Why have late penalties if they are so low that contractors would simply choose to pay them rather than complete a job on time?
The current situation with construction delays at Kansas University's Memorial Stadium raises questions about exactly how effective penalty clauses are in construction contracts.
The KU athletics department received approval on Monday to pay the contractor who is building a new press box and spectator suites an extra $300,000 to complete the project in time for the Jayhawks' football home opener on Sept. 11. It's worth it to the athletic department to spend $300,000 to help pay overtime for workers because it stands to lose as much as $1 million in revenue if the stadium project isn't completed on time.
The situation is ironic, however, because, according to the contract, the builder actually should be paying KU if the project is late, not the other way around. The contract required Walton Construction Co. of Kansas City, Mo., to pay a penalty if the project is completed late. Officials didn't say how much that penalty was, but it was small enough that the contractor had decided to pay the penalty rather than spend the additional money needed to complete the project on time.
In such a case, it doesn't seem that monetary penalties for late construction have a lot of meaning. Why have late penalties if they are so low they don't provide a significant incentive?
A similar situation arose in 1995, when city residents were awaiting the opening of the new Lawrence Aquatic Center. In that contract, Merit Construction Co. of Kansas City, Kan., was responsible for paying the city $300 a day for every day after the May 15 deadline the pool wasn't "substantially complete." That standard wasn't met until July 15, well into the swimming season and 61 days after the deadline.
If the city had charged the contractor for all 61 days, the bill would have been $18,300. As it was, the city decided that because of unanticipated soil problems, the contractor only deserved to be penalized for 29 days or $8,700 for the $2.88 million project.
Delays in completion of a road project, for instance, usually result in inconvenience. But in projects like the stadium and the pool, delays are related directly to lost revenue. The pool had a banner year its first summer, but the city estimated it lost as much as $80,000 because of the delayed opening. With both the stadium and the pool, construction delays also are a public relations issue. The city had many unhappy swimmers; the KU athletic department will have many unhappy football fans if the boxes aren't completed on time.
Higher late penalties, of course, may scare off a potential bidder or cause a firm to submit a higher bid to cover itself in case of unexpected delays. Perhaps it makes sense to offset penalties for being late with incentives for builders to complete a project early. The $300,000 the athletic department is giving its contractor is, in effect, an incentive being added during the course of the contract.
KU was up against the wall on the stadium project. A cynical person might even speculate that was exactly where the contractor wanted athletic department officials to be. In any case, construction penalties on the stadium and any number of other projects weren't enough to ensure timely completion of the project. Bonuses for early completion would be a nice-guy approach, but higher late penalties that are strictly enforced might also get the job done -- and done on time.