To ensure liquidated damages clauses are both enforceable and equitable, construction professionals should work closely with legal counsel to craft provisions that include clear, adequate checks to prevent overreach or ambiguity.
Supply-chain disruptions in construction and other industries are no longer aberrations and are now viewed by market participants as routine due to many factors, including trade disruptions, tariffs, political and/or diplomatic tensions, changing policies and regulations as well as climate related events.
Indeed, the risk of supply-chain disruptions are rated as high or very high by over 60% of market respondents in recent surveys.[1] The perceptions are not inaccurate, as disruptions have been significant in 2025, with approximately 80% of organizations experiencing at least one major instance of supply chain disruption.[2]
The consequences for contractors that experience supply chain disruptions are delays that trigger liquidated damages provisions and, therefore, increase costs and reduce profits on their projects. Considering the continued instability of supply chains, it is imperative that contractors review their existing contractual obligations and focus on drafting favorable language in their future contracts that account for current volatility and provide flexibility. The focus should be on crafting adequate checks to be included in typical liquidated damages clause and making liquidated damages subject to a strong force majeure provision.
Liquidated Damages Are Here to Stay
It is a challenge for contractors to exclude liquidated damages provisions from their contracts because such clauses are now prevalent, often required by owners and their counsel who are fully aware of the potential for delays on large construction projects. While the American Institute of Architects (AIA) does not include specific language for liquidated damage provisions, there are specific references to liquidated damages in various AIA forms and placeholders for the parties to insert terms, including the A101 and the A102. These placeholders serve as reminders to sophisticated owners that projects can be delayed. Consequently, owners often insist on including liquidated damages provisions for their benefit, especially if the contractor insists on a limitation on consequential damages. Clauses imposing liquidated damages have been heavily litigated in the courts over the last few decades and are often enforced, especially on large or complex projects.
Contractors typically argue that such clauses constitute unenforceable penalties, or that the number of damages imposed by the clauses substantially exceeds the actual damages suffered by the owner. Of course, the actual damages incurred by owners on these large and complex projects are often difficult to calculate, which is precisely why parties include liquidated damages in their contracts. Because of the frequency with which these clauses have been litigated, owners and their counsel are as knowledgeable and adept as ever at effectively negotiating enforceable language.
Accept Liquidated Damages
In most instances, the best strategy for contractors is to accept the inclusion of a liquidated damages clause, but to actively negotiate the language included in the clause to expressly exclude delays caused by supply-chain disruptions or other causes beyond the contractor’s control.
Liquidated damages clauses can benefit contractors if they are thoughtfully drafted. First, liquidated damages provisions should be expressly subject to a well-drafted force majeure clause (or other provisions addressing delays in the construction contract) and toll any delays allowed by the declaration of force majeure by the contractor (as discussed in more detail below).
Second, the language should be narrowly tailored so that liquidated damages are only triggered for delays that are caused by the contractor and exclude delays beyond the control of the contractor that are caused by market conditions, the owner or by other project parties such as design delays caused by architects or engineers or delays that are caused by sub-contractors.
In the case of specialty contractors, language that obliges the specialty contractor to pay for any delays they cause should be included not only in the contract with the owner, but also in the specialty contractor agreement.
Third, all liquidated damage provisions should include language stating that liquidated damages shall be the sole and exclusive remedy to the owner for delays caused by the contractor, and that liquidated damages are in lieu of any other direct, indirect or consequential damages that may flow from delays caused by the contractor.
Contractors should accept liquidated damages clauses but negotiate language to exclude delays from supply-chain disruptions or other causes beyond their control.
Finally, any delays that trigger liquidated damages should be tied to the critical path of the project and should not be imposed unless the delays affect substantial completion of the project and not the final completion of the project. In other words, delays that can be addressed and mitigated without delaying key milestones should be expressly excluded.
In addition to including favorable language limiting the circumstances that liquidated damages may be imposed, and tolling delays that may trigger such causes, contractors should include other protections in liquidated damages clauses.
Contractors should strongly consider proposing caps on the total liquidated damages that can be assessed in their construction contracts regardless of the length of the delay. Caps can be tied to a fixed dollar amount, the total contract price, or more commonly to a percentage of the total contract price. In addition to caps, contractors can also propose that any applicable liquidated damages be first drawn from any contingency or allowance funds that are in place before they are assessed against the contractor.
