Liquidated Damages in Construction: How LAD Is Calculated

An employer cannot simply deduct liquidated and ascertained damages, commonly called LAD, because a project finished late. There must first be a contractual right to LAD, the contractor must have missed the applicable completion date, and any contractual procedure for imposing LAD must be followed.

Even then, section 75 of the Contracts Act 1950 limits recovery to reasonable compensation. The important change in modern Malaysian law is that once the employer proves the breach and the LAD clause, the contractor generally bears the burden of showing that the amount claimed is unreasonable.

What is LAD?

LAD is an amount agreed in advance for delay or another specified breach of contract.

In construction contracts, it is commonly expressed as a daily or weekly rate. For example:

RM5,000 per day for every day the works remain incomplete after the contractual completion date.

The purpose is to give the parties certainty. Instead of the employer having to calculate its losses from scratch whenever completion is delayed, the contract provides an agreed rate.

However, the amount written in the contract is not automatically payable in every case.

Section 75 of the Contracts Act 1950 provides that where a contract names a sum payable for breach, the innocent party is entitled to reasonable compensation not exceeding the amount stated in the contract.

How is construction LAD calculated?

The basic calculation is usually straightforward:

LAD rate × number of days of culpable delay

Suppose a contract states:

• completion date: 1 June;
• LAD: RM10,000 per day;
• practical completion: 21 June; and
• no valid EOT.

If the contract permits LAD for those 20 days, the starting calculation would be:

20 days × RM10,000 = RM200,000

The calculation becomes more complicated where an EOT has been granted.

If the contractor receives a 10-day EOT, the completion date moves from 1 June to 11 June. LAD should then generally run from the adjusted completion date rather than the original date.

The contract should also be checked for any overall LAD cap, such as 5% or 10% of the contract sum.

Do not assume that a cap found somewhere in the tender documents automatically applies. Construction contracts often consist of several documents with a clause stating which document takes priority if there is a conflict.

In MS Elevators Engineering Sdn Bhd v Fairview International School Nusajaya Sdn Bhd [2025] MLRAU 223, the Court of Appeal upheld LAD of RM940,000 based on RM10,000 per day for 94 days. Although another contractual document referred to a 5% limit, the Letter of Award expressly took precedence and contained the RM10,000 daily rate.

The first step in calculating LAD is therefore to read the entire contract, not just the clause headed "LAD".

Does the employer have to prove its actual loss?

Not necessarily.

This is where the Federal Court decision in Cubic Electronics Sdn Bhd (In Liquidation) v Mars Telecommunications Sdn Bhd [2019] 2 MLRA 83 significantly changed the practical position.

The employer first has to establish two things: there was a breach, and the contract contains a clause fixing the amount payable for that breach.

Once those matters are established, the employer does not have to prove its exact financial loss in every case before relying on the clause.

The burden then shifts to the contractor to show that the amount claimed is unreasonable, for example because it is extravagant or unconscionable when compared with the employer's legitimate interest in timely completion.

For contractors, this means that simply demanding invoices or saying, "Show me your actual loss," is no longer enough to defeat LAD.

You need evidence explaining why the contractual amount itself is unreasonable.

What does "reasonable" LAD mean?

There is no fixed percentage at which LAD becomes unreasonable.

The court considers matters such as the commercial purpose of the clause, the value of the contract, the consequences of delay and whether the stipulated amount is proportionate to the employer's legitimate interest.

Recent decisions show that relatively substantial LAD can still be upheld.

In Savelite Engineering Sdn Bhd v Askey Media Technology Sdn Bhd & Another Appeal [2025] MLRAU 218, the Court of Appeal upheld LAD of RM768,900 for 233 days of delay at RM3,300 per day. The amount represented roughly 9% of the contract price and was held to be reasonable in the circumstances.

Similarly, in Kementerian Pertahanan Malaysia & Anor v SME Ordnance Sdn Bhd [2026] 2 MLJ 206, the Court of Appeal applied Cubic and reinstated an LAD claim exceeding RM10 million after the defaulting party failed to prove that the contractual amount was unreasonable.

The modern position therefore makes an LAD challenge more evidence-driven than before.

Was the proper contractual procedure followed?

Even where the LAD rate itself is reasonable, the employer must still comply with the contract.

Many standard forms require a Certificate of Non-Completion, commonly called a CNC, before LAD can be imposed. The certificate records that the contractor failed to complete by the contractual completion date or the properly extended date.

In Johor Bahru Pyramid Sdn Bhd v Sinometal Punching Technology Sdn Bhd [2009] 5 MLRA 158, the Court of Appeal rejected an LAD claim where the required Certificate of Non-Completion was not produced and the LAD had been imposed by the wrong person rather than through the contractual certification machinery.

The point is not that every Malaysian construction contract requires the same certificate. The relevant contract must be checked.

Where the contract makes certification or notice a condition for LAD, the employer should follow that procedure before making the deduction.

Was the completion date properly extended?

Before accepting an LAD calculation, check every EOT application.

