Should you use Penalties and Bonuses in Construction Contracts?


One of the most important elements of construction agreements revolve around the schedule- specifically when the work will be complete. In order to help achieve a certain deadline, penalties and bonuses are often used.  The reason deadlines in construction are so critical, is that  lateness often creates additional hardship or income loss for the owner such as extra rent needed before they can return to their renovated home, or a store that won’t be open for the holiday season if the construction takes longer than planned.


The opportunity to earn a bonus is often attractive to contractors, but it comes with a risk. The contractor may not be able to achieve early completion due to factors beyond its control. And the incentive bonus is usually accompanied by a disincentive penalty for failing to meet the stipulated date. Incentives can also jeopardizing quality if contractors cut corners and rush in order to reach milestones for bonuses.


The proper legal name for penalty clauses is “liquidated damages.” Liquidated damages are merely an agreement between the parties as to what damages will be assessed for late completion, so that neither party has to prove what the actual damages are (or are not). A typical liquidated damages clause reads something like the following: “For each calendar day beyond the scheduled date of Substantial Completion that the Project has not achieved Substantial Completion, the Contractor shall pay to the Owner as liquidated damages the sum of $_____.”

Of course, the number of days then has to be monitored and the criteria for establishing a “weather delay” from and “owner-created delay” has to be mutually agreed upon since these elements will influence actual penalties or bonuses and create additional friction at the close of a project.

We have several other strategies for helping meet deadlines and meet construction schedules-let’s talk 914 980 5532, ask for Steve