Liquidated damages are one of the most misunderstood risk mechanisms in construction contracts. For main contractors, they are a familiar feature of employer-issued agreements — a fixed weekly sum that becomes payable if practical completion is not achieved on time. For subcontractors, they are something altogether more unpredictable: a liability that often appears buried in subcontract conditions, poorly defined, and potentially disconnected from the actual value of the work being carried out.
The flow-down of liquidated damages from main contract to subcontract is standard practice. The problem is how it is done — and how rarely subcontractors scrutinise what they are agreeing to before they sign. LazyQS contract review helps subcontractors identify LD exposure before work starts, because by the time a delay occurs, the opportunity to negotiate has long passed.
What Liquidated Damages Actually Are
Liquidated damages — usually abbreviated to LDs — are a pre-agreed sum payable for each day or week that practical completion is delayed beyond the contractual completion date. They are not a penalty in the traditional sense, and that distinction matters.
The legal basis for LDs is that they represent a genuine pre-estimate of the loss that the innocent party will suffer as a result of the breach — in this case, late completion. Because the parties agree the rate at the outset, neither side needs to prove actual loss when the trigger occurs. The employer deducts at the agreed rate, and the contractor (or subcontractor) absorbs it.
For LDs to be enforceable, that pre-estimate test must hold. If the rate bears no reasonable relationship to the actual loss likely to flow from the delay, a court or tribunal may find it to be a penalty — and penalties are not enforceable under English law. This is the foundation of the most important defence available to subcontractors facing disproportionate LD clauses.
How LD Flow-Down Works in Practice
When a main contractor signs an agreement with an employer, the contract will typically specify an LD rate for the project as a whole. If the project is delayed and the employer triggers LDs against the main contractor, the main contractor will look to recover some or all of that exposure from the subcontractors whose works contributed to the delay.
This recovery mechanism is written into most subcontracts. It is referred to as an LD flow-down clause. In practice, it works in one of two ways:
Direct replication. The subcontract imports the main contract LD rate unchanged. Whatever the employer charges the main contractor per day, the main contractor charges the relevant subcontractor per day. This approach is legally and commercially problematic when the subcontract value is a fraction of the main contract value.
Bespoke sub-rate. A rate is negotiated or specified for the subcontract specifically, distinct from the main contract rate. This is more defensible provided the rate is proportionate and represents a genuine estimate of the main contractor's exposure attributable to that subcontractor's delay.
The distinction matters. A direct replication of main contract LDs applied to a subcontractor who represents 10% of the project value is almost certainly not a genuine pre-estimate of the loss attributable to that subcontractor's delay — which is the test that determines enforceability.
The Proportionality Problem
Consider a straightforward example. A main contract carries LDs of £15,000 per week. A mechanical subcontractor is engaged for a package worth £300,000 on a £3 million project. The main contract LD rate is applied directly to the subcontract. The subcontractor's theoretical weekly exposure is therefore £15,000 — equivalent to 5% of their entire subcontract value, every week.
If the subcontractor runs four weeks late and the project as a whole suffers as a result, the claim against them could reach £60,000. That figure has no grounding in what the main contractor actually loses attributable to the mechanical package — it is simply the rate that appeared in the tier above, applied wholesale.
This disproportionality is the practical basis on which many LD claims against subcontractors can be challenged. It is also the reason the unfair subcontract clauses guide identifies disproportionate LD flow-down as one of the seven terms most worth pushing back on during contract negotiation.
The Penalty Clause Doctrine
English law does not permit enforceable penalties. A contractual provision is a penalty — and therefore unenforceable — if it imposes a detriment on the breaching party that is out of all proportion to the legitimate interest of the innocent party in enforcing the obligation.
The Supreme Court restated this principle in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, moving away from a purely mechanical test and asking instead whether the clause was commercially justifiable in the context of the contract as a whole. This gives the courts some flexibility, but it does not eliminate the doctrine.
For subcontractors, the relevance is this: if you can demonstrate that the LD rate in your subcontract is not a genuine pre-estimate of the loss the main contractor would suffer from your delay — and that it instead reflects the main contractor's own exposure to their employer, which is a different and much larger risk — you have the foundation for arguing that the clause is penal and unenforceable.
That argument is not straightforward. Courts are reluctant to rewrite commercial bargains made between sophisticated parties. But it is a recognised and available argument, particularly where the rate is clearly disproportionate to the subcontract value and there is no evidence of any separate pre-estimate exercise having been carried out.
Not sure if the liquidated damages clause in your subcontract is proportionate — or even enforceable? LazyQS flags uncapped LD provisions, missing flow-down limits, and penalty clauses that may not survive a challenge.
Concurrent Delay and Its Importance
One of the most significant protections available to a subcontractor facing an LD claim is the doctrine of concurrent delay. Concurrent delay exists where two or more events, one the subcontractor's responsibility and one not, are both operative causes of the same period of delay to the completion date.
