Penalty clauses in contracts

[fatgaz]

Hi

Can anyone advise what are acceptable/standard penalty clauses in contracts? I have looked through the standard JCT contract but it is helpfully blank where the suggested amounts shoult be.

If anyone can shed any light on what the typical amounts are and how they work - i.e. weekly charge for overun, if so how much, or % of job. The project in question is about £100k extension and refurbishment.

thanks in advance guys and girls.

cheers

G

 

[Softus]

Can anyone advise what are acceptable/standard penalty clauses in contracts?

It's surprising what some people will accept.

A friend recently engaged a builder who offered no penalty for being late or over-budget, but who would refund 50% of the budget (and keep the other 50%) for being under-budget.

He overran by about 100% and went over budget by about 50%.

 

[noseall]

are you making it clear to all contractors quoting for the project, that there will be in- built penalties clauses?

will you also be in- building a reward bonus for work on time and on budget?

will you compensate the contractor, should there be any unforseen mishaps at no fault to the contractor?

 

[fatgaz]

hi noseall. Cant imagine progressing a project without telling them! how could i make that happen! The builders are known to me and i have seen some of their work so i intend to have a very open relationship. I may also include some 'gain sharing' options in there too for things like ontime and on budget which are important to me. Im a pretty resonable person so im unlikely to penalise anyone for something unforseen. If you have any good ideas for the reward/gain sharing stuff that would also be useful. Sounds like Softus' mate had a bad run!

 

[noseall]

[quote="fatgaz

hi noseall. Cant imagine progressing a project without telling them! how could i make that happen!

i meant prior to them submitting their estimates, i.e when you give them a copy of the drawings and shedule of works.

If you have any good ideas for the reward/gain sharing stuff that would also be useful.

treat the job similar to a bet. you will cough up a percentage if the targets are met, similarly, he will cough up or forfiet a percentage if the targets are not met.

[/quote]

 

[fatgaz]

Hi Noseall and thanks for the comments. I think im ok with the pricinple, its the amount i have no clue about and i dont want to go into these kind of discussions clueless. have you any idea what percentage i should use for my 'bet'!

cheers

G

 

[noseall]

i guess the amount needs to be penal enough so that the builder will respond to it.

same with the bonuses.

i'm thinking of figures starting at 5%, with weekly penalties on top.

there is only a certain speed at which any builder can work successfully, and only so many hours in a day. you don't want the builder to rush or have him at the house 24/7.

careful thought is needed when deciding on the penalty thing.

 

[fatgaz]

i'm thinking of figures starting at 5%, with weekly penalties on top.

Would this mean that if the work carried on past a certain date, 5% is the penalty and then an additional amount for every week beyond that? Sorry to be a pain!

there is only a certain speed at which any builder can work successfully, and only so many hours in a day. you don't want the builder to rush or have him at the house 24/7.

Yes, just the thing i want to avoid. the last thing i would want is a rush job and for them to lose interest in the project.

thanks for your help and comments.

cheers

G

careful thought is needed when deciding on the penalty thing. [/quote]

 

[Thermo]

give a local surveyour a ring, they will probably be able to tell you over the phone, or give riba wjo produce the jct contracts a ring. I cant for the life of me remember what percentage we used to use from my surveying days. I know we did some at set amounts per week on some contracts, but it was at the clients discretion if he applied them. Dont forget the retention either!

 

[fatgaz]

hi Thermo

thanks for the advice - good tip. Ill try and make some calls.

Cheers

G

 

[gangman]

Gaz

I use JCT contracts all the time. I always work through an architect, who sorts out the JCT. On a contract of 100k my penalty clause would be £100 per week, though I have had £40 per day. There would be no bonus for completing early, why should there be. I should be able to progam the job properly and not be far out on the completion date.
If the builder says he can finish in 4 months for 100k then that's what he signs for, you don't reward him for finishing a bit earlier or we'd all be adding six weeks to the program. The other side of it is, if the builder finishes in two months you can't say 100k for two months work is too much, the price was agreed by both parties and the contract keeps you to it.

Personally I prefer using contracts, and penalty clauses are rarely invoked. If there's a delay beyond the builders control, such as bad weather or unforseen extras all these things have to be taken into account.
You have to remember a clever builder will be covering himself. If I thought a client was likely to stop £100 of me for being a week over, then he would be charged top whack for all the extras during the job, and the prelims would be added for the time on these extras. One week of prelims can cover a few weeks of overun.

Try it at £100 per week, this should be acceptable to most builders, to me £500 for five weeks over is nothing, especially on £100K. I'd be more worried about five weeks extra labour costs. If they don't want any penalties or contracts at all it could be that they've not enough confidence in their ability to work to their program. Or maybe not enough funds, with a JCT don't pay any money up front just pay every four weeks on work completed.
My completion date never ties with my program I always add time on, just in case, and I've never had any penalties.

At the end of the day penalty clauses are a minor part of what the contract is about. It's more about what you're getting for how much money. If it's agood job, done how you want it would you really worry about a few hundred pounds for it being a few weeks late.

 

[holmslaw]

UK law does not recognise penalty clauses. It is illegal to impose one and has no legal standing.
What can be imposed are LAD's these are "agreed and accessed damages" ie agreed by both parties before you start work. Importantly they are only applicable to an actual quantifiable loss. So for example if I build you a house and you move in during a heat wave and the CH is not working you cannot make a claim because you have'nt suffered any loss. If its minus 10 outside then you have a claim but only at the rate agreed.
There is a type of penalty system called "lane rental", because it was first used for road works. The way it works is, I agree to build your new house in 40 weeks, you then charge me an agreed rent - say £500 a week. You give me rent free period of 40 weeks. If I finish in 36 weeks you owe me an additional £2000, if finish 4 weeks late I owe you £2000.

 

[gangman]

'Penalty clause' is not the correct term but in the building game that's how we see them, so that's what we call them. In a JCT contract it will be down as 'Liquidated damages' but calling a dog a cat will not stop it barking.

From my understanding, courts will uphold liquidated damages as long as they are not seen as a penalty. That is the agreed amount of the LD was reasonable and the right procedures were followed. It would be interesting to see the results of some cases to see how the arguments went.

For me as a builder £100 per week is reasonable, putting up with builders cracks, swearing, loud radio, mess etc. it should be more, and if it did go wrong being deducted £100 per week is not going to break the bank.

For the client it's good to have something that might keep the builder on his job and not off doing other jobs.

 

[fatgaz]

hi Guys

thanks so much for the comments and advice - i think i have a handle on what im going to include. At the end of the day, i guess its all about getting the balance right!

thanks guys!

G