•  In traditional contracts, liquidated damages play a dual role: acting as a disincentive to poor or late performance, and, if payable, serving as compensation for the party that has incurred costs as a result or the poor or late performance.

•  Liquidated damages for late completion of construction under a traditional construction contract, for example,will often be the only contractual incentive to complete on time.

•  In a privately funded PPP project there are other reasons to complete the construction on time: the Private Party will only be able to perform services in the project asset once the asset has been commissioned and completed, and it will not receive the service payments until 1 it starts to perform the services. The lenders, on the other hand, often require debt repayments to start on the scheduled date for commencement of services if service commencement is late, the Private Party will be making debt repayments without receiving service payments to fund them, (although it will also not be incurring the cost of providing the services).

•  If the Project Agreements provides for liquidated damages to be payable in those circumstances as well, the Private Party will include a contingency in the price to allow for that risk- in addition to the contingency to allow forth risk of having to make debt repayments before services actually commence. Government will pay for the latter contingency i n its service payments.

•  Liquidated damages must, of course, be a genuine pre-estimate of Government's likely losses; they are only likely to offer value for money in a PPP project if the scale of those losses, or the impact of delay on core services would be so great that the expense can be justified. An example would be if Government was committed to providing the services to the public by a set date, and would have to pay to procure other facilities during the period of delay. This might occur, for example, where Government was unable to open a new educational facility on time and had to use alternative facilities.

•  In a PPP project, liquidated damages will usually have only one role - to compensate for loss - and should not be used as incentive for timely performance.