The formula, the three drafting details that move it, and the expected cost per unit of a weak clause.
Liquidated damages for late delivery are the contract rate times the base it applies to times the weeks of delay, stopped at the cap. On an illustrative 2,400,000 order at 0.5 per cent a week with a 5 per cent cap, a seven-week delay costs the supplier 84,000. If a week of delay really costs the buyer 58,000, that is 20.7 per cent of a 406,000 loss, and because agreed damages commonly replace the right to claim actual delay losses, the buyer carries the other 322,000.
Worked in full in Contract Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Most liquidated damages clauses are negotiated on the rate and the cap as percentages, and signed without anyone writing down the buyer's weekly cost of delay beside them. The arithmetic below prices the clause the way it will actually be paid, then turns it into an expected cost per unit so it can be set against the price.
| Input | Value |
|---|---|
| Order value (20,000 units at 120.00) | 2,400,000 |
| Liquidated damages rate, per week of delay, on order value | 0.5% |
| Cap, as a share of order value | 5% |
| Delay | 7 weeks |
| Buyer's actual cost of a week's delay (lost output margin, expediting, idle line) | 58,000 |
LDs = MIN(rate × base × weeks late, cap × base)
Per week: 0.5% × 2,400,000 = 12,000. Seven weeks: 84,000. Cap: 5% × 2,400,000 = 120,000, reached after 10 weeks.
In Excel, with the base in B1, the rate in B2, the weeks in B3 and the cap in B4: =MIN(B1*B2*B3,B1*B4). If the clause says "per week or part week", wrap the weeks in ROUNDUP(B3,0).
| Line | Amount |
|---|---|
| Buyer's loss, 7 weeks at 58,000 | 406,000 |
| Liquidated damages paid | 84,000 |
| Loss the buyer carries | 322,000 |
The rate covers 12,000 of a 58,000 week. To cover the buyer's real cost it would need to be 2.42 per cent a week, 4.8 times what was signed. That is not necessarily a bad bargain, since a supplier asked for 2.42 per cent would price the risk, but it should be a known one.
The base. Damages on the value of the late items only, rather than the whole order, are common and much smaller. If 30 per cent of the order, 720,000, is late, seven weeks at 0.5 per cent give 25,200, a recovery of 6.2 per cent. A missing 30 per cent can stop a line as completely as a missing 100 per cent.
Part weeks. A delay of 6.3 weeks, 44 days, costs 84,000 if the clause charges "per week or part week" and 75,600 if it is pro rata. Small, but it is decided by four words.
The cap. Beyond 10 weeks the supplier pays nothing more, and recovery falls with every week.
| Weeks late | Liquidated damages | Buyer's loss | Recovered | Unrecovered |
|---|---|---|---|---|
| 2 | 24,000 | 116,000 | 20.7% | 92,000 |
| 4 | 48,000 | 232,000 | 20.7% | 184,000 |
| 7 | 84,000 | 406,000 | 20.7% | 322,000 |
| 10 | 120,000 | 580,000 | 20.7% | 460,000 |
| 14 | 120,000 | 812,000 | 14.8% | 692,000 |
| 20 | 120,000 | 1,160,000 | 10.3% | 1,040,000 |
A single delay is an outcome; the clause is a bet across outcomes. Give the delay a rough distribution from the supplier's record and the category: here 60 per cent on time, 25 per cent four weeks late, 10 per cent seven weeks and 5 per cent fourteen weeks.
Expected loss = 58,000 × (25% × 4 + 10% × 7 + 5% × 14) = 139,200
Expected damages = 25% × 48,000 + 10% × 84,000 + 5% × 120,000 = 26,400
Expected loss the buyer keeps = 112,800, or 4.7 per cent of the order, 5.64 a unit
That 5.64 a unit belongs beside the 120.00 price when two bids are compared, in exactly the way the other clauses are priced in how to compare two supplier bids on total cost. A competing bid 3.00 dearer with stronger damages may be the cheaper contract.
| Rate a week | Cap | Expected damages | Share of expected loss | Per unit |
|---|---|---|---|---|
| 0.5% | 5% | 26,400 | 19.0% | 1.32 |
| 1.0% | 10% | 52,800 | 37.9% | 2.64 |
| 1.0% | 15% | 57,600 | 41.4% | 2.88 |
| 2.0% | 15% | 99,600 | 71.6% | 4.98 |
Raising the cap from 10 to 15 per cent at a 1 per cent rate adds only 4,800 of expected value, because only the fourteen-week tail reaches it. Doubling the rate is worth far more. Negotiators often spend their credit on the cap because it sounds like protection; the rate is where the money is unless long delays are likely.
Treating the damages as a floor with actual losses claimable on top. Where a clause fixes damages for delay, it is often read as the agreed and exclusive remedy for that delay, so the 322,000 is not a claim, it is gone; whether that holds depends on the wording and the governing law. The second mistake runs the other way: a rate set far above any loss the buyer could suffer. Many legal systems control agreed sums that look like a penalty rather than compensation, by refusing to enforce them or by allowing a court to reduce them, and the tests differ from one jurisdiction to the next. Recording how the rate was derived from the buyer's weekly cost helps in any of them. This is arithmetic, not legal advice: take advice on the law that governs the contract.
Rate times base times weeks, capped: 84,000 for seven weeks against a 406,000 loss, and 5.64 a unit of expected cost the buyer keeps. The same question on a construction contract is worked in do liquidated damages cover what a late week costs the client. Contract Management prices every clause of one supply contract in money per unit, and the free workbook for this case includes a liquidated damages calculator with its sensitivity table.
Supply contracts often use 0.5 to 1 per cent of the order or late items' value per week, capped at 5 to 15 per cent. These are conventions, not measures of loss. In the example 0.5 per cent a week pays 12,000 against a real weekly cost of 58,000; covering the loss would need 2.42 per cent a week.
Often not for the same delay. Where a contract fixes liquidated damages for late delivery, they are commonly treated as the exclusive remedy for that breach, depending on the wording and the governing law, so a buyer losing 406,000 over seven weeks recovers the 84,000 the clause gives and no more. Some contracts preserve termination or other remedies after the cap is reached; check the wording.
It depends on the clause. Damages on the whole order value are larger: 84,000 for seven weeks on 2,400,000. On the late items only, if they are 30 per cent of the order, the same seven weeks give 25,200. Buyers whose production stops for any missing part should negotiate the whole-order base.
This article is one calculation from Contract Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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