amount.
Depending on the contract, the legal claims asserted, and the available evidence, the owner may still pursue actual damages caused by the delay. The owner would then need to prove those losses instead of relying on the predetermined contractual amount. For contractors, an unenforceable clause does not necessarily eliminate all potential delay liability. It changes how the owner must establish and calculate the claimed damages.
Concerned about a liquidated damages provision before signing? Learn more about Joe Tolbert’s construction contract review services.
Frequently Asked Questions (FAQs)
Liquidated damages are a predetermined contractual amount intended to compensate a party for a specified breach, such as delayed completion. They are not supposed to punish the contractor.
The contract usually provides a daily, weekly, milestone-based, or other stated amount. The total may be calculated by applying that amount to the period of delay properly chargeable under the contract. The daily rate should reflect a reasonable forecast of the owner’s anticipated losses.
Potentially. The ability to challenge the assessment may depend on the contract, applicable deadlines, releases, waivers, dispute procedures, and the facts surrounding the delay. A contractor should obtain legal advice promptly after liquidated damages are assessed or withheld.
No. Texas law does not establish one standard percentage, daily rate, or formula for every construction project. The amount should be based on the anticipated harm associated with the project and must satisfy the applicable enforceability requirements.
Reviewing a Clause or Facing a Delay Claim?
Liquidated damages can place substantial financial pressure on a construction company. Before signing a contract, contractors should understand how the clause allocates responsibility.
Joe Tolbert is Board Certified in Construction Law by the Texas Board of Legal Specialization and has represented businesses and individuals for over 30 years. His practice includes construction contracts, payment disputes, delay claims, and insurance litigation.
Call 817.338.1700 to discuss your construction contract or delay dispute with Joe Tolbert.
