The thought of voluntarily adding a penalty clause to your construction contract may seem like heresy, but it can actually make good business sense. In legalese, it is called a "liquidated damages" clause and allows the homeowner to deduct a preset amount from the final payment for each day the work extends beyond the completion date. The dollar amount of the damages approximates the value of out-of-pocket expenses incurred by the client because of the delay. While most contractors will wince at the thought of having to pay a predetermined amount of money if a job runs over schedule, without such a clause a bad situation can quickly take a turn for the worse. For example, let's say that you're a week late finishing a kitchen. The clients could reasonably argue that they incurred additional expenses by having to eat seven restaurant dinners. They could, in fact, dine at a very expensive restaurant each of those nights, invite friends and family along, too, and submit a claim for $500 per day against the final payment. Such a claim might not hold up in court, but it could take many expensive legal hours to get them to back down. A liquidated damages clause in your contract, on the other hand, would cap the amount you would have to pay out at much less -- say, $100 per day.
A liquidated damages clause is even more valuable when I present it as a service guarantee and employ it as a sales tool. This service guarantee is more than a mere promise that I will complete the job on time, because it carries a penalty if I break my word. After all, it's easy to say I'll be done by the end of the month, but if nothing...
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