What does "liquidated damages" refer to in a contract?

Liquidated damages in a contract refers to a specific sum of money that the parties agree upon in advance, which is to be paid if one party breaches the contract. This predetermined amount is established to provide clarity and avoid disputes over the actual damages incurred due to the breach. It reflects the parties' assessment of the potential harm that could result from a failure to perform as expected. This provision is particularly useful in situations where actual damages might be hard to quantify.

In contrast, other options do not capture the essence of liquidated damages. The general fund for unexpected costs is not specific to breaches and rather serves as a safety net. An estimate of potential project delays does not represent compensation or damages but rather a projection of timing issues that might arise. A standard fee for contractor services relates to compensation for work performed rather than addressing the consequences of a breach. Understanding liquidated damages is crucial for ensuring all parties are aware of the financial repercussions of failing to uphold their contractual obligations.