Bill Griffeth's article, "Cure for Terribly Slow Ivan: The Carrot and Stick" (Sept. 9), illustrates one of the potential problems householders may face when dealing with construction contractors. Fortunately for Griffeths, his carrot and stick, the "bonus/penalty clause," appears, eventually, to have worked. Unfortunately for other householders, the bonus/penalty clause will not work.
While the general concept of the bonus/penalty clause is sound, one must be careful to apply it so as not to render it unenforceable in the eyes of the law. The "penalty" portion of the bonus/penalty clause, more appropriately termed a liquidated damages clause, liquidates or defines in advance the damages the householder will suffer in the event the contractor fails to complete the project on time.
To be enforceable, the amount of liquidated damages must, at the time it is made, be a reasonable estimate of the actual damages the householder will suffer as a result of unexcusable contractor delay. If the amount of liquidated damages is construed to be a penalty rather than a reasonable estimate of householder damages, the clause will not be enforced.
Part of the folklore of the construction industry is that there must be a bonus side to the bonus/penalty clause in order for the liquidated damages clause to be enforceable. This is not the case. While a householder may wish to include a bonus clause to encourage early project completion, such a clause is not necessary to render the liquidated damages clause enforceable.