Construction Contract - penalty clause

Asked over 1 year ago - Renton, WA

My general contractor has changed the completion date many times and asked for several change orders. What general penalty clauses should be listed on the contract?

Attorney answers (4)

  1. Roger M. Townsend

    Contributor Level 9

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    Answered . First of all, avoid the word "penalty" and replace it with "liquidated damages." It might sound like semantics, but penalties are unenforceable. However, where damages are difficult to ascertain, it is possible for parties to contract in advance for a liquidated amount of damages. People are familiar with these clauses in residential real estate contracts, where they are called "earnest money."

    Change orders are part of the construction business and may be contemplated in your existing agreement (if you have one). You can certainly provide financial incentives for completing the project in a timely manner and disincentives for failing to meet deadlines. In short,. you can definitely put this in your agreement. I recommend contacting an attorney with experience in construction law.

  2. Matthew F. Davis

    Contributor Level 8

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    Answered . I am going to take a stab at this too. I gather from your question that you are the owner, and your general contractor has changed the completion date and asked for change orders. Neither of these will strike an attorney as unusual in the abstract. It seems that almost every construction project ends up late and over budget.

    You ask what penalty clauses should be included in the contract. Unfortunately, that is not really the question because you already have a contract. You first need to figure out what your rights are under the existing contract. Your existing contract probably will define your rights for the job. The general contractor is unlikely to agree to additional remedies at this point, and he does not have to change the contract.

    Assuming that you used a good form contract or had an attorney represent you for the contract, it should have a few provisions.

    First, it should have a completion date or a limited amount of time to do the work. Both likely will be subject to adjustment for weather and other uncontrollable circumstances. If your contract has these, they then generally are enforceable. Start by identifying and calculating the dates.

    Second, most construction contracts have some kind of retention provision. The owner holds back an identified percentage (usually 5% or 10%) from all payments to the contractor until the end of the job. This is used to make sure that the work gets done and to help pay for your damages. You should know if the contract has a retention provision and whether you have retained anything from payments to the contractor. If you have, don't let go of anything until all matters are resolved.

    Third, a typical construction contract has a liquidated damages clause for delays in doing the work. This usually is expressed a a dollar amount or percentage of the contract value per day of unexcused delay. These are the typical liquidated damages that you have been told about. The amount has to be reasonable, and the delay has to be unexcused. The amount usually is not an issue, but excuses for any delays are.

    Fourth, the contract should have a provision for you to inspect and accept the work, or to reject it. Hopefully, the contract has clear standards for the work, and you are entitled to performance according to the contract terms. If there are no standards, then a general workmanlike standard would probably be implied.

    Last, you contract may well have an arbitration provision in it. if it does, the you have to arbitrate and cannot sue the contractor in court.

    Most of these questions will be answered by your contract. At this point, you are probably stuck with the contract you have instead of the contract you want. You should be able to determine the answers to these questions.

    At that point, you could post a follow up question or consult with a construction attorney. Not all real estate attorneys do construction cases, and you would be best served by finding someone who does. Yours sounds more like a construction contract dispute than a construction defect claim. Ideally, you would find someone with experience in both drafting construction contract and handling disputes arising from them.

    This is legal information and not legal advice. The final answer to your question will depend on more facts than... more
  3. Saphronia R Young

    Contributor Level 13

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    Answered . Mr. Townsend is correct. "Penalty" clauses are unenforceable in Washington. It sounds as though you may be discussing a situation where you are being accelerated...in other words, you've been told to wait, and wait, now hurry up! This throws your own schedule, other jobs, personnel, equipment usage and projected staging for the project completely out of whack, and is generally very expensive. First, do not agree to revise the schedule if it will impact you (and it always does) without a change order to compensate for that. Second, determine the true extent of the financial impacts as promptly as possible (if you have a good scheduling program, with your true "critical path" markers on it, this should be do-able). Third, notify the general / prime contractor promptly of the impacts and demand your change order. Fourth, do not proceed without protest having been documented, but DO NOT STOP WORK until an attorney has reviewed the situation and advised you. You don't want the prime to claim that you failed to staff the project, provide equipment, materials, etc. Always wear the good guy hat, but document your impacts and keep insisting on change orders. Get a construction attorney ASAP.

    Without knowing all of the details, reviewing documents, and interviewing witnesses, no person should assume that... more
  4. David A. Kulisch

    Contributor Level 11

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    Answered . Roger and Saphronia have provided excellent advice. However, to fully understand your question and provide proper advice, we need to understand the relationships. Are you the owner, a subcontractor or supplier? If an owner, you need to look at every change order because, typically, a change order does two things: (1) it adjusts the amount of the contract; and, (2) it adjusts the contract completion time. If you signed these change orders with completion time adjustments, you have already agreed to the extensions and you may not be in a position to argue about it. It sounds like you need to talk with a construction lawyer in your area. I don't know Roger unfortunately, although he appears to be well qualified. I know Saphronia well and I recommend her very highly. Good luck.

    1 - If you and I do not have a written and signed Fee Agreement for attorney services, then you are not my client... more

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