How do liquidated damages function in a contract?

Liquidated damages are a key contractual mechanism used to address delays in project completion. They specify a predetermined amount of money that one party agrees to pay the other if a specific contract milestone is not achieved by an agreed-upon deadline. This financial figure is stipulated in the contract to provide clarity and reduce disputes related to damages caused by delays.

The rationale behind liquidated damages is to create certainty and encourage timely performance. By defining the damages upfront, both parties know the consequences of a delay, which helps manage expectations and promotes adherence to deadlines. This approach also serves to mitigate the difficulties that arise in calculating actual damages resulting from delays, which can often be complex and contentious.

In contrast to other options, liquidated damages do not function as incentives for early completion, do not provide for penalties solely tied to minor delays, and do not allow for additional time extensions without consequences. Instead, they serve as a clear deterrent against late completion by imposing financial liability when deadlines are missed.