April 2026
What Are Liquidated Damages?
Liquidated damages are pre-agreed, specific monetary sums stipulated in a contract to be paid by one party to another if a particular breach occurs, such as a late design/construction project completion. They represent a reasonable, estimated compensation for anticipated losses that are difficult to calculate at the time of contract formation.
Clients of architects and engineers often face situations where the consequences of not completing a project on time may be very costly. The prospect of a delayed project often drives clients to include a liquidated damage provision in their contracts. In a perfect world, if someone is late on a project, you’d just calculate the actual damages and call it a day. But the real world doesn’t always work that way.
For Example
Consider a football stadium that is scheduled to kick-off with the most anticipated season opener by a certain date, but the project is delayed. The costs and reputations could be astronomical if the team had to arrange their games in another stadium.
- Purpose: They provide certainty and avoid complex, costly litigation to prove actual damages.
- Enforceability: For a clause to be valid, the agreed amount must be a reasonable forecast of just compensation for the breach. Generally, courts have held that the amount of liquidated damage must bear some reasonable resemblance to the actual damage that might be suffered. Furthermore, the amount set as a liquidated damage cannot be irrespective of the actual impact of the breach of contract.
- Penalty vs. Damages: If the amount is set merely to punish the breaching party rather than compensate for loss, courts may deem it an unenforceable "penalty." So, it doesn’t work to have clause labeled “PENALTY” if is intended to be effective.
- Common Usage: Frequently used in construction contracts (e.g., $500 per day of delay) and commercial leases, before any breach occurs. Project plans and specifications should prescribe a clear definition of the possible delay of performance, so it is relatively easy to determine when the contract’s services are completed. It could be defined as the date of substantial completion, the date of beneficial occupancy, or some other measurable completion milestone.
- Components: Often calculated based on a daily or weekly rate for delays in performance.
- Substitute for Proof: The injured party does not need to prove their actual losses to collect the agreed-upon amount. But this raises the question—may the injured party claim damages beyond the stipulated damages?
What Liquidated Damages Are Not:
Liquidated damages are generally considered inappropriate for professional design services, as they can jeopardize professional liability insurance coverage and fail to account for factors outside the design professional’s control. This includes, but is not limited to, client-driven changes, material availability, consultant delays, permitting issues, or trades not working on schedule, etc.
Keep in mind that most design/construction projects are like a concert performance (with a lot of moving parts), with all musicians working on a copy of the same sheets of music. In reality, a construction project is usually delivered with a team of design professionals and constructors that may never have worked together before and may not again. On the other hand, musicians practice their concert over-and-over again, before playing in front of audiences. And, if the parties to a construction contract do negotiate a provision for weather delays, it raises another issue.
When a liquidated damages clause is placed in a contract with an architect or engineer, it creates a contractual liability that is not easily managed by the design professional firm. Firms are generally tasked with producing instruments of service that have sufficient information to allow a contractor to construct the project. This could include timely completion of work by others that are contracted directly by the client (e.g., geotechnical investigations, land surveys, or specialists on sustainability), and obtaining necessary site control and easements or zoning approvals, securing necessary permits from various agencies and unforeseen conditions that alter the original design assumptions.
A Liquidated Damages Clause Can Also Impact the Quality of the Design
If such a contract clause is included in the design professional’s agreement with their client, an architect or engineer may feel compelled to deliver their instruments of service to meet the stated deadline to avoid paying liquidated damages—even if the drawings and specifications are not yet completed. The client may ultimately be better served by professional services that are completed with sufficient time and information for the construction contractor to complete the project, rather than a set of documents that have been delivered on time with insufficient competence.
Furthermore, a liquidated damages provision may present the design professional firm with a conflict of interest between their desire to provide an adequate set of instruments of service that meets the client's needs and their wish to avoid paying liquidated damages. A liquidated damages provision triggered by a failure to meet a specified date does not take those circumstances into account.
Standard of Care of Design Professionals
While common in construction for contractors, applying them to design services is risky, as professional liability is based on a standard of care, not strict time completion. Design professionals should ensure their contracts emphasize performance based on professional standards rather than strict, scheduled-backed deadlines.
Architectural and engineering firms are required to provide professional services in a manner that meets the standard of care, which is commonly defined as an obligation to provide services with "the skill and care used by members of design professionals' profession practicing under similar circumstances at the same time and in the same locality."
One of the key provisions of this clause is that the quality of the services provided is examined under similar circumstances that prevailed during the course of the project. Those circumstances are a key element of the standard of care expected of design professionals. Since a liquidated damages clause is not related to negligence in the performance of professional services (not meeting the standard of care), the professional liability insurance policy may not respond. Most professional liability policies specifically exclude coverage for liquidated damages.
In Summary
A liquidated damages clause is not appropriate for design services and jeopardizes the available coverage of a professional liability policy. Lastly, liquidated damages must be added to contract formation, at the time of signing the agreement.
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About the Author of this Risk Management Building Block Article
As a risk manager for the last 20 years for the design profession, Eric O. Pempus, FAIA, Esq., NCARB has experience in professional liability insurance and claims, architecture, engineering, land use, law, and a unique background in the construction industry. Prior to risk management, he has 25 years of experience in the practice of architecture/engineering, and as an adjunct professor teaching professional practice courses at the undergraduate and graduate levels for 37 years at Kent State University’s College of Architecture & Environmental Design.
As a Fellow of the American Institute of Architects and AIA National Ethics Council 2021 Chair, he has demonstrated his impact on architectural profession. He has presented numerous loss prevention and continuing educational programs to design professionals since 2000 on topics of ethics, contracts, and professional practice in various venues across the United States and Canada. He is a former member and chair of his city’s Board of Zoning & Building Appeals for 24 years, and is a licensed architect, attorney, and property & casualty insurance professional.
His educational background includes a JD from Southwestern University School of Law, Los Angeles; Master of Science in Architecture from University of Cincinnati; and BA in psychology/architecture from Miami University, Oxford, Ohio.
The above comments are based upon DesignPro Insurance Group’s experience with Risk Management Loss Prevention activities and should not be construed to represent a determination of legal issues but are offered for general guidance with respect to your own risk management and loss prevention. The above comments do not replace your need for you to rely on your counsel for advice and a legal review, since every project and circumstance differs from every other set of facts.
Disclaimer: The viewpoints expressed in this article are those of the author(s) and are not necessarily approved by, reflective of or edited by other individuals, groups, or institutions and this article is an expression by the author to generate discussion and interest in this topic.