How to Calculate Damages for a Breach of Construction Contract

UPDATED as of 4/14/2025 (originally published in June 2022)

While catching up with an old friend over coffee recently, they shared a troubling situation involving their grandmother and a construction contractor.

She had hired the contractor to renovate her kitchen, and halfway through the project, the contractor and his crew simply vanished—no calls, no emails, no warning—leaving the grandmother in a state of confusion and with an unusable kitchen. Days later, it turned out he’d taken on a more lucrative restaurant renovation job, putting her kitchen remodel on the back burner.

It wasn’t just unprofessional; it was a textbook example of a potential breach of contract.

My first question after listening to this wild story—a fundamental one in such situations—was: “Did your grandmother sign a construction contract?” Thankfully, my friend’s answer was yes.

This seemingly small detail changed everything, as it provided grounds for their grandma to pursue legal action against the contractor to recover damages and ensure the completion of her kitchen renovation.

What Is a Construction Contract?

A construction contract is a legally binding agreement between a property owner (or client) and a contractor. It lays out in detail, among other things:

• The construction work to be done
• Payment terms
• Quality of materials to be used
• Timeline and project milestones
• Termination conditions
• Dispute resolution procedures

When well-drafted by an experienced construction attorney or business dispute lawyer, a construction contract serves as both a roadmap and a shield. If one party fails to follow the map, the contract becomes the legal basis for recourse.

When Does a Breach of Construction Contract Occur?

When you enter into an agreement, you and all parties involved are obligated to uphold the agreed-upon terms.  If any of the parties fails to perform what is expected of them without a legal excuse, a breach of contract has happened.

This applies whether the contract is written or verbal (though written contracts are easier to enforce in court).

This failure can manifest in various ways within the context of a construction project including:

• The contractor fails to complete the work. This remains a primary form of breach of construction contract.

As seen in my friend’s grandmother’s situation, abandoning a project mid-way without proper justification clearly falls under this category. This also includes situations where the contractor unreasonably delays project completion beyond the agreed timeline, taking into account potential extensions outlined in the contract for unforeseen circumstances.

• Inferior materials are used, despite specific quality standards outlined in the contract. This can lead to structural issues, aesthetic flaws, and the need for costly rework.  
• Work deviates from the approved plans. Construction projects often rely on detailed architectural plans and specifications. 

Unilateral deviations from these plans by the contractor without the client’s consent can be considered a breach, especially if these changes impact the functionality or value of the project.

• Failure to obtain necessary permits and approvals: Depending on the terms of the agreement, the contractor may be responsible for securing necessary building permits and regulatory approvals. 

Failing to do so, leading to project delays or legal issues, can be considered a breach, especially where environmental and safety regulations are increasingly stringent.

• The client fails to pay the contractor as scheduled. While the initial anecdote focused on a contractor’s breach, it’s crucial to remember that clients also have contractual obligations.

Failing to make payments according to the agreed-upon schedule, without a valid reason, is an agreement breach on the client’s part. Contracts often incorporate detailed payment milestones tied to specific stages of completion, making timely payments essential for project continuity.

• Unjustified Termination or Replacement: A client who prematurely terminates a contract or fires a contractor without just cause or mutual agreement will be in breach of contract. 

What Are Your Legal Options When a Breach of Construction Contract Happens?

Breach of contract is among the most common issues in business law, as contracts form the backbone of nearly all business dealings.

Once a contract is in place, a single party’s failure to fulfill their obligations can quickly lead to a legal dispute, potentially resulting in significant financial losses and time-consuming litigation if not addressed promptly.

So, if your contractor walks off the job, uses shoddy materials, or doesn’t meet agreed deadlines, what can you do to resolve the matter quickly?

• Negotiate and Settle

Sometimes the simplest approach is the most cost-effective and quickest way to resolve disagreements. If the dispute is minor or due to miscommunication, you and the contractor can fix it by talking it out and agreeing on how to move forward.

For example, if substandard materials were used, after discussions, you might agree that the contractor redo the work with the quality of material agreed upon in the contract at their own cost—or charge less for the job.

This works best when both parties are acting in good faith.

• Mediation

When direct negotiation proves unsuccessful, mediation is the next logical step.

Here, a mediator—who is a neutral third party, often a retired judge or seasoned attorney—facilitates communication between the warring sides, helping them explore creative solutions and reach a voluntary settlement without imposing a decision.

Mediation is private, usually faster and far less expensive than litigation, and helps maintain business relationships.

California courts often encourage (or require) mediation before a breach of contract trial is scheduled in construction-related cases.

• Arbitration

This is another method for resolving construction disputes outside of a courtroom. 

It involves an arbitrator who hears the breach of construction contract case and makes a decision on the matter based on evidence presented by all parties.

For illustration, if a homeowner alleges that a contractor abandoned a kitchen remodel midway through, and their contract includes an arbitration clause, the dispute must be resolved through arbitration rather than litigation. 

Each party would submit relevant documents including the signed agreement, communication messages, and photos of the incomplete work for the arbitrator’s review.  After evaluating the evidence, the arbitrator issues a judgment, which could include monetary damages or ordering the contractor to finish the project. 

Unlike mediation, which is collaborative and non-binding, arbitration results in a binding ruling that can be enforced like a court judgment.