The Daily Rate Is Important
At a minimum, contractors should take special care to ensure that the daily rate provided in a liquidated damages clause is reasonable and grounded in metrics applicable to the project, and to the extent possible, not carried over from a contract form from another project or viewed as random or arbitrary. While some practitioners might ignore arbitrary daily rates because they see an advantage if the liquidated damages clause is not enforced by a court, the reality is that certainty and reasonable rates are also valuable for contractors.
More specifically, if a daily rate is found arbitrary by a court, it will potentially jeopardize the enforceability of the remainder of the clause that may be helpful to the contractor (including the sole remedy language) and will be likely to prolong the dispute and cause the contractor to incur significantly more legal costs and delays.
The daily rate should be a reasonable forecast of actual losses that the owner may incur if the project is delayed. It should be jointly calculated and documented prior to the execution of the contract and the commencement of the project. Taking the total contract price and dividing it by the expected length of the project as the sole basis for the rate is not likely to be considered a reasonable forecast of actual losses.
The calculation should start with an estimate of extended general conditions and consultant costs (architects, engineers, project managers) per day for the owner but should also include consideration for extended financing costs and ongoing administrative and personnel costs for the owner. In some cases, including amounts for lost revenue, associated rental costs of substitute space, and quantifiable lost opportunity costs may be appropriate.
Don’t Forget the Force Majeure Clause
Force majeure clauses are particularly beneficial to a contractor because they operate to delay performance and toll any milestone dates upon the occurrence of certain circumstances beyond the control of the contractor. From a contractor’s perspective, all construction contracts should include a force majeure clause that specifically references and limits the operation of the liquidated damages clause and works hand in hand with that clause.
While the law varies on this subject in different jurisdictions, two concepts are universal: (1) the scope and applicability of a force majeure clause is highly dependent on its express terms, and (2) parties cannot generally avoid their contractual obligations simply because their performance has become more economically burdensome than anticipated (absent clear language to the contrary).
The second prong can be particularly problematic for contractors. Accordingly, owners will often attempt to remove references to laundry lists of specific events (like adverse weather, fire, hurricanes, strikes, etc.) and insert language excluding the applicability of force majeure unless performance by the contractor is fully prevented, while also declaring that commercial impracticability and circumstances that impose an extreme economic hardship on the contractor are not force majeure events.
Contractors should push back on such efforts, should insist on specific language for supply-chain events triggering force majeure, and should avoid relying on vague or catch-all phrases. Specific language should include at a minimum: (1) supply-chain disruptions; (2) material shortages; (3) tariffs, trade embargoes, or other government orders, restrictions, and trade sanctions; (4) labor disputes, strikes, or civil disorder; (5) epidemic or pandemic; and (6) the inability to obtain necessary materials, machinery, or equipment from usual or customary sources.
Contractors should strongly consider proposing caps on the total liquidated damages that can be assessed in their construction contracts regardless of the length of the delay.
Contractors should resist efforts to include language conditioning a declaration of force majeure on events that fully prevent performance, as opposed to referencing delayed performance. It is also advisable to eliminate any exclusions for foreseeable events (since supply-chain disruptions have become common occurrences) and to include specific language involving commercial impracticability or extreme economic hardship as grounds for declaring a force majeure event.
Conclusion
To ensure liquidated damages clauses are both enforceable and equitable, construction professionals should work closely with legal counsel to craft provisions that include clear, adequate checks to prevent overreach or ambiguity. Additionally, integrating a robust force majeure provision can provide essential protection against unforeseen events, safeguarding all parties involved. By taking these proactive steps, contractors and owners can mitigate risks, foster fair agreements, and navigate potential disputes with greater confidence.
Richard F. Whiteley chairs the Bracewell law firm’s construction litigation practice group and guides clients on drafting effective construction contracts and managing litigation on issues, such as force majeure, indemnity, defect claims and product liability.
Phillip L. Sampson, Jr. is a partner in the Houston office of Bracewell. He represents clients in a diverse range of complex business litigation and arbitration matters involving the energy, construction, insurance, manufacturing, steel, oil field services, chemical, petrochemical, software, financial services, consumer products and real estate sectors.
[1] www.forbes.com/sites/johnbremen/2025/06/16/8-tips-for-navigating-global-supply-chain-risks-in-2025
[2] www.rapidratings.com/news-items/rapidratings-2025-risk-survey-reveals-resurgent-supply-chain-crisis
