Liquidated Damages

What are Liquidated Damages?

Liquidated damages (LDs) are predetermined monetary amounts written into a contract that become payable by the supplier if specific performance failures occur — most commonly delays in completing work by the contracted date. They represent the parties’ genuine pre-estimate of the loss the agency would suffer from the breach, agreed at the time of contract formation.

How Do Liquidated Damages Work in Government Contracts?

In Australian government procurement, liquidated damages clauses are common in construction, infrastructure, and major service delivery contracts. They typically operate as follows:

• A daily or weekly rate is specified in the contract for each day of delay beyond the completion date
• The rate must be a genuine pre-estimate of the agency’s likely loss — if it is excessive or punitive, it may be unenforceable under Australian law
• A cap is usually set on total liquidated damages, often as a percentage of the contract value (commonly 10-15%)
• Extensions of time may be granted for delays caused by the agency or force majeure events, which pauses the LD clock

When are Liquidated Damages Applied?

LDs are most commonly applied for:

• Late completion of construction or infrastructure works
• Failure to meet go-live dates for IT system implementations
• Delay in achieving operational milestones in staged delivery contracts
• Failure to meet KPI targets in some service contracts

Liquidated Damages vs General Damages

The key advantage of liquidated damages for both parties is certainty. The agency does not need to prove its actual loss — the agreed amount applies automatically. Conversely, the supplier knows its maximum exposure for the specified breach.

Tips for Tenderers

• Factor LD risk into your pricing — the possibility of LDs is a cost that should be reflected in your bid.
• Assess the LD rate against the contract value — if the rate seems disproportionate, seek clarification or negotiation during the tender process.
• Build program contingency — plan your delivery timeline with buffer to avoid triggering LDs.
• Document everything — if delays are caused by the agency or third parties, contemporaneous records are essential for claiming extensions of time.