Construction contracts sometimes call for an incentive bonus for early completion. This is most common on public transportation projects, but the clauses can also be found in private contracts, particularly those affecting utility or industrial production. The opportunity to earn a bonus is 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.
A recent Tennessee case involved these issues. The contractor encountered changed work and excusable delay for which the project owner granted an extension of the performance schedule. But the owner took the position that the calendar date for earning the bonus remained unchanged. Had the date been extended to reflect the excusable delay, the contractor would have earned a substantial early completion bonus. Instead, the contractor was assessed a disincentive penalty.
These clauses are controversial. The Federal Highway Administration, for one, has restricted the circumstances under which it will fund early completion bonuses. At least one state supreme court has ruled the disincentive portion of the clause an unenforceable penalty. What do you think? Are these clauses an effective incentive which can be mutually beneficial for owners and contractors? Or are they a trap for contractors, offering an illusory bonus and a harsh penalty? I welcome your comments.
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Bruce Jervis, Editor
Construction Claims Advisor