Basis in ascertaining the amount of liquidated damages

Abstract

In Malaysian construction industry, one of the conditions in the contract made between the employer and contractor is to complete a project within a specified time. Failure to fulfil the condition will amount to breach of contract. Main remedy available for breach of contract is an award of damages. Damages are a reasonable sum of money awarded as compensation to the innocent party and one of the damages available is liquidated damages. It is a genuine pre-estimate amount and provided not to penalise the party at fault. A building owner will want to claim as much as he can to cover the loss resulted from the delay of completion. The objectives of this research are to identify the basis in ascertaining the amount of liquidated damages and ascertain whether the amount of liquidated damages is a reasonable compensation or not. There are elements of cost from nine articles tabulated in a table to create a basis in ascertaining the liquidated damages amount. Twenty elements of cost found and they were divided into major and minor costs. There are seven elements under the major cost and the rest were classified as minor cost. The major costs are financing interest, loss of profit, professional fee, administrative cost, alternative facilities, supervision fees and overhead. Three public projects and two private projects were analysed to ascertain whether the amount of liquidated damages were reasonable or not. As a result, the amount of liquidated damages in public project appears to be reasonable as it is less than the amount of losses suffered. In private projects, the amount of liquidated damages is unreasonable as the amount is more than the losses suffered and can be challenged as penalty by the contractor.