Liquidated Damages in NZ Construction Contracts — How Delay Damages Work, and When They're an Unenforceable Penalty

Steve Parker
Jun 22
7 min read

Updated: Jul 9

Liquidated damages are a fixed amount — usually a set sum per day or per week — that a construction contract makes the contractor pay for completing late. In New Zealand the rate must reflect a genuine pre-estimate of the principal's loss. If it is out of all proportion to the principal's legitimate interest in timely completion, a court can refuse to enforce it as a penalty.

By Steve Parker · Trueworks · NZ construction document analysis · 6 min

When a project runs late, the contract usually has a number already written into it for what late completion costs the contractor. That number is the liquidated damages rate. It is one of the most consequential figures in any construction contract, and one of the least scrutinised when the contract is signed — because at signing, nobody expects to be late. By the time it matters, the rate is fixed and the argument is about whether it applies, for how long, and whether it is enforceable at all. This note sets out how liquidated damages work under the standard New Zealand contract, the change the 2023 standard made, and the practical checks before you accept a deduction.

What liquidated damages are

Liquidated damages are an agreed, pre-set amount payable for a defined breach — here, failing to reach completion by the contract date. They serve two purposes. For the principal, they remove the need to prove actual loss: rather than itemising holding costs, lost rent or financing, the principal simply applies the contracted rate for each day or week of delay. For the contractor, they cap and make knowable the exposure for late completion — instead of facing an open-ended damages claim, the contractor knows the daily cost in advance.

That second point is often missed. A liquidated damages clause is not purely a stick. It is also the contractor's ceiling on delay liability, provided the clause is valid and the contract does not allow the principal to claim general damages on top.

Where the rate comes from — NZS 3910:2023 clause 10.5

Under NZS 3910:2023, the standard form for most commercial building and civil work in New Zealand, liquidated damages for late completion are dealt with at clause 10.5, and the actual rate is stated in the contract-specific schedule (the Special Conditions / Schedule 1). The standard does not invent a figure — the parties insert one. The rate should be arrived at the same way a court will later test it: as a reasonable estimate, made at the time of contracting, of the loss the principal would suffer from delayed completion.

That estimate is project-specific. For a commercial building it might reflect holding costs, financing on the construction loan, and rent that cannot be earned until practical completion. For a fit-out tied to a tenant's opening date it might reflect the income the tenant loses. The point is that the figure should be defensible against the project's own economics, not lifted from another contract.

The 2023 change — no separate cap on late-completion damages

NZS 3910:2023 introduced a general cap on the contractor's overall liability, set in the schedule. A change worth knowing is that liquidated damages for late completion sit outside that general cap unless the parties expressly provide otherwise. In other words, the headline liability cap you negotiated may not limit your exposure to delay damages, which can accrue separately for every day past the completion date. On a long-running delay, that distinction can matter more than the cap itself. Read the schedule for both numbers, and check whether late-completion damages are carved out of the cap.

When liquidated damages become an unenforceable penalty

A liquidated damages clause is only enforceable if it is not a penalty. The leading New Zealand authority is 127 Hobson Street Ltd v Honey Bees Preschool Ltd [2020] NZSC 53, in which the Supreme Court restated the test. A clause that imposes a consequence for breach is an unenforceable penalty if that consequence is out of all proportion to the legitimate interests of the innocent party in having the obligation performed.

This is a deliberate shift from the older approach, which asked only whether the sum was a genuine pre-estimate of loss (the rule traced to Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79). A genuine pre-estimate of loss is still the safest way to set the rate, and a strong indicator the clause is valid. But the modern test is broader: the principal's legitimate interest in timely performance can extend beyond a narrow loss calculation to wider commercial interests, and deterring breach can be legitimate — though pure punishment is not. The test is objective and assessed at the time the contract was formed, not with hindsight. The Court also noted that where one party held a markedly superior bargaining position, a court may be readier to find the clause penal.

For a contractor facing a deduction, this matters in a specific way. If the rate in your contract bears no rational relationship to any loss the principal could plausibly suffer from delay — for example a daily rate many times the project's actual holding and financing costs — there is a genuine argument that the clause is unenforceable as a penalty, and that the principal is left to prove its actual loss instead. That is a legal question on which you should take advice; the groundwork for it is factual, and it starts with the numbers in the schedule.