If the contractor is entitled to additional time because of variations, late drawings, delayed site access or another recognised event, LAD should normally be calculated from the revised completion date.

This can substantially change the amount.

An employer cannot calculate LAD using the original date while ignoring a valid EOT that has already moved the contractual completion date.

Contractors should therefore preserve all EOT applications, responses, revised completion dates, site records and evidence showing employer-caused delay.

A weak EOT file often becomes a strong LAD claim for the employer.

Did the employer itself cause the delay?

This can provide a more fundamental challenge.

Under the prevention principle, an employer should not be able to cause the contractor's delay and then recover LAD for that same delay.

Where the employer prevents timely completion and the construction contract does not contain an effective EOT mechanism covering that event, the contractual completion date may become "at large". The contractor must then complete within a reasonable time, and the contractual LAD mechanism may cease to operate.

This argument must be used carefully.

If the contract already contains an EOT mechanism covering the employer's delay, the contractor is normally expected to use it. A contractor cannot simply ignore the contractual notice procedure and later rely on the prevention principle to avoid LAD.

This is why EOT and LAD disputes are closely connected.

What if both sides caused delay?

Concurrent delay does not automatically mean that LAD should be divided equally.

In Yuk Tung Construction Sdn Bhd v Daya CMT Sdn Bhd [2020] MLRAU 211, the Court of Appeal reversed a 50% reduction in LAD that had been made on concurrent-delay grounds. The court held that the contractual EOT and LAD machinery had to be applied rather than simply dividing liability based on what appeared fair.

However, where the employer cannot prove the delay attributable to the contractor, causation may still undermine the amount claimed.

The proper approach is to examine the programme, critical path and periods of delay rather than assume that concurrency automatically results in a 50:50 outcome.

Can the employer claim LAD and additional delay damages?

Care is required to avoid double recovery.

Where the contract has already fixed LAD for a particular delay, the employer should not ordinarily recover the same loss twice by claiming LAD together with another damages claim covering the same consequences.

In Savelite Engineering, the employer recovered its LAD but its additional claims for loss of profit and compensation paid to its tenant were rejected.

The contractual LAD amount effectively operated as the agreed measure and ceiling for the relevant delay claim.

This does not mean every separate claim is automatically barred. It depends on whether it relates to the same breach and the same loss.

How can a contractor challenge LAD?

A useful LAD review should focus on the contract and evidence rather than simply arguing that the figure is too high.

Check whether:

1. There is a valid LAD clause. Identify the rate, completion date, cap and contractual documents that take precedence.
2. The contractual procedure was followed. If a CNC or other notice is required, confirm that it was properly issued by the right person.
3. The correct completion date was used. All valid EOTs must be taken into account.
4. The employer contributed to the delay. Review variations, late instructions, access problems and other prevention events.
5. The LAD amount is reasonable. Under Cubic, the contractor should produce evidence showing why the amount is extravagant, unconscionable or disproportionate.
6. The delay analysis is correct. Determine whether the alleged contractor delay actually affected the critical path.
7. The employer is claiming twice for the same loss. Check for overlapping LAD, loss-of-profit and other damages claims.

The strongest challenge is usually based on several of these points rather than one broad allegation that the LAD is unfair.

Frequently Asked Questions

Does an employer have to prove actual loss before claiming LAD?

Not necessarily. Following Cubic Electronics, once breach and the LAD clause are established, the contractor generally bears the burden of showing that the amount is unreasonable.

Can LAD exceed 10% of the contract sum?

Potentially, yes. There is no universal statutory 10% cap. The applicable rate and cap depend on the contract, although the resulting compensation remains subject to section 75.

Can LAD be imposed without a Certificate of Non-Completion?

It depends on the contract. Where the contractual machinery requires a CNC as a condition before LAD can be imposed, failure to issue it may defeat the claim.

Does an EOT reduce LAD?

Yes, if an EOT validly extends the contractual completion date. LAD should generally be calculated only for culpable delay after the revised completion date.

Final takeaway

A contractual LAD rate is an important starting point, but it does not end the enquiry.

The employer must establish a breach and a valid contractual LAD mechanism, calculate the delay from the correct completion date and comply with any required certification procedure.

For contractors, the modern law makes one point particularly important. It is no longer enough to say that the employer cannot prove its actual loss. Following Cubic Electronics, the contractor should be prepared to show why the LAD amount is unreasonable or why the employer has not established the contractual right to impose it in the first place.

Speak to JPP LAW

Justin, Poh & Partners, also known as JPP LAW, assists employers, main contractors, subcontractors and consultants with LAD claims, extension of time disputes, concurrent delay, construction payment disputes, arbitration and construction litigation in Malaysia.

If LAD has been deducted from your payment claim, or you are considering imposing LAD for delayed completion, you may contact us to assess the contractual procedure, EOT position, delay evidence and amount claimed.

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Disclaimer: This article is for general information only and does not constitute legal advice. LAD disputes depend heavily on the construction contract, completion and EOT provisions, certificates issued, causes of delay and supporting project records.