Liquidated Damages
Definition
Liquidated damages (LDs) are amounts agreed in a contract in advance that one party pays the other if a defined failure occurs, such as missing a completion date or falling short of a performance guarantee. They replace proof of actual loss with a formula, usually a rate per day or per point of shortfall, and they are usually capped. In energy projects they appear in construction contracts, equipment warranties and offtake agreements.
Why it matters
LDs are the main contractual compensation for delay and underperformance, but they are a negotiated estimate, not a guarantee of being made whole. An investor should compare the damages rate and cap with the revenue at stake, check the credit of whoever owes them, and trace where the payments go in the financing structure.
Common misconceptions
- •LDs are not a measure of actual loss; they are a pre-agreed formula.
- •A high daily rate means little if the cap is low.
- •Damages owed by a weak contractor may never be paid.
- •LDs paid to the project may go to lenders before equity sees any of it.
Technical details
SCE and Ameresco (2021 battery contract)
Schedule damages: 0.015% of the EPC price per day for an initial period (length redacted), then 0.4% per day up to 60 days after the Guaranteed Completion Date.
Aggregate cap: 10% of the EPC price per project.
Availability damages: 0.2% of the EPC price per whole point below 97% annual equivalent availability.
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Do liquidated damages fully compensate for project delays?
- Not necessarily. They are set in advance and capped, so they can be less than the revenue actually lost, and they are only worth what the paying party can pay. SCE's contract with Ameresco caps schedule damages at 10% of the EPC price per project.
- What kinds of damages are common?
- Schedule damages per day of delay; performance damages for missing capacity, efficiency or availability guarantees; and offtake damages owed by the seller to the buyer. Ameresco's contract charges 0.2% of the EPC price for each whole point that annual availability falls below 97%, and Pelican's Jaw's financing refers to damages under both the EPC contract and the PPA after its battery capacity test.
- Who receives the money?
- Often the lenders first. Pelican's Jaw's financing requires that 'all liquidated damages and warranty payments' received before term conversion be deposited in a Liquidated Damages Account controlled by the lenders, and MN8 Energy's financing treats delay damages as 'revenue replacements.'
- Can the project also owe damages?
- Yes. Shasta Power Fund II warns that if it fails to build on schedule under a PPA, 'the power purchase agreement may be terminated and/or the Company could be required to pay liquidated damages.' SB Energy notes delays could 'trigger obligations to pay liquidated damages.'