Caps, Sub-Caps and Carve-Outs: What Actually Survives When Several Things Go Wrong
There are three ceilings on what you can recover from a contractor, and only two of them are in the contract. The first is the layered cap structure — daily rates, sub-caps, an aggregate LD cap, an overall limit. The second is the exclusion clause, which removes entire categories of loss before any cap is reached. The third is the contractor's balance sheet, which does not appear in the document at all and is frequently the binding constraint.
A 100% liability cap on a $90m contract is a $90m promise from an entity that may be worth $25m. The cap describes what is owed. It says nothing about what arrives.
This is the third and final post in the Risk Allocation section of Contracts & Legal. You will get the full layered structure, why carve-outs routinely fail to do what both parties intended, why a standard consequential loss exclusion probably does not exclude lost profits, how the layers apply when a project is late and short and defective at the same time, and how to model all three ceilings together.
ℹ️ Note: This describes how these mechanisms work in practice. It is not legal advice — the classification of losses and the enforceability of exclusion clauses are jurisdiction-specific and turn heavily on the precise drafting.
What Does a Liability Cap Actually Cap?
Several different things, at several different levels, and the levels do not necessarily interact the way the headline number implies. A contract typically contains four tiers plus a set of exceptions, and a claim travels up through them.
| Tier | What it limits | What to extract from the signed contract |
|---|---|---|
| Daily LD rate | Exposure per day of delay | dollar rate / formula and start-stop dates |
| Delay LD sub-cap | Total delay damages | separate cap and whether it counts toward other caps |
| Performance LD sub-cap | Capacity / performance shortfall damages | formula, cap and interaction with delay LDs |
| Combined LD cap | Multiple LD categories together | aggregate ceiling and order of application |
| Overall liability cap | Broader contractual liability | percentage / dollar amount and what is included |
| Carve-outs / separate limits | Liabilities outside or beside the general cap | exact wording, separate caps and whether amounts consume aggregate headroom |
A number borrowed from a comparable deal is only a negotiation reference; it was calibrated to somebody else's scope, risk profile, security package and contractor credit.
The tiers matter because a claim can be defeated at any one of them while passing every other. A delay claim within the daily rate and within the delay sub-cap can still be blocked by the combined cap if a performance claim got there first — the point made in post 2 and worth re-testing every time a second claim arises.
Why Can a 100% Cap Be Illusory?
Because a contractual ceiling is not the same thing as a recoverable amount.
A contractor can agree to liability equal to 100% of the EPC price and still be unable to pay a large claim. The owner therefore needs to read the cap together with parent-guarantee strength, bond or LC support, retainage, insurance and contractor credit.
The useful metric is the amount of realistic recovery available when the bad scenario occurs.
Which Liabilities Sit Outside the Cap?
There is no universal carve-out list.
The contract can place a liability inside the overall cap, under a separate sub-cap, outside the cap, or under a separate indemnity / insurance regime.
Build the matrix from the signed contract rather than from market convention:
| Liability | Sub-cap | Counts toward overall cap? | Security / insurance? |
|---|---|---|---|
| Delay LDs | $ | yes/no | |
| Performance LDs | $ | yes/no | |
| Defect correction | $ / uncapped | yes/no | |
| Third-party indemnity | $ / uncapped | yes/no | |
| IP | $ / uncapped | yes/no |
Do Carve-Outs Count Toward the Cap or Sit Above It?
The drafting has to answer this explicitly.
A liability can be excluded from application of the cap while still counting toward aggregate consumption, or it can sit completely outside the capping regime.
If a $20 million third-party indemnity counts toward a $50 million overall cap, only $30 million remains for capped claims. If it sits outside, the full $50 million remains available.
Do not infer the answer from the word "carve-out."
Does a Consequential Loss Exclusion Exclude Lost Profits?
Do not answer that from the label alone.
The original draft leaned too heavily on English-law case classification. That is not a safe shortcut for US project contracts with different governing laws. The more reliable diligence method is to read what the executed clause expressly names.
Public EPC agreements filed with the SEC show the drafting technique clearly. One agreement waives claims for consequential, special, incidental, indirect, punitive or exemplary damages and then separately enumerates loss of revenue or profits, loss of production, opportunity, financing costs, use and contracts. It also expressly states that specified liquidated damages are not treated as excluded consequential damages. Another filed EPC similarly excludes loss of use, business opportunity, profit or revenue and cost of capital, while preserving identified indemnity claims.
That drafting matters because it removes the classification argument. If the contract says “loss of revenue” is excluded, the model should treat it as excluded subject to any carve-back. If the contract says only “consequential damages,” counsel has a governing-law interpretation question.
