In short
Liquidated damages are a fixed daily amount the contractor agrees to pay the owner for each day the project finishes late. In AI data center construction, the daily rate can be thousands or tens of thousands of dollars. For the clause to be enforceable, the amount must be a reasonable forecast of the owner’s probable loss, not a penalty designed to punish delay. Federal law under the FAR Subpart 11.5 requires that the rate be a reasonable forecast of just compensation. FAR 11.501. Virginia applies a similar test, asking whether the actual damages contemplated at the time of the agreement were uncertain and difficult to determine with exactness and the amount fixed is not out of all proportion to the probable loss. Boots, Inc. v. Singh, 274 Va. 513 (2007). Recent disputes, including a $34 million claim against Microsoft and a securities fraud suit after CoreWeave’s delayed AI data centers, show how high the stakes can be. CourtListener docket, GAR analysis, CourtListener, WSJ, Law firm analysis. Contractors now negotiate caps, grace periods, and clear force majeure lists to limit exposure.
What are liquidated damages and when do they apply?
In a construction contract, time is money. If a contractor finishes late, the owner may lose rent, incur extra financing costs, or delay its own operations. Proving those losses in court can be slow and expensive. A liquidated damages clause solves this by fixing a daily dollar figure the contractor must pay for each day the project is late beyond the agreed completion date. The parties pick the number before the work starts.
The legal rule is that liquidated damages must compensate the owner for the probable harm caused by delay. They cannot be a penalty meant to coerce performance. The United States Supreme Court has stated that the reasonableness of a liquidated damages clause is judged as of the time the contract was signed. Priebe & Sons, Inc. v. United States, 332 U.S. 407 (1947).
In federal construction, the FAR Subpart 11.5 governs liquidated damages. It directs contracting officers to use liquidated damages only when the time of delivery or timely performance is so important that the Government may reasonably expect to suffer damage if the delivery or performance is delinquent and the extent or amount of such damage would be difficult or impossible to estimate accurately or prove. FAR 11.501(a). The rate must be a reasonable forecast of just compensation. It is not a negative performance incentive. .
State courts apply similar common law tests, often tracing to the Restatement (Second) of Contracts § 356. That rule says damages may be liquidated in the agreement but only at an amount reasonable in light of the anticipated or actual loss and the difficulty of proving loss. An unreasonably large liquidated damages term is unenforceable as a penalty. Restatement § 356.
How does federal law decide if a liquidated damages clause is a penalty?
The Armed Services Board of Contract Appeals (ASBCA) handles disputes on federal construction projects. It uses a three part test from Winslow Tele Tronics, ASBCA No. 15,036 (1972). A liquidated damages provision is valid, not a penalty, when three things are true.
- The damages anticipated from the breach are uncertain in amount or hard to prove.
- The parties intended to liquidate them in advance rather than leave them for later proof.
- The amount is reasonable, not greatly disproportionate to the presumable loss. Tax alert
In BCI Construction USA, Inc., ASBCA No. 62657 (2024), the Board held that a daily rate of 0.01 percent of the contract price was not inherently unreasonable. The contractor bears an exacting burden to show the rate is an unenforceable penalty. ASBCA No. 62657.
The FAR also requires that the LD rate be based on a reasonable forecast. For construction contracts, FAR 52.211-12 includes the liquidated damages clause. For construction contracts, the rate should include estimated daily costs of Government inspection and superintendence and other expected expenses associated with delayed completion such as renting substitute property. FAR 11.502(b). If the Government’s delay prevents the contractor from completing the work by the original deadline, the liquidated damages clause is waived entirely and the Government may recover only actual damages for any subsequent contractor caused delay. United States v. United Engineering and Contracting Co., 234 U.S. 236 (1914). Liquidated damages also stop accruing once the project reaches substantial completion, the point when the owner can use the project for its intended purpose. Government contracting analysis.
How do the five major build market states test enforceability?