Your first defence is usually time, not the rate

Before arguing about whether the rate is a penalty, look at the date it runs from. Liquidated damages only accrue once the contractor has passed the Date for Completion. If the contractor is entitled to an extension of time, the Date for Completion moves out, and liquidated damages do not run for the extended period. A validly granted extension of time is therefore the contractor's primary protection against a delay deduction — often a more reliable answer than challenging the rate.

That is why delay events and variations matter so much to the final account. A variation that adds work, a late instruction, or a qualifying delay event can each support an extension of time — but only if the contractor gives the notices the contract requires, within the contract's timeframes. We set out how that notification works in our note on extension-of-time notification under NZS 3910 clause 10. If you missed the notice, the entitlement can be lost even where the delay was genuinely the principal's responsibility, and the liquidated damages clock keeps running.

Residential building contracts

The standard residential building contracts used in New Zealand — including those issued under industry membership schemes — commonly contain their own liquidated damages clause, usually a fixed weekly sum for late completion. The same principles apply: the figure must be a reasonable pre-estimate and not a penalty, and it runs from the agreed completion date subject to any extension of time. Homeowners and builders alike should check what their contract says before either side assumes a deduction is automatic, and should record any agreed extension to the completion date in writing.

What to check before you accept a liquidated damages deduction

If a deduction for late completion has been applied, or threatened, the practical checks are:

Find the rate and the date. What is the liquidated damages rate in the schedule, and what is the contracted Date for Completion it runs from?
Account for every extension of time. Has the contractor claimed, and the principal granted, extensions for variations, instructions or qualifying delay events? Each valid extension moves the date and reduces the days that damages can accrue.
Check the notices. Were the extension-of-time notices given in the form and within the timeframes the contract requires? Lost entitlement usually comes down to a missed notice, not the merits of the delay.
Test the rate against the project's economics. Is the rate a defensible estimate of the loss delayed completion actually causes, or is it out of all proportion to any plausible loss?
Confirm the deduction follows the contract and the payment rules. A deduction still has to be made through the contract mechanism and reflected correctly in the payment process under the Construction Contracts Act.

Most of the genuine answer lives in steps 2 and 3 — reconstructing the timeline of variations, instructions and delay events, and matching it to the notices that were actually given.

What an independent review can and cannot do

To be clear about scope: a document review establishes the factual groundwork — the rate in the schedule, the contracted completion date, the variations and instructions that bear on time, and whether the extension-of-time notices were given as the contract required. That is the evidence layer a delay claim or a defence to a liquidated damages deduction depends on. It is analysis, not legal advice, and whether a clause is an unenforceable penalty is ultimately a legal question for advice or a tribunal. Where you need a binding decision, the routes are set out in our note on the Disputes Tribunal, adjudication and court, and where the disagreement is really about the cost of varied work rather than time, see how to dispute a building variation and our guide to who pays for a building cost overrun.

Get a delay or variation position reviewed

Send us the contract, the schedule, the relevant instructions and your extension-of-time notices. We return a code-cited assessment of the rate, the completion date, and whether the time entitlements stack up — the evidence layer your delay position relies on. No charge for your first review packet. NDA available; files NZ-hosted and deleted after 30 days unless you ask us to retain them.

→ Get the free check at trueworks.co.nz/contact — or email hello@trueworks.co.nz

About Trueworks

Trueworks is built by Steve Parker — 20 years on the analytical side of NZ construction. Independent, citation-backed second opinions on construction documents for homeowners, builders and trade subcontractors: variation reviews, quote checks and delay-position assessments against the contract, the relevant NZ standards and the Building Code. Analysis, not legal advice. I answer every enquiry personally.

hello@trueworks.co.nz · trueworks.co.nz

Sitting on a variation, claim or contract clause you are not sure about? Send it with the contract — a written, code-cited answer back within 24 hours. Send us the drawings and the quote, tender or variation. You get a written, code-cited check back within 24 hours. No charge for your first check. No card, no obligation. NDA available. → Get the free check at trueworks.co.nz/contact — or email hello@trueworks.co.nz