The practical matrix is:
| Head of loss | Expressly excluded? | Carved back? | Subject to LD regime? |
|---|---|---|---|
| Lost revenue | yes/no | yes/no | yes/no |
| Lost profit | yes/no | yes/no | yes/no |
| Cost of capital / financing | yes/no | yes/no | yes/no |
| Loss of use / production | yes/no | yes/no | yes/no |
| Third-party claims | yes/no | indemnity-specific | n/a |
ℹ️ Note: “Consequential loss” is not a model input. The model needs the actual recoverable heads of loss after applying the governing-law interpretation and the contract's express wording.
Why Does the Exclusion Matter More Than the Cap Percentage?
Because an exclusion removes a category of loss entirely, before any cap is applied. A cap limits the amount of a recoverable claim. An exclusion determines whether the claim exists at all.
Consider the order of operations when a project runs 120 days late:
- Is the loss recoverable in principle? Exclusion clause and exclusive remedy provisions (post 2) are tested first.
- Is it within the relevant sub-cap? Delay LDs against the delay sub-cap.
- Is it within the combined LD cap? Competing with any performance claim.
- Is it within the overall cap? Net of anything carved out.
- Is it collectable? Security, then covenant strength.
A negotiation that spends its energy on step 3 and none on step 1 has optimised the wrong variable. Moving a sub-cap from 10% to 12% is worth $1.8m on a $90m contract. Establishing whether lost revenue is recoverable at all is worth the difference between a claim and no claim.
How Do the Layers Apply When Several Things Go Wrong at Once?
By running every claim through the same hierarchy in the order the contract requires.
Public EPCs show why this cannot be inferred from a headline cap. One filed agreement has a separate Substantial Completion LD cap, a separate overall LD cap and then an overall contractor-liability cap. It also lists liabilities that do not receive the same treatment, including specified indemnities, fraud / willful misconduct and certain correction obligations.
Another filed EPC similarly places delay LDs under a dedicated cap and then provides an overall liability cap with express exceptions.
For diligence, build a claim ledger rather than a single percentage:
Claim type
Gross claim
Exclusive remedy?
Specific sub-cap
Counts toward combined LD cap?
Counts toward overall cap?
Outside / separate cap?
Security available?
Insurance available?
When delay, performance and defect claims overlap, the remaining headroom for the later claim depends on what the earlier claims already consumed. The contract has to answer that sequence; the spreadsheet should not invent it.
Where Does Insurance Sit in the Stack?
Insurance is a separate recovery contract.
Whether insurance proceeds reduce contractor liability, sit outside the cap, or are credited against a claim depends on the EPC and policy wording. Model insurance and contractual liability as separate layers before applying any double-recovery restriction.
The causal tests are also different: contractor liability generally requires breach; property or construction insurance generally requires a covered insured event.
How Do You Model the Liability Stack in Excel?
Build it as a cascade with three ceilings, and report the binding one. The output that matters is not the total claim — it is which constraint stopped you.
The inputs
Assumptions, labelled as such:
EPC contract price $90,000,000
Delay: 120 days at $45,000/day $5,400,000 claim
Performance buy-down NPV $3,700,000 claim
Defect rectification cost $4,000,000 claim (carved out)
Delay LD sub-cap 10% of contract price
Combined LD cap 20% of contract price
Overall liability cap 100% of contract price
Contractor net worth $25,000,000
Security posted (LC + retainage) $11,000,000
Ceiling one — the contractual cascade
Delay_Recoverable = MIN(5,400,000, 90,000,000 × 10%) = $5,400,000
Perf_Recoverable = MIN(3,700,000, 90,000,000 × 10%) = $3,700,000
Combined_LD_Claim = 5,400,000 + 3,700,000 = $9,100,000
Combined_LD_Cap = 90,000,000 × 20% = $18,000,000
Combined_Allowed = MIN(9,100,000, 18,000,000) = $9,100,000
Rework = $4,000,000 (carved out of the cap)
Total_Contractual = 9,100,000 + 4,000,000 = $13,100,000
Overall_Cap = $90,000,000 → not binding
Comfortable at every tier. This is the point at which most analyses stop, and it is the point at which the real constraints begin.
Ceiling two — the exclusion test
Lost_Revenue_Beyond_LDs = 120 days × (65,000 − 45,000) = $2,400,000
Recoverable_If_Direct = $2,400,000
Recoverable_If_Excluded = $0
The uncovered carrying cost from post 2 reappears here as a claim rather than a loss. Whether it is recoverable turns entirely on the exclusion clause's drafting and on whether LDs were expressed as the sole remedy. Model it as a flagged scenario, not a number — the honest output is a range with the drafting question named.
Ceiling three — collectability
Claim = $13,100,000
Contractual_Cap = $90,000,000
Collectable_Secured = $11,000,000
Contractor_NW = $25,000,000
Effective_Recovery = MIN(Claim, Cap, Security + realistic unsecured)
≈ MIN(13,100,000, 90,000,000, 11,000,000 + ?)