Each state applies its own variation. The table below summarizes the test and a key takeaway for Virginia, Texas, Georgia, Arizona, and Florida.
| State | Enforceability Test | What to Watch |
|---|---|---|
| Virginia | Two part test: (1) damages were hard to estimate at contracting, (2) the sum is a reasonable forecast of probable loss. Grossly disproportionate or punitive clauses are struck. Law firm analysis | No Virginia case is directly on point for AI data centers. The test follows general common law as set out in Boots, Inc. v. Singh, 274 Va. 513 (2007). |
| Texas | Two prong: (1) anticipated damages hard to measure, (2) agreed amount reasonably approximates expected harm. Texas is a second look jurisdiction. The party seeking enforcement must show these elements. Any punitive penalty is unenforceable. Tax alert, Law firm analysis | In Rogers-O’Brien v. Microsoft, the Texas court did not rule on LDs because the case settled. The dispute shows the magnitude of delay claims. |
| Georgia | Georgia’s three part analysis adds an explicit intent inquiry: (1) injury hard to estimate, (2) parties intended to provide damages not a penalty, (3) sum is a reasonable pre estimate of probable loss. The challenger bears the burden of proving a penalty. Law firm analysis | In City of Brookhaven v. Multiplex (2023), a $1,000 per day clause was unenforceable because the city made no effort to calculate anticipated damages. Ga. Ct. App. 2023 |
| Arizona | The fixed amount must be a fair estimate of actual damages and not grossly disproportionate. The Arizona Supreme Court’s Dobson Bay decision (2017) requires the amount be reasonable in light of anticipated or actual loss and difficulty of proof. Tax alert | In Young v. Allen Homes (2022), an $80,000 non-refundable deposit was found to be an inflexible forecast, not a reasonable estimate. Ariz. Ct. App. 2022 |
| Florida | Florida Supreme Court two prong: (1) damages not readily ascertainable at contract formation, (2) stipulated sum not so grossly disproportionate that the parties intended to induce full performance rather than liquidate damages. Additionally, an optional remedies clause makes the LD provision an unenforceable penalty. ConsensusDocs / Smith Currie | Florida courts have found clauses unconscionable when LD amounts exceed roughly 55% of the overall contract price. ConsensusDocs / Smith Currie |
How are liquidated damages rates calculated in AI data center projects?
The daily rate should be a reasonable forecast of the owner’s likely losses. For large AI data center projects, owners and their consultants typically follow a structured method. The calculation starts with the extended general conditions and consultant costs per day. Then it adds extended financing costs, administrative expenses, and sometimes lost revenue or the cost of renting substitute space. Tax alert. In large-scale projects like AI data centers, these rates can range from thousands to tens of thousands of dollars per day. Construction law analysis.
To survive a challenge, the owner should document the forecast before the contract is signed. A rate plucked from the air, like the $1,000 per day in the Brookhaven case that was based on no project specific calculation, will fail. Tax alert. The federal ASBCA has accepted a rate of 0.01 percent of contract price per day, which on a $1 billion project would be $100,000 per day. ASBCA No. 62657.
What role does force majeure play in delay claims?
Force majeure is a contract clause that excuses performance when events beyond the parties’ control occur. In AI data center construction, owners and contractors argue over what counts. Courts treat force majeure as strictly contractual. Only the events expressly listed in the clause will excuse a delay. Legal analysis. Vague language like acts beyond control may not be enough. Supply chain disruptions are not automatically covered unless the clause specifically names them. Geopolitical events such as trade embargoes can be covered if listed. Law firm analysis .
Under the Uniform Commercial Code, a separate doctrine of commercial impracticability (UCC § 2-615) can apply when a contingency makes performance impracticable and the non occurrence of that contingency was a basic assumption of the contract. UCC § 2-615. But for construction services, the common law and the specific contract terms usually govern.
Both sides must negotiate the force majeure list carefully. Owners push for narrow clauses that cover only true unforeseeable events. Contractors push for broad clauses that include supply chain delays, labor strikes, weather, and changes in law. In today’s market, where equipment lead times often exceed a year and transformer prices have jumped approximately 44 percent since 2021, those inclusions are essential. Law firm analysis, Giatec.
How are owners and contractors reallocating delay risk in today’s market?
The rush to build AI data centers has created an environment where equipment delays, power connection waits, and community opposition are common. Contractors are pushing back on accepting full liquidated damages exposure for events they cannot control.
One major shift is decoupling the project schedule and LD risk from equipment delivery, especially when the developer sources critical equipment directly. In those cases, the contractor argues it should not bear the risk of delay if the owner’s suppliers are late. Tax alert. Utility interconnection delays, which can stretch to five years, are another risk whose allocation between the developer and the tenant generates its own category of disputes. Quinn Emanuel. If the owner is responsible for obtaining the utility connection, a delay there should not trigger LDs against the contractor.
