What are liquidated damages primarily used for?

Liquidated damages are primarily meant to serve as a pre-determined amount of money that one party agrees to pay to another if they fail to meet specific contractual obligations, particularly with regard to project completion. In the context of construction or project contracts, liquidated damages are intended to compensate the affected party for losses incurred due to delays. They provide a clear framework for quantifying the penalties associated with such delays, which can help the parties involved understand the financial implications of not adhering to deadlines.

This mechanism does not serve as a punitive measure in the traditional sense but is rather a contractual obligation that reflects the anticipated losses that a party might experience as a result of a delay. By agreeing to liquidated damages upfront, both parties establish expectations and reduce the potential for disputes about the extent of damages that might be awarded later. Thus, it acts as a bridge between incentivizing completion timelines and addressing the impacts of delay, direct compensation for which is often challenging to quantify.