Liquidated damages in building contracts: Australia guide

TL;DR

A liquidated damages (LD) clause sets a pre-agreed daily or weekly rate the builder pays the client for every day construction runs past the contracted completion date. The HIA NSW residential contract defaults to $1 per working day if the Particulars are left blank: that default is effectively useless, because courts have consistently held that nominal amounts ($0, $1, or $50 per day) do not bar the client from claiming full general damages instead (Carbone v Fowler Homes [2024] NSWCA 192, verified 2026-05-09). If you want LDs to be the ceiling on your delay exposure, the clause must specify a genuine dollar amount and expressly exclude common law damages with clear language. If no LD clause at all, the client claims actual proven losses with no cap. The only thing that reliably cuts your exposure is a properly issued extension of time (EOT).

What liquidated damages are

Liquidated damages are a contractual mechanism for handling delay. Rather than litigating actual loss after the fact, the parties agree at signing on a fixed rate per day or per week. If the builder is late to practical completion and has no valid EOT, the LD rate starts accruing.

They serve two purposes simultaneously:

For the client: a streamlined path to compensation without having to prove every dollar lost.
For the builder: a known cap on delay liability, provided the clause is genuine and properly drafted.

The key word is “genuine.” Australian courts will not enforce a rate that functions as a punishment rather than a pre-estimate of real loss. A clause that is excessive becomes an unenforceable penalty and is struck out entirely.

The penalty doctrine and genuine pre-estimate test

The test

Under Australian law, a liquidated damages clause is unenforceable as a penalty if the agreed rate is extravagant, exorbitant, or grossly disproportionate compared to the legitimate commercial interests being protected by the clause.

The governing authorities are:

Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 (verified 2026-05-09, AustLII) — the High Court confirmed the penalty doctrine applies even where a clause is not activated by a breach of contract, and that the core question is whether the stipulation is “in substance penal.”
Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28 (verified 2026-05-09, AustLII) — the High Court majority confirmed that a clause does not need to be a mathematically precise pre-estimate of loss. It is sufficient that the amount protects a legitimate commercial interest and is not punitive. The comparison is not to actual loss but to what is “extravagant or disproportionate.”

For construction contracts, the legitimate interest protected by an LD clause is typically the principal’s holding costs, rental costs, loan interest, and other directly caused delay losses. An LD rate that materially exceeds a reasonable assessment of those costs risks penalty classification.

What happens when an LD clause is struck out as a penalty

If the clause is void as a penalty, the entire LD mechanism falls away. The principal is not left without a remedy: they can still claim general law damages for delay, but must prove actual loss on the standard principles from Hadley v Baxendale (foreseeability and causation). The difference is that proving actual loss requires evidence, time, and expense — the very things the LD clause was meant to avoid.

Nominal and nil LD clauses: the Australian position

Australian courts diverge sharply from English courts on nominal LD clauses.

In England, a clause stating “£Nil” per day (the Temloc v Errill Properties [1987] approach) is treated as an exhaustive liquidated damages agreement, meaning the principal gets nothing and can claim no general damages for delay.

In Australia, the position is the opposite. Three key decisions confirm the approach:

Case	Year	Key finding
Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021	2020	$1/day did not exclude claim for general damages for delay under Home Building Act 1989 (NSW)
J-Corp Pty Ltd v Mladenis [2009] WASCA 157	2009	”NIL DOLLARS” per day did not exclude unliquidated damages claims; clear unambiguous terms required
Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192	2024	NSW Court of Appeal: $1/day “negligible compared to the contract price”; general damages remain available (verified 2026-05-09, Mosaic Projects case note)

The principle from Carbone (2024): a liquidated damages clause at a nominal amount does not, by itself, extinguish the client’s right to common law damages. Clear express words are required if the intention is to make LDs the sole and exclusive remedy for delay. A schedule entry of $1 per day does not contain those words.

Note the Cappello court also observed that if the LD amount were “substantial rather than nominal,” the outcome may differ. A genuine, realistic rate expressly stated as the exclusive remedy has a much better chance of capping builder exposure.

HIA standard contract: how LDs are structured

In the HIA NSW Residential Building Contract for New Dwellings, the liquidated damages amount is set in Schedule 1, Item 11 (the contract Particulars). The builder and client must fill in the agreed rate before signing.

If the Particulars are left blank, the HIA contract defaults to $1 per working day (verified 2026-05-09, Contracts Specialist, NSW home building contracts). As the courts have confirmed, that default is effectively nominal and does not cap delay liability.

Common industry rates used in practice range from $50 to $350 per week for a standard residential new home, though the only defensible rate is one calculated from the client’s actual anticipated holding costs (see calculation method below). Using $50/day or $350/week without a documented cost basis still exposes both parties to argument: the client may say it understates their real loss, the builder may say it overstates it and is a penalty.

The MBA contracts follow a similar structure: a rate is stated in the contract schedule, with the default being nominal unless the parties complete the relevant item. For HIA Contracts Online access and contract particulars guidance, see hia.com.au/business-support/contracts-online (verified 2026-05-09).

Calculating a genuine pre-estimate

The rate in the Particulars must reflect genuine anticipated costs to the client if the project runs late. Document this calculation at signing; it is the defence against a penalty challenge.

