Penalty Clauses

Mind you, I'm not a fan of using them as I like to keep the relationships with my panel builders on good terms, in fact, I've never used one before, but the subject came up regarding a job we have out for bid right now as this job absolutely must remain on schedule and we have been burned before.

What kind of verbage have you all seen or used yourselves and what is fair and reasonable?

What use is a penalty clause if it must remain on schedule ? if the supplier builds in a contingency for the penalty - you're no better off.

Been there, done that, its tough. Have you tried the incentive method? Shorter payment terms if they are on-time? Like 5 days verses the standard 30 if they beat the due date.

Nearly Impossible

A penalty clause to a panel builder is nearly impossible to enforce and any panel builder would be an idiot to agree to one. The reason is that there are too many things beyond his (her) control.

For example, you are bulding panels that use SLC 5/04's. Rockwell Automation's production plant for 5/04's goes on strike. (Sorry to bring up THAT thread again.) Or there is hurricane damage to the plant. Or a serious QC issue halting release of product. Reasons ad nauseum...

Are you really expected to make your own SLC 5/04's? Are you supposed to buy them on eBay to get by? How can you get your panels done if the hold-up is due to the delays originating from "others".

Panel builders do not really "manufacture" anything in the sense that they do not take "raw materials" and "refine" them. They are simply "job shop" assembly areas.

To make sure a project gets done, you must plan and build it in milestone stages that get individual inspections or checkpoints. (progress payments even?) You must also develop a working, trusting relationship with the panel builder.

Some sort of price incentive pro-rated by time will sometimes give a panel-shop a little kick in the butt. But, as stated already, no respectable panel shop will agree to a penalty clause on a delivery date.

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Dealing with contrractors I come across this all the time. There are some things you need to be aware of:

Force majeur is the group of exceptions that Jimmy mentioned. This usually includes flood, fire, acts of God, acts of war, and things beyond the supplier's reasonable control. This is pretty standard. If your panel shop isn't sharp enough to include these exceptions in the agreement they may be too stupid to do your work anyway.

Liquidated damages is the best basis for any penalty. The term usually refers to the cash equivalent of the damages to you (or your customer passed back to you) for lost revenue, increased operating expense, whatever. You and the panel shop can agree to anything, but if there isn't a reasonable basis for the amount selected it is harder to make it stand up in court.

Fair is fair. If you are supplying some material to the shop, the clock can't start ticking until he has everything in his hands.

Incentives for faster performance, as mentioned above, are a good way to keep your supplier from feeling abused. Usually the incentive is some percentage of the penalty.

We are an Integrator and panel shop together so it kinda works out for us since we can steal the PLCs and Screens when they come in. So we can start doing the testing even before the panel is getting built. The panel shop side of this business is already a money loser we hope to make it up in the programming side of it. I dont think it is fair or right to try to push your panel shop, like everyone said before there IS stuff that is out of our control.

It can be advantageous to the panel builder to have a contract with specified liquidated damages - generally a percentage of the contract price, typically 5% - 15%. Without it, the contractor could be left open to being sued for damages beyond the contract value.

And how about balancing the penalty for late delivery with a bonus for early delivery?

Here is what we came up with. I think it is more than fair. What do you all think?

The panel builder is invited to submit two bids. The first bid is a penalty-less bid. The second bid is optional but we will give a favorable weighting to bids if the optional bid is submitted.
It gives the panel builder the opportunity to earn more money by submitting a higher bid with a penalty clause, he gets to keep the extra if he meets the deadline. If he misses the deadline then the penalty will apply. We set the dealine to make sure we can get the panel on time (3 door 72x98 (1830 x 2490) panel) with a few days to spare. We are providing all of the hardware and the panel, etc. except wire/duct/screws/labels, so the panel builder's exposure is minimized (plus we don't have to pay component mark up as we get quite a bit of it at OEM prices anyways.)

I hope that it will make both our management and our panel builders happy.

That is more than fair and by supplying commerical items, his money isn't tied up for any period of time.

Alaric said:

Here is what we came up with. I think it is more than fair. What do you all think?

The panel builder is invited to submit two bids. The first bid is a penalty-less bid. The second bid is optional but we will give a favorable weighting to bids if the optional bid is submitted.
It gives the panel builder the opportunity to earn more money by submitting a higher bid with a penalty clause, he gets to keep the extra if he meets the deadline. If he misses the deadline then the penalty will apply. We set the dealine to make sure we can get the panel on time (3 door 72x98 (1830 x 2490) panel) with a few days to spare. We are providing all of the hardware and the panel, etc. except wire/duct/screws/labels, so the panel builder's exposure is minimized (plus we don't have to pay component mark up as we get quite a bit of it at OEM prices anyways.)

I hope that it will make both our management and our panel builders happy.

Click to expand...

That's a big panel.
Are they doing the field wiring as well or are y'all doing it in house?

I'll be doing the field wiring. In the hydraulic sludge pit no less. One of those times to get down right filthy. I'll probably be able to get Bubba to help out a bit.

Ugggh. Got a good set of coveralls? Nice part about a new factory, there's not a hydraulic mess anywhere right now. 6 months to a year, that might be a different situation.

Note penalty clauses are two way actions,
if you have a penalty clause for late delivery then it has to be balanced with a bonus clause for early delivery. If you do not offer the bonus part the penalty clause may not be enfoceable.

Alaric said:

Here is what we came up with. I think it is more than fair. What do you all think?

The panel builder is invited to submit two bids. The first bid is a penalty-less bid. The second bid is optional but we will give a favorable weighting to bids if the optional bid is submitted.
It gives the panel builder the opportunity to earn more money by submitting a higher bid with a penalty clause, he gets to keep the extra if he meets the deadline. If he misses the deadline then the penalty will apply. We set the dealine to make sure we can get the panel on time (3 door 72x98 (1830 x 2490) panel) with a few days to spare. We are providing all of the hardware and the panel, etc. except wire/duct/screws/labels, so the panel builder's exposure is minimized (plus we don't have to pay component mark up as we get quite a bit of it at OEM prices anyways.)

I hope that it will make both our management and our panel builders happy.

Click to expand...

This is basically how I was doing it when I was in business but the deadline part was based on a time frame of recieving all stated components that worked properly, in other words a delivery date had to be set AFTER all parts arrived and were tested.

As long as I can obtain the components I have never missed a deadline BUT on the other end of that I have had panels ready for delivery and could not get them accepted, for periods as long as 6 months.

I once had an issue over a panel with drives connected by DNET, the add-on cards were the wrong ones and it took extra time to get them, note the customer supplied the parts but wanted to penalize me for it. The main reason I did not know the cards were not the proper ones is because I was originally just given one, without DNET to use for mounting dimensions, the plc was the same. They did not order the actual drives and plc until later.

It is hard to say what is fair and what is not.