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Payment for penalties or liquidated damages is difficult and time consuming. However to motivate your contractor to perform I on time/at cost, I would suggest an incentive such as in an FFP incentive contract or FFP with award fee type contract. Certainly equitable adjustment terms typically found in CHANGES clauses are also standard so do not discount the opportunities for modifications during performance.
I speak in generalities however and without knowing the circumstances it is difficult to be dogmatic or provide advice.
In big EPC oil and gas projects, LD or penalty will not proactively protect the client's needs/interest. However, it act as a deterrent to some extent and EPC contractor always states liability will be limited and it is finally upto the client to ensure their interests are protected and organization realizes the "business value". This requires organization capability in terms of identifying the risks, data quality, capability of EPC contractor versus price charged by EPC contractor.
In a contract, everything makes a difference so you have to strike a balance between protecting your company's interest and making sure you are being fair with the contractor.
Bonus Schemes goes both ways in big contracts (i.e. You share losses and share savings based on defined percentages) so it really depends on the situation.
1- We define a ceiling price.
2- If the contractor goes below this price then the savings are shared between the client and them based on an agreed percentage like 30:70 or 40:60.
3- If they go above the ceiling price then the losses are also shared based on the same percentages.
This is a two way street.
In some cases, we do not include no. 3 in case we have prior successful business relationship with the GC or Construction Manager.
Hope this helps.
I ever advocate for a win-win situation. But it will depends on the organization culture.
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