Understanding Contracts – Liquidated Damages

There is the opportunity in the standard new house building contracts to be compensated if the building takes longer than the agreed Contract Period. This is called ‘Liquidated Damages’.

The basis of the ‘Damages’ that the builder is likely to be subject to are typically a week’s rent for each week the contract is delayed.

If the liquidated damages are large it will act an an incentive for the builder to complete on time. (See: Contract Period, to find out what delays are acceptable)

The amount of damages is set before the contract is signed and should be a reasonable estimate of the actual ‘Damages’ that will affect you.

Typically the builder will suggest an amount which, unless you object, will be the figure that appears in the contract. For our last building contract which was for a contract period of 9 months the Liquidated Damages was set at $250/week.

I have heard that now that some builders are offering very short build periods. . . . but they want to minimise the financial risks of any delays. (One way of reducing the risk is to offer minimal Liquidated Damages amounts like $1/weekso there is no penalty for finishing late. This means there early finish offer is meaningless)

There is nothing to stop you objecting to the builders amount and suggesting a higher, but still reasonable figure. The builder however may say that due to the increased financial risk the overall price of the house to you will go up.

I think the best approach to get a quality house is for a reasonable contract period rather than go for a fast build. You should then look for a liquidated damages amount around the $300/week mark.

Whatever you decide make sure you look at the Liquidated Damages amount before you sign the contract.

 

For similar posts see Contract Documents