The $90m cap is doing no work at all. The binding constraint is $11m of posted security plus whatever an unsecured claim against a $25m entity is actually worth — which, if the failure that generated the claim also impaired the contractor, may be very little.
The output to report
Binding_Constraint = "security and covenant strength, not the cap"
Headroom_Illusion = 90,000,000 − 11,000,000 = $79,000,000
That last line is the number to put in front of a negotiation. Seventy-nine million dollars of the agreed cap is decorative.
ℹ️ Note: Re-run the cascade after every claim, not once at signature. Sub-caps and the combined cap are consumed cumulatively, so the headroom available to a second claim depends on what the first one took.
To run the full version — the cascade applied to your own sub-cap structure, carve-outs flagged as accruing or non-accruing, and recovery tested against posted security rather than the contractual ceiling — prompt Dezzmond with your liability provisions and claim history.
What Do Lenders Actually Check?
Lenders treat the cap as the least interesting number in the section and go straight to what pays.
- Who signed, and what is behind them? The contracting entity's balance sheet and the parent guarantee's scope.
- How much is posted rather than promised? Security is the only tier that converts to cash without litigation.
- Do carve-outs accrue toward the cap? Explicitly stated, or left to be argued.
- Is the consequential loss exclusion itemised? If lost revenue, profit, financing cost or loss of production are meant to be excluded, the agreement should say so expressly or counsel should confirm the governing-law interpretation.
- Are LDs the sole and exclusive remedy? If so, the exclusion question is largely academic — post 2 covers why.
- How much combined LD headroom remains after a delay claim? The performance claim competes for it.
- Is rework genuinely carved out? Otherwise a contractor can exhaust its cap and decline to fix the plant.
Frequently Asked Questions
What should set the overall liability cap?
Project-specific exposure, contractor credit and the negotiated security package. Comparable deals can be a negotiation reference, but they are not a sizing methodology.
Does a consequential loss exclusion stop me claiming lost revenue?
It depends on the wording and governing law. Many US EPC agreements avoid the classification fight by expressly naming loss of revenue, profit, production, use or financing cost in the exclusion. If the agreement uses only a generic “consequential damages” label, treat the answer as a legal interpretation issue rather than a modelling assumption.
Do liquidated damages count toward the overall cap?
Only if the contract says they do. SEC-filed EPCs show several structures: dedicated delay or performance sub-caps, an aggregate LD cap, and an overall liability cap, with the interaction stated expressly. Extract that interaction rather than assuming LDs consume the general cap.
What is carved out of the cap?
Whatever the executed contract identifies. Public EPCs commonly illustrate carve-outs or separate treatment for selected indemnities, fraud or willful misconduct, IP claims, insurance-related obligations and certain correction / completion obligations, but the list and the interaction with the aggregate cap are transaction-specific.
Why does the contractor's balance sheet matter more than the cap?
Because the cap sets what is owed and the balance sheet sets what arrives. Beyond posted security, a capped liability is an unsecured claim ranking with other creditors — and the event generating the claim is often the event impairing the contractor.
Closing: Three Ceilings, and the Contract Contains Two
Liability provisions are read as a single number and function as a cascade. A claim has to be recoverable in principle, then within its sub-cap, then within the combined cap, then within the overall cap, then collectable. Each stage can stop it, and the stages most likely to stop it are the first and the last — the two that get the least attention.
The middle tiers are where negotiations concentrate because they are quantified and therefore negotiable. Moving a sub-cap by two percentage points is a visible win. Establishing that lost revenue is a first-limb loss, or that a carve-out does not accrue toward the ceiling, or that the counterparty cannot fund the number it just agreed to — none of those produce a number to report, and all of them are worth more.
This closes the risk allocation trio and, with it, the contracts arc of the series. Across eight posts the shape has been identical every time. The completion dates sit in two documents and drift. The delay LD rate is negotiated rather than derived. The cap exhausts before the longstop arrives. Capacity and PR are guaranteed while annual energy is not. Availability is remedied at the size of a fee. A tariff may not be a change in law. Force majeure stops the clock that was paying you. And here: the cap you agreed is bounded by an exclusion you may have misread and a balance sheet nobody checked.
Every document does what it says. The exposure lives between them, and only the model sees all of them at once.
The series turns next to the financing itself — debt sizing, coverage ratios and the cash waterfall — where the question changes from who owes what to how much the structure can absorb before equity funds it.
Related reading: Delay liquidated damages · Force majeure in energy contracts
Sources: SEC-filed EPC — Article 19 Limitation of Liability · SEC-filed Axial Basin Solar EPC — Article 40 Limitation of Liability · SEC-filed EPC — Article 16 limitations and carve-outs · Dezzmond analysis; model assumptions are illustrative.