What is Liquidated damages?
Liquidated damages (LD) are a pre-agreed amount a buyer can deduct from a contractor’s payments for late delivery or late completion of work.
What are liquidated damages?
Liquidated damages, usually called LD, are compensation for delay that the buyer and contractor agree in advance in the contract. Instead of proving its actual loss each time, the buyer applies the LD clause when supplies or work are late.
The LD clause is in the tender’s conditions of contract, so the bidder agrees to it by bidding. The rate, the period it is counted on and the maximum are all set by that clause.
How LD usually works
- A rate is applied for each week or part of a week of delay, as the contract sets
- It is calculated on the value of the delayed supplies or work, or on the contract value, depending on the clause
- There is usually a maximum, beyond which the buyer may cancel the contract
- It is deducted from bills, the security deposit or the performance security
How it differs from other deductions
LD is linked to delay. Forfeiture of EMD is linked to the bidder’s conduct before award, and invoking a PBG is linked to failure to perform the contract. A contract may also have separate penalties for quality or service-level failures.
When the buyer extends the delivery period, it often says whether the extension is with or without LD. Delays caused by the buyer or by force majeure may be excused, as the contract allows.
Tips for bidders
Read the LD clause before you bid and price the risk in. During the contract, write to the buyer as soon as a delay looks likely and keep records of the reasons, so you can ask for an extension without LD where it is justified.
Common questions
Common questions about Liquidated damages in government tenders.
LD means liquidated damages: a pre-agreed amount the buyer can deduct for late delivery or completion, as set in the contract.
The buyer may extend the delivery period without LD if the delay was not the contractor’s fault, for example force majeure or buyer delay. It depends on the contract and the buyer’s decision.
People often use the words loosely. In contracts, LD is a pre-agreed estimate of loss from delay, while penalties may cover other failures.
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