The Rogers-O’Brien lawsuit against Microsoft illustrates this tension. The contractor alleged that Microsoft failed to supply equipment and manage vendors, causing extensive delays. The case settled, but it shows how owner caused delays become central to a dispute. Global Arbitration Review, Court docket.
When the owner is at fault for a delay, the general rule is that the owner cannot recover liquidated damages for that period. The ASBCA has consistently held that the government bears the risk of its own delay. Darwin Construction Co., ASBCA No. 32500. Similarly, if delays are concurrent, meaning both owner and contractor are responsible, North Carolina courts will not enforce LDs unless the contract has an apportionment clause, though other jurisdictions are trending away from this strict non-apportionment rule. National Law Review, National Law Review.
How do recent AI data center disputes inform contract drafting?
Three high profile cases offer lessons.
Rogers-O’Brien Construction v. Microsoft Corp. In 2020, a general contractor sued Microsoft over an AI data center project in San Antonio, Texas. The contractor sought $34 million, including $13.6 million in withheld retainage, alleging Microsoft’s failure to respond to intervention requests and manage vendors, along with design errors, water intrusion, and defective software, caused delays. ENR. The case was dismissed with prejudice in April 2023 after a joint stipulation, each side bearing its own costs, which suggests a negotiated settlement. CourtListener. The dispute highlights how critical owner provided equipment and software integration can be in delay claims.
CoreWeave and Core Scientific. In 2025, CoreWeave, a major AI cloud provider, cut its revenue guidance and later faced multiple securities class action lawsuits after disclosing delays in AI data center buildouts intended for OpenAI. The delays traced to Core Scientific, the building partner. Core Scientific had flagged delays as early as February 2025, nine months before CoreWeave’s public announcement. Newsfile, Market analysis, Securities filing. Weather pushed back the Denton, Texas cluster by several months. CoreWeave’s stock fell 34 percent, erasing $14 billion in market value. Law firm analysis. The situation shows that delay risk in AI data centers can cascade into securities liability when tenant commitments are missed.
Tract’s withdrawal in Arizona. Tract, an AI data center park developer, withdrew a proposed $14 billion project in Maricopa County in 2024 after community opposition over water, energy, and noise. Global Arbitration Review. The cancellation reflects that local opposition can halt projects entirely, not just delay them. An estimated $64 billion in U.S. AI data center projects was blocked or delayed over two years amid grassroots resistance. Data Center Watch. For contractors and owners, these delays are often not covered by traditional force majeure, so specific contract language must address permit and entitlement delays.
These cases, along with a 43 percent rise in the average value of North American construction disputes since 2021, demonstrate the need for clear contract drafting and proactive dispute avoidance strategies. Global Arbitration Review.
What practical protections are contractors negotiating?
In response to the pressure, contractors are securing several risk mitigation tools.
- Cap on total LD liability. A common cap is five to ten percent of the contract value. This caps the maximum amount the contractor could owe regardless of how long the delay lasts. Sutliff & Stout, Construction contract guide
- Grace periods. A small number of days, for example 30 or 60, where no liquidated damages accrue before they kick in. This absorbs minor delays.
- Weather days. An explicit allowance for days lost to severe weather, often based on historical averages for the site.
- Staggered or tiered LD rates. Instead of a flat daily rate, the contract may set a lower rate for the first month of delay and a higher rate afterward, reflecting that the owner’s losses grow over time.
- Exclusion for force majeure and owner caused delays. The clause should plainly state that LDs do not run during periods when delay is caused by events in the force majeure list or by the owner’s own actions.
- A sub cap on delay damages. A separate limit on delay damages alone, distinct from other liquidated damages, is often negotiated. Law firm analysis
Key takeaways
- Document the LD rate forecast before the contract. A daily rate that is not supported by a project specific calculation will likely fail, as seen in the Georgia Brookhaven case.
- Check the enforceability test in the governing state. Georgia adds an intent prong. Florida forbids optional remedies. Arizona demands a fact specific reasonableness inquiry. One size does not fit all.
- Decouple equipment delivery risk from the construction schedule. If the owner is buying the transformers and switchgear, the contract should make clear that delays by those suppliers do not trigger LDs.
- Negotiate a cap on total liquidated damages. Five to ten percent of contract value is common in the market.
