Contract Penalty Calculator
Contract penalty clauses (properly called liquidated damages clauses) specify in advance how much one party owes the other if a specific breach occurs. Common in construction contracts (daily penalties for late completion), service agreements (late payment interest), and supply contracts (delay penalties). This calculator handles three common penalty structures: a fixed lump sum, a per-diem penalty, and an interest-based late payment penalty. It also applies any contractual cap on total damages. All results are estimates only and do not constitute legal advice.
Contract penalty formula
Per-diem: Penalty = Daily Rate * Days in Breach
Lump sum: Penalty = Fixed Amount
Interest: Penalty = Invoice Amount * (Annual Rate / 100) * (Days / 365)
After cap: Penalty = min(Calculated Penalty, Cap)
Penalty % = Penalty / Contract Value * 100
The enforceability of liquidated damages clauses depends on whether the agreed amount represents a genuine pre-estimate of harm at the time of contracting. The Restatement (Second) of Contracts Section 356 states that a liquidated damages clause is enforceable if the amount is reasonable in light of either the anticipated or actual loss. Penalty clauses designed to punish rather than compensate are not enforceable.
Common contract penalty structures
- Construction contracts: per-diem penalties for late project completion are very common, often ranging from $500 to $10,000 per day depending on project size and the cost of delay to the owner.
- Supply and delivery contracts: penalties for late delivery of goods, often expressed as a percentage of the order value per day or week of delay.
- Service agreements: late payment interest clauses, typically 1% to 2% per month on overdue invoices.
- Software development contracts: milestone-based liquidated damages for delayed delivery of specified features or milestones.
- Employment non-competes: specified damage amounts for breach of non-compete or confidentiality provisions, though courts scrutinise these carefully.
Contract penalty calculator: frequently asked questions
What are liquidated damages?
Liquidated damages are a pre-agreed sum specified in a contract that one party must pay to the other if a breach occurs. To be enforceable, liquidated damages must represent a genuine pre-estimate of the harm likely to result from the breach, not a penalty designed to punish the breaching party (penalty clauses are generally unenforceable in US contract law). Courts examine whether the amount was reasonable at the time of contracting.
What is the difference between liquidated damages and a penalty clause?
Liquidated damages are a genuine pre-estimate of harm and are enforceable. A penalty clause is a sum designed to punish rather than compensate and is generally unenforceable in the US (though the distinction can be blurry). Some states (notably California under Civil Code 1671) have specific rules on when liquidated damages clauses are valid. Courts look at whether the amount was proportionate to the anticipated harm.
What is a per-diem penalty?
A per-diem (per day) penalty is a daily charge applied for each day a party is in breach of a contract obligation, most commonly late completion of a construction project or late delivery of goods. For example, a construction contract might specify $500 per day for each day the project is late beyond the completion date.
Are interest penalties on late payments enforceable?
Yes, in most jurisdictions, contractually agreed late payment interest is enforceable up to the usury limit set by state law. Many commercial contracts specify an interest rate for late invoices (e.g., 1.5% per month or 18% per year). The Prompt Payment Act (31 U.S.C. 3901) governs interest on late payments by federal government agencies and sets a rate based on the Treasury yield.
Can a contract cap total liquidated damages?
Yes. Many construction and commercial contracts include a cap on total liquidated damages (e.g., 10% or 15% of the contract value). This protects the breaching party from unlimited exposure. The cap must be agreed in the contract and applies regardless of how long the breach continues. Courts generally enforce reasonable caps.
Official sources
- Cornell Law School Legal Information Institute, Liquidated Damages: Liquidated Damages (Wex).
- 31 U.S.C. 3901 (Prompt Payment Act): 31 U.S.C. 3901.
Reviewed by the CalculatorHub team, edited by James Graham, 14 June 2026. See our methodology.