Typical components for a residential new home:

Cost item	How to calculate
Construction loan interest	Daily interest on the outstanding loan balance during the delay period
Rental accommodation	Weekly rent for alternative accommodation (if the client must vacate or cannot move in)
Storage fees	Monthly storage costs for furniture and belongings
Lost rental income	Weekly market rent if the property was to be tenanted on completion
Extended professional fees	Any consultants or certifiers engaged by calendar period rather than milestone

Example: A client with a $600,000 construction loan at 6.5% p.a. is paying approximately $107 per day in interest. Add $250/week rent for alternative accommodation ($36/day), and the genuine daily rate is around $143. Rounding to $150/day is defensible. Inserting $1,000/day without a documented basis is not.

Rates should be recorded in the contract particulars before signing, not inserted after practical completion is missed.

When an LD clause is not in the contract

If the contract contains no LD clause at all, delay liability falls back on general law damages. The client can claim actual losses caused by the delay, subject to:

Remoteness: the loss must have been within the reasonable contemplation of both parties at the time of contracting (Hadley v Baxendale foreseeability rule)
Mitigation: the client must take reasonable steps to reduce their loss
Causation: the delay must be proven to have caused the loss

Without an LD clause, the client’s claim is uncapped but harder to prove. From the builder’s perspective, no LD clause is not a protection: it is an open-ended exposure to whatever loss the client can prove in court.

Security of Payment intersection

When a client withholds or deducts LDs against a progress payment claim, the SOP Act rules govern whether that deduction can survive adjudication.

NSW

In NSW, the outcome depends on what the construction contract says. In J Hutchinson Pty Ltd v Glavcom Pty Ltd [2016] NSWSC 126, the NSW Supreme Court confirmed that a principal can only deduct LDs against a progress claim if the contract expressly provides for that calculation in the progress payment mechanism (verified 2026-05-09, Construction Law Made Easy, LD clauses and SOP legislation). If the contract is silent on set-off, section 9(b) of the Building and Construction Industry Security of Payment Act 1999 (NSW) limits payment calculations to the value of work performed — no set-off right arises.

VIC

In Victoria, LDs are an excluded amount under section 10B of the Building and Construction Industry Security of Payment Act 2002 (VIC). The leading case is Seabay Properties v Galvin Construction [2011] VSC 249, which established that LD claims are either time-related costs or damages for breach, both excluded from adjudication. LDs must be resolved by general law proceedings, not adjudication (verified 2026-05-09, Construction Law Made Easy).

QLD

In Queensland, the Building Industry Fairness (Security of Payment) Act 2017 (QLD) governs adjudication of progress payment disputes. As with VIC, LD set-off in adjudication depends on whether the contract expressly provides for it in the payment mechanism. LDs are damages for delay, and adjudicators focus on the value of work performed; separate proceedings are generally needed to enforce an LD entitlement independent of a progress payment.

Practical implication

If a builder receives a payment claim after a delay event and the client wants to set off LDs, check the contract: does it expressly allow that set-off in the payment schedule? If not, the client must pay the claimed amount and pursue LD recovery separately through adjudication (in NSW if the contract permits) or court. A client who simply deducts without contractual authority risks the builder serving a payment claim for the full amount under the SOP Act.

What can go wrong

Leaving the Particulars blank and relying on the $1 default. The client can then claim full general damages for delay. After Carbone [2024], any builder relying on a $1 LD rate to cap their delay exposure is exposed.

Setting an inflated rate to deter delay. A rate far exceeding the genuine pre-estimate of client costs risks being classified as a penalty and struck out entirely. The builder loses the certainty the clause was meant to provide.

Using LDs as a reason not to grant valid EOTs. If the builder fails to issue valid EOTs for qualifying delay events (weather, client-caused delays, variations), the client’s entitlement to LDs is correspondingly reduced or eliminated. The EOT procedure and LD clause are interconnected: mismanage one and the other misfires.

No express exclusion of general damages. Even a genuine, defensible LD rate may not be the exclusive remedy unless the contract expressly says so. For builders wanting LDs to be the ceiling, the clause needs language excluding unliquidated delay damages.

Client deducting LDs from a progress payment without contractual authority. In NSW, this triggers SOP Act exposure. The builder can serve a valid payment claim for the full amount; the client’s LD set-off may not be available in adjudication.

Post-completion disputes where no LD rate was documented. Without a pre-signed calculation showing the genuine pre-estimate basis, defending a penalty challenge — or making an LD claim stick — becomes a credibility exercise under cross-examination.

References

Carbone v Fowler Homes Pty Ltd [2024] NSWCA 192 (verified 2026-05-09, Mosaic Projects case note)
Cappello v Hammond & Simonds NSW Pty Ltd [2020] NSWSC 1021 (verified 2026-05-09, Mondaq summary)
Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30 (verified 2026-05-09, AustLII)
Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28 (verified 2026-05-09, AustLII)
DLA Piper: Liquidated damages in construction contracts — the approach of the Australian courts (verified 2026-05-09)
DLA Piper: Be aware when negotiating liquidated damages clauses (verified 2026-05-09)
Construction Law Made Easy: LD clauses and SOP legislation (verified 2026-05-09)
Contracts Specialist: Liquidated damages in NSW home building contracts (verified 2026-05-09)
Building and Construction Industry Security of Payment Act 1999 (NSW) (verified 2026-05-09)
Home Building Act 1989 (NSW) (verified 2026-05-09)