Where true concurrency exists, the subcontractor should not be liable for LDs during the concurrent period. The basis for this is that the main contractor (or employer) cannot hold the subcontractor responsible for delay they did not solely cause — particularly where an event outside the subcontractor's control was also delaying progress at the same time.
In practice, demonstrating concurrent delay requires detailed programme analysis. You need to show what was happening on the critical path, when, and what caused it. This requires contemporaneous records — delay event notices, site diaries, programme updates, instructions received, and correspondence about access or information. The absence of records is one of the main reasons otherwise valid concurrent delay arguments fail.
If your subcontract contains a condition precedent notice requirement for delay events — where you must notify within a set period or lose your entitlement to claim — the interaction with concurrent delay arguments becomes even more important. Review the subcontractor contract review checklist to understand which notice clauses you should be scrutinising before signing.
Negotiating the Cap
The most effective way to manage LD exposure is before the contract is signed. Once the subcontract is executed, your options are confined to contractual and legal arguments. Before execution, you can negotiate.
The key points to push for are:
A sub-contract specific LD rate. Resist direct replication of the main contract rate. Ask the main contractor to justify the rate they are proposing for your package specifically. What is their actual exposure if your works cause delay? That figure — not the employer's LDs — is the appropriate starting point.
A cap on total LD liability. Even where a weekly rate is agreed, the total exposure should be capped. A cap expressed as a percentage of subcontract value — commonly 5% to 10% in negotiated subcontracts — limits the worst-case outcome and ensures the clause retains some proportionality.
A clear definition of the completion date and scope. LDs can only run from the date by which you were contractually obliged to complete. If the completion date is ambiguous, or if your scope has been changed after the original programme was set, the start point for any LD calculation is itself in dispute.
Provisions for extension of time. Your subcontract must include a mechanism for extending the completion date when delay is caused by events outside your control — employer instructions, late information, access issues, or changes by the main contractor. Without an extension-of-time mechanism, LDs can run even when you are not the cause of the delay.
Where your subcontract is back-to-back with the main contract, check that the extension-of-time provisions available to you are genuinely mirrored from those available to the main contractor. If the main contractor can get time but you cannot, you bear the LD risk of delays that neither party can prevent.
Retention and LD Interaction
It is worth noting that LDs and retention money can interact in ways that compound a subcontractor's financial exposure. If LDs are triggered at the same time that retention is being held, the main contractor may be holding a significant sum against you from two separate mechanisms simultaneously.
Understanding the total picture — what is held in retention, what is alleged as an LD liability, and what notice has been issued — is essential for managing your position accurately. The construction retention guide covers how retention works and what subcontractors can do to recover it, including where retention is being used alongside other deductions.
LD Flow-Down Risk Assessment
Before signing a subcontract with a liquidated damages clause, work through these questions:
- Rate source? — Is the LD rate taken directly from the main contract, or is it a separate rate calculated for your package? A direct copy of the main contract rate is a red flag.
- Proportionality? — What does the weekly LD figure represent as a percentage of your subcontract value? Anything above 5% per week deserves close scrutiny.
- Pre-estimate evidence? — Can the main contractor explain how the rate was calculated? If there is no answer, the rate may not satisfy the genuine pre-estimate test.
- Total cap? — Is there a cap on the total LD liability? If not, negotiate one before signing.
- Completion date defined? — Is your contractual completion date clear and unambiguous? Is it consistent with the programme attached to the contract?
- Extension of time available? — Does your subcontract include an extension-of-time mechanism for events outside your control? Is it genuinely mirrored from the main contract?
- Notice requirements? — Are there condition precedent notice obligations for delay events? What are the timeframes, and can you comply with them in practice?
- Concurrent delay records? — Do you have a process for recording delay events contemporaneously so you can demonstrate concurrent delay if it arises?
What to Do When LDs Are Claimed Against You
If a main contractor issues an LD claim after completion, do not accept it without analysis. The first step is to establish whether the factual basis is correct — was there actually a delay to your completion date, and if so, for how long?
Check the programme records. Confirm the contractual completion date. Identify any extensions of time that should have been granted but were not. Review the critical path to understand which activities caused the overall delay and whether your works were genuinely on the critical path throughout the period being claimed.
Where concurrent delay is apparent from the records, document it and raise it formally. Where the LD rate appears disproportionate, take advice on whether the penalty doctrine applies in your circumstances. Where proper notice procedures were not followed — for example, where the main contractor failed to notify you of the delay event within any required period — that procedural failure may undermine the claim.
LDs are a legitimate part of construction contracts. Disproportionate, improperly applied, or unsupported LD claims are not — and subcontractors who understand the difference are far better placed to protect their position when the dispute arises.