PENALTY Clauses for Builders

In order to make sure builders don't procrastinate what penalty or condition clauses have people used.
Are these successful in reality.
DO builders accept them.
What wont they accept?

I would expect most builders would want to finish and get their money , but i have known several instances where 2 hours work has taken several weeks to be done by National Builders

If Banks are slow in releasing funds the builder may impose some additional interest charges I believe.
As it is difficult to get these large institutions to move at times what can be incorporated into the contract to prevent this.
Will builders accept any of this

That would depend on the balance of power.

Try inserting penalties here, now and you would have to build it yourself. Builders are self-employed and have the same right to accept or reject offers as you do.

Sun fish,
If no penalties are created then what leverage do you have over a builder.


If the penalties are harsh then why accept the contract. if the penalties are not unreasonable then why wouldn't you accept the contract .

eg $50 a day beyond completion date with 5 days grace.
The aim is not to screw the builder , but to make sure the original agreement is worth the paper its written on.

I was also thinking of using incentives if completion was early.
Why wouldn't you want to reward an efficient job.

Are you inferring that this approach wont work?

Ggumpshots,

There are three choices;

Either a penalty clause or a liquidated damages clause.

I found some info that may explain it better than I can

http://www.sparke.com.au/sparke/new...ges_a_good_risk_management_tool_june_2006.jsp

Note that there is a difference between the two.

Retention can also be used, although is mainly used to ensure compliance on warranty issues.

As an electrical contractor on major projects, we would usually accept LD and retention clauses in contracts. Penalty clauses were never accepted, even to the point that I would throw the job if I couldn't negotiate them out.

Similarly the builder would be working under the same clauses in his contract with the developer.

Hope that explains it a bit

ciao

Nor

Norwester,
Thanks for an excellent link.

I had the right idea but was misusing words in a legal sense.
My intention was to be able to recover lost rental income as a result of the completion date not being met.The intention was to Not to punish a contractor.
Some information which may be useful to others follows,

A penalty is a sum that is disproportionate to the actual harm.

It serves as a punishment or as a deterrent against the breach of a contract.

Penalties are granted when it is found that the stipulations of a contract have not been met. For example, a builder who does not meet his or her schedule may have to pay a penalty.
Liquidated damages, on the other hand, are an amount estimated to equal the extent of injury that may occur if the contract is breached. These damages are determined when a contract is drawn up, and serve as protection for both parties that have entered the contract, whether they are a buyer and a seller, an employer and an employee or other similar parties.

As a GC

We dont accept LD's or penalty clauses. It causes too much finger pointing and paperwork ie. the reason we are taking longer is because your wife needed 10 paint samples on the wall and still took two weeks to decide which one she wanted because she had to fly in her feng shui consultant (i build VERY high end custom homes)

There have been a few clients who offered additional bonuses to the company and specific people on the project if we met their deadline. That worked very well....

BAdams said:

We dont accept LD's or penalty clauses. It causes too much finger pointing and paperwork ie. the reason we are taking longer is because your wife needed 10 paint samples on the wall and still took two weeks to decide which one she wanted because she had to fly in her feng shui consultant (i build VERY high end custom homes)

There have been a few clients who offered additional bonuses to the company and specific people on the project if we met their deadline. That worked very well....

Click to expand...

HI BADAMS
Rewards work amazingly well. I have seen adults strive really hard to meet a goal with the rewrd being a shiny sticker!!!!!
I have had no experience with giving rewards in house construction.
As a percentage of total cost, what reward amounts in past jobs made you pay attention?
Would any other builders like to comment on this

all pointless

As in most contracts such clauses are pointless. Scratching your head? well as the saying goes he has most wins...

in short think practically....

1) you have a $500 liquidated damages per week clause for delayed work.

ok say the builder goes over by 1 week, 2 weeks hell make it a month.

and the cost is say $5000 in damages.

you cannot hold back the last draw down or hold it to ransome therefore the house will be finished, builder has all his money and you are chasing him/her for 5k.

if the builder says "piss off" your options are then? zilch lets face it you wont sue over 5k. Second, lets say the builder is more polite, he will simply (before completion) printout every day it rained as per the weather reports and request an extenion to completion.

If you are signing a HIA contract then you have no real leverage. If you try and do away with the HIA contract you will find absolutely no builder willing to agree.

Sorry to burst your buble but the penalty clause can say whatever it likes you will never be able to enforce it.

your only and i mean ONLY leverage is, too kick and scream send letters to HIA, MBA and the local council of dept of fair trading (whoever issued the builders licence) cause such a racket that the builder sees real benefit in getting rid of you and hence finish on-time.

Ok , I get the picture.
Liquidated damages clauses in practise for builders are seemingly not feasible

That being the case , if they are easy to worm out of or difficult to enforce there must be little problem in a builder agreeing to them.

In terms of completing a project don't they at least put some psychological pressure on the builder to complete the work by the promised time?
I am assuming normal delays and rain etc. when agreeing to these clauses

I really want to now change the direction of the thread given the comments.

