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 happens should I miss that
date, what good is the promise? This lack of consequences helps
fuel the general hilarity with which the public responds to
Imagine, though, the power of making a voluntary promise
regarding your performance on a job, and backing it up with
real consequences. Imagine telling a client: "I acknowledge
that time is a valuable commodity to us all, and I want you to
know that we will be done by July 31 or we will be deducting
$100 a day from our final bill." You'll have the client's full
attention, and you'll have a competitive advantage over
contractors with more elusive completion dates.
Does this strategy really work? Some
industries that have used service guarantees to good effect
were profiled by Christopher Hart in a July 1988 Harvard
Business Review article. In the most outstanding example,
if you are a customer of BBBK, a pest exterminator in Miami,
Fla., you don't pay for anything until all the pests are gone.
On top of that, if you are ever dissatisfied with the company's
service, BBBK refunds your money and pays a competitor of your
choice to take over the job for the next year. That's not all:
If your facility is closed down by the Board of Health because
BBBK was unable to eradicate the pests, the company pays all
fines, all lost profits, and an extra $5,000 on top.
What does BBBK get in return? They get to charge up to ten
times more than any other exterminator in the area, and they
still get the biggest share of their market. In 1986, the
company paid out $120,000 in self-imposed "fines" on sales of
$33 million. For small remodelers doing a volume of $500,000,
that works out to around $1,800 -- possibly the most effective
advertising and marketing money you'll ever spend.
Designing the Agreement
Before you put a completion date on the table, you need to pay
attention to how well your schedules run now, and what can be
done to improve your timeliness before you can turn it into a
Know your track record.
Monitor how long it takes you to do a variety of projects. Be
sure to stick to facts, and don't let wishful thinking get in
your way. I can do a complete kitchen remodel in ten weeks, and
a complete bathroom takes five weeks. Could I do the work
faster? Maybe, but the fact is, I don't. Don't make a judgment,
just report the historical data.
Completion vs. substantial completion. Be
careful which of these terms you use. Completion means entirely
done and out of there, with no return trips for missing items.
Substantial completion means the space is usable for its
intended purpose, but some work may be unfinished. For example,
the kitchen is usable, but the cabinet handles aren't installed
yet because they were ordered in the wrong color.
I recommend starting with the term "substantial completion"
because it leaves you more wiggle room. But it also dilutes the
selling power of the guarantee, so you may want to change to
"completion" after you've had a chance to see how the service
Under-promise and over-deliver. If the job
will take eight weeks, I put the substantial completion date
twelve weeks out. I don't want the job to be open-ended, but I
need to leave enough time to do a good job, even if something
screws up. Clients will remember the date you list as the
completion date, as well as whether or not you hit it. They
usually forget that you padded the schedule a little.
Although Christopher Hart believes effective service
guarantees should be unconditional, I think you need to include
some common-sense measures so that you are not at risk from a
client's failure to perform. Circumstances that can extend or
waive the substantial completion date include:
Changes in the scope of the project. Extra
work takes additional time to complete. Every change order
should note specifically the new completion date. To make sure
I don't forget to factor in an extension of time, I include a
"Revised Completion Date" line on my change-order forms.
Product selections. It's easy to blame clients
and their indecisiveness, but it's your job to inform clients
of the consequences of their indecision. "Take as long as you
need to choose that light fixture, but I need to remind you of
two things: We'll still complete our end of the agreement
within 15 days of having the fixture on site, but the
electrician quoted the job based on installing everything at
the same time. I'll need to charge you extra to have him
install one later, and extend the completion date by three
weeks." This can be hard to say, but it's something that needs
to be pointed out in crystal clear terms.
Fire, theft, and vandalism. These are
circumstances beyond your control.
Acts of God. This refers to blizzards, floods,
lightning strikes, plagues of locusts, and other events over
which you have no control. (A better paying project on the
other side of town will not fly as an Act of God.) I suggest
that you meticulously document every such act -- in my 17 years
of business, I have yet to encounter one that affected a
completion date, but there is still time.
Money Well Spent
In his article, Christopher Hart also stated that if you never
pay out any money against your guarantee, it's too weak to
really be a guarantee. In about ten years of including
liquidated damages in my contracts, I've paid out about $1,500.
Maybe it's time to raise the bar a little. It's a good use of
marketing money and I budget it that way.
I've also talked with contractors who believe that if your
client insists on a liquidated damage clause, you should insist
on a bonus clause. If you're a day late, they get $100; if
you're early, you get $100. I think this strategy only serves
to eliminate the value of the service guarantee. Because you
set the schedule, there's no credibility -- you could rig it in
your favor every time.
A liquidated damages clause is not something to fear; in
fact, including such a clause in your contract shows clients
that you take customer service seriously, and that you back up
the talk with real consequences.
Byggmeister, a remodeling company in Newton, Mass.