- Write the force majeure list with today’s bottlenecks in mind. Supply chain disruptions, tariffs, utility connection delays, and community permit appeals should be addressed explicitly.
- Give notice of delay events immediately. Under Georgia law, timely notice can be essential to preserving a defense.
- When the owner causes delay, document it and assert the government caused delay defense. If the contract is federal, the United Engineering case is strong authority that the government cannot collect LDs for its own fault.
- Consider a tiered or staggered LD structure rather than a flat daily rate, which may better reflect actual harm and thus survive judicial scrutiny.
- Watch for Florida’s option to choose rule. A clause that lets the owner pick between LDs and actual damages is void as a penalty in Florida.
- Anticipate securities law exposure if your tenant is publicly traded. Delays that cause a tenant to miss guidance can trigger costly litigation, as CoreWeave shows.
Frequently asked questions
Q:What is a liquidated damages clause?
A:A liquidated damages clause is a contract term that sets a fixed dollar amount the contractor must pay for each day the project is late. It replaces the need to prove actual damages in court. The amount is agreed to before the work starts.
Q:How is a liquidated damages amount different from a penalty?
A:A liquidated damages amount is meant to compensate the owner for probable loss from delay. A penalty is an unreasonably large sum meant to coerce performance. Courts will not enforce a penalty. The test for reasonableness looks at whether the amount was a reasonable forecast when the contract was signed. Priebe & Sons, Inc. v. United States, 332 U.S. 407 (1947)
Q:Can a contractor avoid liquidated damages if the owner caused part of the delay?
A:Yes. Under the Government caused delay defense, the owner cannot collect liquidated damages for any period it prevented the contractor from performing. This applies in federal contracts under United States v. United Engineering, and state courts follow similar logic. United States v. United Engineering and Contracting Co., 234 U.S. 236 (1914)
Q:Does force majeure automatically cover supply chain delays?
A:No. Force majeure clauses cover only the events expressly listed in the contract. If the clause does not name supply chain disruptions or equipment delivery delays, a court may not excuse a delay caused by those events. Parties must negotiate the list carefully. Tax alert
Q:What is the typical daily LD rate on a large AI data center?
A:Rates vary widely because they depend on the contract value and the owner’s projected losses. Federal case law has accepted a rate of 0.01 percent of the contract price per day. On a $1 billion project, that equals $100,000 per day. BCI Construction USA, Inc., ASBCA No. 62657. Actual private data center rates are often confidential.
Q:What is a reasonable cap on liquidated damages?
A:Contractors negotiate caps on liquidated damages in AI data center construction, often expressed as a percentage of the total contract value, to limit their maximum exposure. Bracewell
Q:Does Florida treat liquidated damages differently than other states?
A:Yes in two ways. First, Florida courts have found clauses unconscionable when the LD amount exceeds roughly 55 percent of the contract price. Second, a clause that gives the owner the option to choose between liquidated damages and actual damages is an unenforceable penalty. ConsensusDocs / Smith Currie
Q:What happened in the Rogers-O’Brien v. Microsoft AI data center dispute?
A:A general contractor sued Microsoft for $34 million over delays on an AI data center in San Antonio, Texas. The contractor claimed Microsoft failed to supply equipment and manage vendors. The case was dismissed with prejudice in 2023 by joint stipulation. ENR, CourtListener
Q:How did CoreWeave’s delay turn into a securities class action?
A:CoreWeave, a public AI cloud company, lowered its 2025 revenue guidance after admitting AI data center construction delays. The delays traced back to its building partner, Core Scientific, which had flagged them months earlier. The news erased $14 billion in market value, and investors filed securities fraud lawsuits alleging the company had misled them about its infrastructure timeline. Newsfile, Hagens Berman
Q:What steps should an owner take to make an LD clause enforceable?
A:The owner should prepare a documented forecast of probable daily losses before the contract is signed. The calculation should include extended general conditions, financing costs, supervision, and any quantifiable lost revenue. The resulting daily rate must be reasonable in light of those numbers, not a standard sum picked without analysis. Bracewell, Tax alert
Subscribe to The Compute Law Brief
The Compute Law Brief is a free weekday newsletter on the law of AI infrastructure across tax, real estate, construction, power, and deals. The big US build markets and federal law. Three minutes a morning. No paywall, and no email gate to read the blog. Subscribe if you want it in your inbox.
Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.