The right liquidated-damages rate depends less on construction convention than on what the completed asset is supposed to do for the organisation.
The supplied 1999 paper by Tony Ma and Patrick Lam is useful because it does not treat delay loss as a single formula. It distinguishes different economic settings: rental property, property for sale, manufacturing or industrial facilities, smaller projects and non-commercial public assets.
Its formulas and historical rules of thumb are not suitable for direct republication as current Australian practice. [FACT CHECK REQUIRED]
Its deeper reasoning is more durable:
the economics of delay follow the business model of the asset.
The Strategic Context
A construction contract can use the same legal mechanism across very different projects.
But late completion of a warehouse, hotel, manufacturing line, school and transport asset can produce very different consequences.
A rental property may lose occupancy income.
A development intended for sale may delay settlements and financing recovery.
A factory may lose productive output or require temporary facilities.
A public asset may not generate direct commercial revenue at all, yet delay can extend project overhead, defer service delivery and increase wider stakeholder cost.
If the LAD rate ignores those differences, the number may look precise while its logic is weak.
What Leaders Commonly Misread
The first mistake is beginning with the contract sum.
Contract value can be relevant, but it does not automatically equal the economic consequence of delay.
The second is beginning with an industry percentage.
The source paper presents a historical rule of thumb for smaller projects. That should not become an ERANORTH recommendation. [FACT CHECK REQUIRED]
The third is counting every possible loss without considering mitigation, probability or overlap.
A defensible estimate should reflect likely consequence, not a worst-case catalogue.
The fourth is assuming delay loss is always financial revenue loss.
For some public or strategic investments, the primary consequence may be service delay, extended temporary operations, loss of capacity or strategic dependency.
The fifth is failing to document the calculation before tender.
If the rate is challenged later, the organisation should be able to show how it reasoned at the time the contract was formed.
Reframing the Issue
ERANORTH's source-derived Delay-Loss Map is:
Asset purpose → benefit stream → delay pathway → avoidable/avoidable cost → mitigation → expected duration → defensible LAD basis
Start with what the asset is intended to create.
Then identify how late availability interrupts that value.
This turns LAD calculation into investment analysis.
Strategic Analysis: Different Assets Create Different Delay Pathways
Rental asset
Delay can defer rental income, but assumptions about occupancy matter.
The 1999 paper historically uses a utilisation factor to recognise that a property may not be fully occupied immediately.
The enduring insight is to avoid assuming 100 per cent benefit utilisation without evidence.
Asset intended for sale
Delay may affect settlement timing, financing and interest.
The historical source models delayed revenue receipt.
A contemporary project should instead use its own financing and sales assumptions.
Manufacturing or industrial facility
The source notes that delay can be more complicated because productivity and operational losses may matter.
That is particularly important for industrial leaders.
A delayed production line may create:
- lost contribution margin;
- overtime elsewhere;
- temporary subcontracting;
- alternative premises;
- inventory effects;
- customer-service impact.
Not all of those losses will necessarily be recoverable under the contract. The point is to understand the business exposure before deciding what the LAD rate should represent.
Public or non-commercial asset
The source uses a historical capital-employed approach for non-revenue-generating projects.
That specific formula should not be generalised. [FACT CHECK REQUIRED]
For contemporary public projects, the more useful question is what measurable cost or service consequence the organisation can defend.
Avoid Double Counting
A credible delay model needs discipline.
If lost revenue already includes a margin that covers certain overheads, adding those overheads again may double count.
If alternative premises reduce lost production, the mitigation benefit should be considered.
If delay affects only one portion of an asset, whole-project loss may overstate the consequence.
If operations had planned a ramp-up period, immediate full-capacity loss may be unrealistic.
This is why the LAD model should be reviewed by commercial, finance and operational stakeholders rather than created by one function in isolation.
Strategic Analysis: Scenario Testing Improves the Rate
A single-point LAD estimate can hide uncertainty.
A stronger approach tests several plausible scenarios around occupancy, production ramp-up, alternative facilities, financing and mitigation.
For a manufacturing asset, leaders might compare a low-impact case where inventory absorbs delay, a base case where production shifts temporarily and a severe case where customer commitments are affected.
The objective is not to choose the worst case. It is to understand which assumptions drive the result.
This sensitivity analysis can improve both the LAD rate and the broader business case.
It can also reveal that some delay consequences are better managed through insurance, contingency, alternative capacity or operational planning rather than through the contract alone.
The strongest commercial design uses LAD as one layer in a wider resilience strategy.
Decision Framework
Use six lenses.
1. Value stream
What economic or service benefit begins at completion?
2. Delay sensitivity
How does each day or week of delay affect that benefit?
3. Temporary alternatives
Can the organisation mitigate using other facilities, inventory, contractors or temporary services?
4. Extended cost
What owner-side project and operating costs continue while completion is delayed?
5. Probability and ramp-up
What assumptions are reasonable at the expected completion date?
6. Contract fit
What portion of the resulting exposure should the LAD mechanism actually address?
The final step requires legal and commercial review.
From Strategy to Execution
Immediate action: create the LAD basis alongside the business case, not after the contract is drafted.
Medium-term capability building: require finance, operations and procurement to review the calculation jointly for material projects.
Long-term strategic positioning: compare expected delay loss with actual post-project outcomes and improve future models.
The best LAD calculations become institutional knowledge.
Signals to Monitor
Watch for identical LAD rates across materially different projects, no documented assumptions, rates derived only from contract value, manufacturing projects with no operations input, public projects using commercial-revenue logic without a real revenue stream, or tender documents issued before the rate has been reviewed.
Another signal is when the organisation knows the daily LAD number but not the daily business consequence of delay.
Questions for the Leadership Team
- What benefit begins when this asset becomes available?
- How does delay interrupt that benefit?
- What mitigation is realistically available?
- Are we double counting any losses?
- Which assumptions are most uncertain?
- What part of the exposure should LAD address?
- Could we explain this calculation to an independent reviewer years later?
Closing Perspective
A liquidated-damages rate should tell a coherent story about value.
The number is credible when it can be traced back to the economics of the asset, realistic assumptions and the specific delay risk being allocated.
That is far stronger than borrowing a percentage from the last project.
Related article: Liquidated Damages Should Price Consequence, Not Punish Delay
Related article: Prolongation Costs: The Hidden Price of Keeping a Project Open Longer
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