Owner counterclaims: liquidated damages and back-charges

Claims run both ways. When the contractor is late or its work is defective, the owner has claims of its own: liquidated damages for late completion, back-charges for work the owner had to correct, and set-off against payments. Owners who handle these well recover real money; owners who handle them badly hand the contractor a reason to escalate. This lesson covers the rules and the arithmetic.

Learning outcomes

• Explain how liquidated damages work and when they may be challenged as a penalty.
• Calculate liquidated damages after extensions of time.
• Describe the steps for a defensible back-charge.
• Explain set-off and the notice of non-payment under Ontario's Construction Act.

The lesson

Liquidated damages

Liquidated damages (LDs) are a fixed amount per day, agreed in the contract, that the contractor pays for late completion. They save the owner from proving its actual losses. The standard CCDC 2-2020 form does not set a daily LD rate, so owners add LDs through the Supplementary Conditions. A clause can be challenged as an unenforceable penalty if the amount is not a genuine pre-estimate of the owner's loss and is extravagant in comparison; owners should document how the rate was set.

LDs only run for delay the contractor is responsible for. Every day of extension granted, for owner, neutral or concurrent delay, moves the date from which LDs are counted. An owner that refuses valid extensions to keep LDs running risks losing them altogether, and risks a constructive acceleration claim (lesson 13).

Back-charges

A back-charge recovers the owner's cost of correcting or completing the contractor's work. CCDC 2-2020 gives the owner rights to correct defective or incomplete work after written notice and an opportunity for the contractor to fix it [1]. Skip the notice and the contractor has an argument that the owner deprived it of the chance to correct at lower cost.

Set-off and notice of non-payment

Under Ontario's Construction Act, an owner that intends to withhold any part of a proper invoice must give a notice of non-payment within 14 days of receiving it, setting out the amount and the reasons; the undisputed balance is due within 28 days. Withholding for LDs or back-charges without that notice invites adjudication [2]. See Ontario prompt payment rules.

Northgate worked example

Northgate Distribution Centre (fictional) is a 12,000 m² tilt-up warehouse in Vaughan, Ontario, built by Halvorsen Builders Ltd. (fictional) under CCDC 2-2020, with Ridgeline Architects Inc. (fictional) as Consultant. See the Northgate fact sheet. This course follows one delay claim from first notice to settlement. Ready-for-Takeover (M9) was due Friday, January 14, 2028 and was reached on Tuesday, March 14, 2028: 60 calendar days late. All events, dates and amounts are illustrative.

Northgate's Supplementary Conditions set LDs at $4,500 per calendar day for late Ready-for-Takeover. The owner documented the rate at tender: lost rent on leased overflow space, extra staffing and carrying costs.

Ready-for-Takeover was reached 60 days late. With the 42-day extension (18 owner, 14 neutral, 10 concurrent), the revised date is February 25, 2028. Halvorsen is late by 18 days from February 25 to March 14: 18 × $4,500 = $81,000 (Figure 2).

View the data

Item	Value
Total delay to Ready-for-Takeover	60 days
Extension of time granted	42 days
Days subject to LDs ($4,500/day = $81,000)	18 days

The owner also considered a back-charge for cleaning after the sprinkler retest, but had not given written notice and an opportunity to correct, so it dropped the item rather than weaken the LD claim. The $81,000 was withheld from Halvorsen's April 2028 progress invoice by a notice of non-payment within 14 days, and set off in the June settlement (lesson 19).

Your move

If you are the owner

• Set an LD rate you can explain. Document how it was calculated at tender.
• Grant valid extensions promptly. LDs run only from the adjusted date.
• Give notice and a chance to correct before back-charging.
• Use the notice of non-payment. Within 14 days, with amounts and reasons.

If you are the contractor

• Check the LD clause before bidding. Price the risk.
• Claim extensions on time. Every day granted removes a day of LDs.
• Respond to correction notices. Fixing it yourself is usually cheaper than a back-charge.
• Challenge withholding without a proper notice. Adjudication is available.

Common mistakes

1. LD rates nobody can explain. They invite a penalty argument.
2. Counting LDs from the original date after granting extensions.
3. Back-charges without notice.
4. Withholding without a notice of non-payment.
5. Using LDs as leverage on unrelated disputes.

Quick quiz

1. Does the standard CCDC 2-2020 form set a daily LD rate?

   1. Yes, $1,000 per day
   2. No; owners add LDs in the Supplementary Conditions
   3. Yes, 1% per week
   4. LDs are illegal in Ontario

2. When may an LD clause be challenged as a penalty?

   1. Always
   2. When it is not a genuine pre-estimate and is extravagant
   3. Never
   4. When the project is late

3. Northgate was 60 days late with a 42-day extension at $4,500 per day. LDs?

   1. $270,000
   2. $189,000
   3. $81,000
   4. $0

4. What must an Ontario owner give to withhold from a proper invoice?

   1. A letter at year end
   2. A notice of non-payment within 14 days
   3. Nothing
   4. A court order

5. Why did the owner drop the cleaning back-charge?

   1. It was too small
   2. No written notice and opportunity to correct had been given
   3. Halvorsen paid it
   4. It was concurrent

Show answers and explanations

1. B. LDs come from the owner's Supplementary Conditions.
2. B. That is the core of the penalty argument.
3. C. 18 days × $4,500.
4. B. Within 14 days, with amounts and reasons.
5. B. Skipping notice weakens a back-charge.

Key terms

Liquidated damages

A fixed daily amount, agreed in the contract, for late completion.

Penalty

An amount out of proportion to any genuine pre-estimate of loss, which may be unenforceable.

Back-charge

The owner's cost of correcting or completing the contractor's work, charged to the contractor.

Set-off

Deducting an amount the contractor owes from an amount owed to it.

Notice of non-payment

The owner's notice under Ontario's Construction Act that it will not pay part of a proper invoice.

References

1. Canadian Construction Documents Committee, CCDC 2-2020 Stipulated Price Contract, GC 6.4 to 6.6 and Part 8. Clause content checked against a publicly posted tender copy; buy the form from CCDC.
2. Government of Ontario, Construction Act, R.S.O. 1990, c. C.30, Part II.1 (adjudication).
3. BRC, Northgate fact sheet (fictional case study, v1, November 4, 2026).

Verified on November 9, 2026.

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