Many construction contracts include mandatory arbitration to avoid drawn-out legal battles.

• Litigation

When all other options have been exhausted, the final course of action is to seek justice through the court system. This means the aggrieved party (the plaintiff) filing a lawsuit against the party accused of breaching the contract (the defendant). 

To succeed, the plaintiff must present evidence demonstrating that a valid contract existed, that the defendant failed to uphold their obligations, and that they suffered measurable harm as a result.

If the court rules in the plaintiff’s favor, it may award damages—monetary compensation intended to cover the financial losses incurred due to the contract breach.

How Are Damages in Breach of Construction Contract Awarded?

Under California law, the main goal of a successful breach of contract lawsuit is to make the wronged party “whole” again, meaning to put them in the position they would have been if the other party had kept their promise. This principle is backed by both the California Legislature and the state’s Supreme Court.

California Civil Code Section 3300 explains that the person who broke the contract may have to pay damages that cover all the direct losses caused by the breach or any losses that would normally be expected to result from it.

In a construction contract dispute, damages you could be awarded include:

• Compensatory Damages

This is the most common type of damages given in a breach of contract case. Here the person who successfully filed the breach of contract lawsuit is awarded financial compensation for losses incurred due to the breach.

There are two types of compensatory damages:

• Expectation damages. When you hire a construction contractor, you’ll agree on the amount you’ll pay them to perform the job. The amount will be included in the contract, and this is what they expect to earn after completing the task.

If you breach the contract and they sue you, they can be awarded the amount you agreed on for the job as expectation damages.

• Consequential damages. When a breach of the construction contract occurs, the injured party may incur some unexpected losses.

For example, if a building contractor was remodeling a hotel, the hotel may have to stay closed longer if they breach the agreement signed, which can lead to a loss of revenue. The income lost can be recoverable as consequential damages.

To give you another example of compensatory damages, if you hired a contractor to renovate your home for $4,000 but they didn’t complete the job, and you had to hire another builder who asked for $7,000, the first contractor can be asked to pay you $3,000, which is the extra cost you had to pay to get the job done.

Also, if you’re the breaching party, in which case you hired the contract for $4,000 but changed your mind after signing the contract and didn’t use their services or pay them, they can sue you for breach of contract, and you could be asked to pay the $4,000 fee you agreed on.

• Liquidated Damages

Sometimes, construction contracts include a liquidated damages clause, which is a pre-agreed penalty that one party agrees to pay the other, usually related to delays.

These clauses are especially common in construction projects that are highly time-sensitive, such as public works or commercial builds.

For example, during the construction contract negotiations, you could specify that if a contractor doesn’t complete the work assigned by a set deadline, they must pay you $500 for each day the project remains unfinished beyond the agreed-upon deadline.

So, if they complete the project after 15 days instead of the 10 that you had agreed on, they’ll be liable to pay you $2500 ($500 x 5).

The penalty for delayed completion of work needs to be reasonable because California courts are unlikely to award liquidated damages that are excessive.

• Nominal Damage

If you suffer no or little losses due to a breach of contract, a court may award you nominal damages, often a small amount of money (e.g., $10), just to acknowledge the violation and hold the breaching party accountable.

• Punitive Damages (Rare in Contract Law)

If a contractor’s behavior veers into outright fraud, deception, or malicious intent, punitive damages may be considered, not to compensate the injured party for their losses, but to punish the defendant for particularly bad behavior and send a clear message that such conduct won’t be tolerated.

For illustration, assume a commercial contractor knowingly lies about being licensed or fakes experience to win a job. That’s not just a contract issue—it’s a serious misrepresentation that could put lives, businesses, public safety, etc., at risk.

In a case like that, where the misconduct is reckless, outrageous, or shows a willful disregard for another’s rights, the legal system may step in with punitive damages. It’s not about how bad the breach was, it’s about how bad the behavior was. 

Most contract breaches, even deliberate ones, don’t meet that bar. But when a breach starts to look more like a tort—like fraud, intentional misrepresentation or malicious intent—that’s when punitive damages can enter the conversation.

• Restitution 

This remedy seeks to prevent unjust enrichment. If one party received a benefit but breached the agreement, the court can order them to return that benefit or its value.

For example, if you paid a contractor $25,000 upfront for a home remodel that was never started, the court may order them to refund that amount—even if no actual damage occurred to the property.

• Specific Performance

Also, in rare cases, the court may order the contractor to complete the job rather than just pay damages.

This is usually only ordered when monetary compensation won’t make the aggrieved party in a breach of construction contract whole. Specific performance, for example, may be awarded in construction cases involving custom renovations on historic buildings or a unique property.

The best way to know what damages you’re entitled to is by speaking to an experienced construction contract attorney.

Gallagher Krich, APC: Construction Contract Law Experts

Should you find yourself in a situation where a breach of contract has happened, contact Gallagher Krich, APC.

Our attorneys have helped hundreds of Californians amicably resolve construction disputes, recover damages, and protect their rights—especially in situations where property owners are taken advantage of by unreliable contractors.

Contact us online now or give us a call at (858) 926-5797 for a free initial consultation on your legal options under California state laws for a breach of construction contract.