What motivates a builder of homes to complete a project early?
Obviously once competed he can get his money and move on to the next project but that motivation is always there.
lets use an example.
If you have a $250,000 home being built, would $500 extra per week for each week finished early, up to a total of $2500 motivate a builder?.
I have put an upper limit as I would not want to compromise on the quality of construction if things moved really quick.

If this would not speed up the building process then what amount would be needed to get the builder into top gear?
How often do builders come up against reward clauses?

I have mentioned parts of this in another thread:

We have just started renovations to our large house.

Let me start by saying we used this particular contractor I will call Don, a year ago.He gave a reasonable quote.He started the work.Soon the job ran into problems, as we are dealing with older properties.By the time we are done it cost a little bit more.He was hired to replace an shingled roof with steel.
He quoted on another older property for a steel roof.Bit expensive, but we could live with it.Before he started the tenant had a fire and the top floor was destroyed.Insurance company paid out the policy as it was "cash value"coverage. Insurance company provided 2 other assessments that it would cost $63k to repair.Don, the contractor,said he would be able to rebuild it for the insurance payout($48500) + $2500. He wrote up a quote and we signed.It was suppose to take 5 weeks.Always seemed to be a problem.It ended up costing us $20k more and it took 4 months longer,which meant no rent.
While he was working on this job, we found our "reno house". Don was brought in to estimate how much it would cost to reno the place.(being transformed into 11 bachelor suites)We were told 35-40k,not a problem.
Numbers added up and we bought the property...took 6 months with county council.Told Rob that this time Don was not starting our reno until we had a quote and I was putting penalty and reward clauses in.

Don was asked for a quote repeatedly for this property, and he always put us off, saying it would be what he estimated.We had the building permit 2 weeks ago, and still we had no quote.Then we were told by his wife on the phone it was 58K PLUS more now because of the conditions council added.
I was fuming.Told them we needed a meeting.Don and his wife figured they could quote any price they like because they thought we would pay them whatever they asked, because we are crunched for time.I asked for our key back and told them their quote was too much.I told him I felt deceived.I told Don it was his job to know what would be required to do work to building code. He admitted he was basing his estimate on him doing the plumbing himself, instead of a plumber.
Don's wife was actually yelling at us.We kept our cool. She wanted us to compromise on what we wanted in the building so we could afford them !!!
Then she accused us of not being truthful that another contractor had quoted a lower price, and we were too coward to admit it.She was correct in the part that we had already picked another contractor, but we had actively sought "Greg"the new builder.We asked him to work for us and we would pay him by the hour. He had recently worked on a couple of projects for us and we were pleased with his price and work.
Greg was at the house today, gave us the supply list. We gave him the key.We have the control this time.Told Greg we may bring in drywallers/tapers to speed up the process.

As much as I liked Don's work, I was getting a gut feeling that if we allowed him to start work on this project,we would be in deep financial trouble and not completed by Sept 1.
So I feel much better, and won't be able to blame anyone but us if we don't finish on time.

So yes...if you are getting a contractor, use penalty/reward clauses.

(sorry it is such a long post)

you want a clause for the builder to finish?

anything with bite the builder wont agree so nothing will work.

for instance the best clause would be a straight forward black and white "order off site" clause with clear liquidated damages.

This will scare any builder off from even signing so whats the point.

All my negative comments come from the stand-point you are talking about a small build, sorry to break it to you but your a dime a dozen therefore the builder would prefer to move on than agree to any contract that heaven forbids gives you any leverage UNLESS its a large project and greed kicks in and hence you have leverage of the old carrot on the stick.

If you want the ONLY way a builder will work quickly do the following;

a) deposit is paid to a trust account (solicitor) released on first drawdown. **this will ensure you for the builder to start (sometimes the hardest part)

b) have the builder agree to following a QS schedule of works and not his % drawdown schedule which is ALWAYS front loaded so by the time you near the end the builder has covered all costs and can delay (i.e. he doesnt need the last two drawdowns) this is profit.

These are standard for larger builder but a builder MIGHT agree to them. Remember that once you start deviating from HIA, finance (on your side) may get difficult.

In the end of the day speak to a solicitor.

OH!!! another important point (select your own certifier) DONT go with the one the builder suggests.

if you do the above then you should be ok. Other small things you can do is ALWAYS be to the point and brief and most important professional. DONT do what everyone does when things start delaying and start giving a sob story on how your paying interest the builder has heard it all before, act professional to the point and state your case, demand a meeting put everything is writing, record minutes make the builder feel that if he lies, delays or tries to take you for a ride that you come across the type that could walk into HIA\MBA and the licence body and give him a real headache..

but also remember done start the crusifiction before he actually does something wrong beleive it or not there are professional builders out there unfortunately the bad ones make you reall feel the pain.

good luck

PS i never proof read so sorry if i write jibberish now and then