Liquidated Damages With Sectional Completion: A Worked Example

How delay damages are calculated when a project hands over in sections, worked through in illustrative riyals, including what happens when only one section is late.

Sectional completion splits a contract into parts with separate completion dates, which allows damages to apply only where lateness actually causes loss. The mechanism works only if each section is properly defined and each rate is calculated from the loss attributable to that section. The example below shows the arithmetic and the traps, using illustrative figures throughout.

The situation

A contract covers a building with two retail units at ground level and twelve apartments above, with two sections: the retail shells, needed early because tenant fit out is programmed, and the residential floors. The retail section completes four weeks late and the residential section completes on time. The question is what can be deducted and how it is calculated. All figures below are illustrative assumptions used to demonstrate the method, not rates or values from any real project.

Assumptions (illustrative)

• Contract sum: 16,000,000 riyals, with section one, the retail shells, apportioned at 3,200,000 riyals.
• Section one completion date: week 52. Actual completion: week 56, so four weeks late.
• Section two completion date: week 68. Actual completion: week 68, on time.
• Illustrative loss for section one: rent of 48,000 riyals a month across the two units, plus 9,000 riyals a month of financing on the apportioned sum, plus 4,000 riyals a month of additional supervision.
• Liquidated damages for section one stated in the contract: 14,000 riyals a week.
• Overall cap on liquidated damages stated in the contract: 8 per cent of the contract sum.

Step 1: Derive the section one rate from the loss

Monthly loss is 48,000 plus 9,000 plus 4,000, giving 61,000 riyals a month, which is about 14,077 riyals a week on a 4.33 week month. The contract states 14,000 riyals a week, which sits just below the calculated loss.

A rate derived from a documented calculation is far more defensible than a round figure. Keeping the stated rate slightly below the calculated loss, with the calculation retained on file, is the practice that makes the mechanism credible.

Step 2: Calculate the deduction for the late section

Four weeks at 14,000 riyals a week gives 56,000 riyals.

That is the whole deduction for section one. Because section two completed on time, no damages arise on it, which is precisely the benefit of sectional completion: the pressure applies only where the lateness actually caused loss.

Step 3: Test the deduction against the contractual cap

The cap is 8 per cent of 16,000,000 riyals, which is 1,280,000 riyals. The deduction of 56,000 riyals is far below it, so the cap has no effect here.

The cap matters in severe delay rather than in a four week overrun. Its practical importance is that it tells the contractor the maximum exposure, which keeps the risk priceable and reduces the incentive to fight every day of delay.

Step 4: Check what would happen without sectional completion

If the contract had a single completion date at week 68 and the whole works completed at week 68, no damages would arise at all, despite the retail units being four weeks late and the rent being lost.

This is the clearest argument for sectional completion. Without sections, early loss on part of a building is simply unrecoverable through the damages mechanism, because the contract only measures lateness against the one date it contains.

Step 5: Confirm the preconditions before deducting anything

Work through the contract list: has a certificate of non completion for section one been issued, has notice of intention to deduct been given, have all outstanding extension of time applications affecting section one been assessed, and is the deduction being made from a payment the contract permits it to be taken from?

Deducting before the preconditions are satisfied is the most common way a sound damages position is lost. The arithmetic is the easy part; the sequence is where the mechanism usually fails.

Step 6: Assess the extension application that arrives in response

Assume the contractor applies for three weeks on section one for a late instruction affecting the shopfront openings. If three weeks are granted, the section one completion date moves to week 55 and the deduction reduces to one week, or 14,000 riyals.

The extension assessment and the damages calculation are the same exercise viewed from two ends. Assessing the application properly first, then deducting the balance, is both correct and far quicker than deducting in full and arguing afterwards.

What changes the answer

• Definition of the section: if the retail shells are not defined precisely enough to say when they are complete, the whole mechanism becomes arguable and the rate cannot be applied with confidence.
• Rate derivation: a rate set well above the documented loss invites challenge and raises the tender price, while a rate set far below it leaves recoverable loss on the table.
• Interaction between sections: if lateness on section one physically delays section two, the damages position has to be assessed alongside the extension position rather than mechanically.
• Apportionment of the contract sum: an apportionment that does not reflect the real value of the section distorts any financing element in the rate calculation.
• Partial possession instead of sectional completion: taking over part of the works without a defined section usually reduces the damages applying to that part, which is a different mechanism with different consequences.

What the numbers tell you

• Sectional completion only works where each section is defined precisely enough that completion can be certified without argument.
• Every rate should be derived from a documented calculation of the loss attributable to that section, and the calculation kept on file.
• A cap makes the exposure priceable, which usually produces a better tender price and a less adversarial response to delay.
• The preconditions to deduction matter more than the arithmetic, because that is where the position is usually lost.
• Assess the extension of time applications first, then deduct the balance, rather than deducting in full and litigating the difference.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira builds and supervises projects across Saudi Arabia, and the commercial discipline above is how its projects stay inside their budget and their programme. Send the drawings, the contract or the site and Domira will tell you where the risk actually sits.