’penalties’ in sub-contract agreements

Hi Milind,



Coming back to ur question:



1. Is it required to have LD Clause in ur sub-contractors contract.

- At some point, the project may not go as planned. For some reason, project will not finish as it was designed and neither within budget. Despite best efforts, the original schedules become a thing of distant memory. If u r in this situation before, u know very well that it doesn’t take much time to start the blame game and everyone starts pointing finger and then starts the damage claim related to delays. The solution to some of these delays is inclusion of Liquidated damages in the contract.



2. Purpose of LD:



-LD can only remove SOME of the uncertainty related to construction delay claims and NOT all. But, definitely its a good weapon to make sure project completes on time.



To be valid, a LD clause must satisy a two-part test. First, the damages covered by the clause should be incapable or difficult to estimate at the time of the contracting. Second, the liquidated amount must be a reasonable calculation of expected damages. The key is taht a liquidated damages must not be a penalty.

Dear Scarllet,



Where did you come across the term "Administrative Charge" please? Under what form of Conditions of Contract



With kind regards,



Samer

Dear Milind,



In some cases, penalty is a harsh word.



Client usually treat the Contractor as partner since without the contractor or sub contractor, no way can a client do the project.



So, my idea only, it is preferable to use the word "Administrative Charge".



Thank you,

Scarlett

Hi Milind,



Try this: By Quenten Fleming

http://rapidshare.com/files/263005538/jk27.rar



Good review on websites (Never purchased or downloaded by me though).



Give a try.

In Australia, and probably in other places, the word "penalty" is never used in contracts and the reason is that they are un-enforcable.

The law generally has no regard for enforcing penalties, which can be arbitrary amounts, but is more supportive of awarding damages which are a realistic approximation of the actual damage. So when there is a reference to LDs there is always or usually a statement to the effect that the parties agree that the amount represents a reasonable assessment of damages and specifically is not a "penalty".

Dear Milind,



"It Depends". Penalties are a standard condition of Contract. What Gary is suggesting is very practical and you are adviced to follow. Whatever penalties or terms of payment you have, carry it over to your subcontractor.



On the same note, the main contractor can not afford the losses that might be incurred because of the subcontractor. That is why, the answer to your question is "It Depends".



If the Main Contractor has a strong management team, then they will replace the subcontractor at the first sign of major failure, or even before that. If the subcontract value is small, then the amount of penalties would be small, but the amount of penalties on the main contract because of delay would be large. Hence, you need to negotiate a balanced contract with the understanding that the common goal is to deliver the complete scope by all parties.



With the proper experience, you can make sure that you have a good Balanced Contract with your subcontractor.



With kind regards,



Samer

Generally speaking, I would say a contractor should try and mirror the penalties in his client contract with his sub-contracts.

That way the risk of penalties is taken by those most responsible for incurring them.