Agreements

In most cases penalties and bonuses should be used in commercial construction agreements…Residential construction agreements in many cases…and here is why

One of the most important elements of construction agreements revolve around the construction schedule- specifically when the work will be complete.

The reason deadlines in construction are so critical, is that  lateness often creates additional financial hardship, inconvenience 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.  https://seconarchitect.com/5-frequent-project-delays-and-how-to-avoid-them/

Schedules

The real benefit of a schedule is to layout expectations and accountability. Many contractors and architects fail to posit realistic schedules. this in turn, can infuriate an owner and result in more finger pointing and disappointment than needed.  The schedule keeps everyone’s tasks measurable and accountable. This of course helps to evaluate cash-flow, monitoring and quality control. A clearly written , simple construction schedule is essential to a well-run project.  Owners have to be involved too in delivering critical information in a timely manner to prevent “decision-bottleneck” that can often jam up a project.   https://seconarchitect.com/construction-schedules/

Bonuses

The opportunity to earn a bonus for early completion 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 his control. And the incentive bonus is usually accompanied by a penalty for failing to meet the stipulated date. Incentives can also jeopardize quality if contractors cut corners and rush in order to reach milestones for bonuses. So don’t overly incentivize. There is almost always an accelerated pace at the end in which mistakes are easily and often made.

Penalties

A large factor in 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 $_____.”  The figure is based on something like the projected income loss that the store -owner is likely to have if the contractor fails to achieve store-opening before a holiday season. https://www.linkedin.com/pulse/liquidated-damages-vs-ontractual-penalty-vincenzo-diego-cutugno

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.

Frequently the penalty amount per day or week will escalate as time goes by to increasingly penalize the party to get the work done promptly.

Fairness

It should also be noted that contractors may collect penalties from owners if such language is contained in the contract.  Those owners who dilly-dally making decisions often prevent the contractor from operating at a good pace where she can make projected profits and move onto the next project.

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

Article by Steven Secon