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Penalties are usually a pre set amount of money informing contractors that such an amount will be deducted from their moneys should they be late in executing the job and is usually limited to10% of their total contract value. On the other hand Liquidated Damages are related to all moneys the Client will suffer from the delay to their project, being it operational cost, financing cost...etc.
Liquidated damages are just that.They are set before the contract is made and come in automatically if the relevant contract term is broken.
Liquidated damages for delay are well know to the industry - because lateness is a common problem. But liquidated damages for other things (eg the plant using more power than the contract said it would) are equally possible.
The law allows liquidated damages, but it does not allow penalties. So, the maximum amount which can be put in a contract for liquidated damages is the amount which is a genuine pre-estimate of the loss which the parties believe the client will suffer if the contractor is late. Anything more is a penalty and is unenforceable. The amount stated can be less than the genuine pre-estimate, but the client cannot later claim anything more.
