The penalty clause: a practical drafting guide

A well-drafted penalty clause is not a boilerplate text copied from an online template, but an instrument calibrated to the real risks of the project. From BSA's experience in disputes on construction contracts, most challenges to penalties are not about the principle, but about the defective way in which the clause was drafted. A few drafting benchmarks:

Trigger events - the clause must identify precisely what triggers the penalty: exceeding an intermediate deadline, delay at handover, failure to remedy a defect within the time allowed, failure to attend the handover meeting. A generically worded clause (“any delay”) is vulnerable to interpretation and to challenge.
Calculation method - a fixed percentage per day/week of delay, applied to a clearly defined base (the value of the delayed works, not the total contract value, where the delay affects only one stage). The absence of a precise calculation base is one of the most frequent causes of disputes over quantum.
Proportionality - the penalty must remain reasonable in relation to the loss foreseeable at the date of signature. Manifestly disproportionate penalties risk being reduced by a court or arbitral tribunal (courts and arbitral tribunals may intervene where the penalty manifestly exceeds the loss); an excessively “armour-plated” clause can rebound on its author.
Cumulation with other remedies - it must be expressly stated whether the penalty may be cumulated with additional damages (for loss exceeding the penalty), with retention of the performance bond or with termination. Without an express cumulation clause, the party invoking the penalty risks being confined strictly to its amount.
Caps - an overall cap on penalties (usually a percentage of the contract value) protects both parties from unlimited exposure and is, in practice, a feature that makes the clause easier to enforce without challenge.
Calculation base and VAT - the clause must state explicitly whether the penalty is calculated on the value with or without VAT and whether it applies to the initial price or to the updated price (in the case of variations/additional works). Ambiguity on this point frequently gives rise to disputes over quantum, separate from the dispute over principle.
Enforcement mechanism - written notice, a cure period before the penalty is actually applied and the manner of set-off against sums due (deduction from invoices, retention from the bond, etc.).

Notes on enforceability and enforcement

A correctly drafted penalty clause does not automatically guarantee that it will be applied without challenge. In practice, BSA additionally checks: whether the obligation whose non-performance triggers the penalty is described in the contract with sufficient precision; whether the prior notice procedure was complied with; and whether the penalty applied is consistent with the parties' previous conduct (a penalty never applied in the past, for similar delays, may be more easily challenged as abusive or tacitly waived). For this reason, BSA treats the drafting of the penalty clause as part of the contractual strategy, not as a formula separate from the rest of the contract.

Contractual remedies: penalty clause vs damages vs retention of the performance bond vs termination

Remedy	What it is	Main advantage	Limitation	When it is used
Penalty clause	A pre-agreed sum/percentage for a specific delay or non-performance	No need to prove actual loss; quick to apply	May be reduced if manifestly disproportionate; requires a clear calculation base	Foreseeable and recurring delays (deadlines, handovers), where an automatic sanction is sought, without a separate process for assessing loss
Damages	Compensation for actual loss suffered, once proven	Covers the real loss, including any loss exceeding a penalty	Requires proof of loss and, as a rule, more time/litigation	Losses hard to anticipate at the time of signature or exceeding the penalty cap
Retention of the performance bond	Direct set-off against the bond provided (cash or bank guarantee letter)	Swift recovery, without depending on the contractor's solvency at the time of the dispute	Limited to the amount of the bond; may give rise to a challenge as to the merits of the retention	Remedying defects identified at handover or covering remedial costs incurred by the other party
Termination / express termination clause	Bringing the contract to an end, either under the contractual conditions (express termination clause) or by court/arbitral proceedings	Definitively resolves the deadlock where continuing the contract is no longer viable	Irreversible; a wrongly formulated termination may expose its author to liability	Persistent non-performance of essential obligations, after notice and a cure period, where the contractual relationship can no longer continue

In practice, these remedies are not automatically mutually exclusive - for example, termination may be preceded by the application of a penalty clause for the earlier period of delay, and retention of the bond may supplement compensation for the defects identified. For each case, BSA analyses which combination of remedies produces the best commercial outcome, not merely which is “correct” in the abstract.

A clear scope: what BSA covers, in which type of contract and project

For clarity, it is useful for contractors to know exactly where BSA's assistance sits, depending on the type of contract and project:

Subcontracts vs contracts with the main contractor - BSA assists both subcontractors (negotiating or challenging clauses imposed by the main contractor) and main contractors/general contractors (structuring contracts with subcontractors or managing chain disputes across several contractual tiers).
FIDIC vs non-FIDIC contracts - for projects using FIDIC conditions (Red Book, Yellow Book, etc.), BSA reviews the mechanisms specific to these forms ("Claim" notices, Engineer/Supervisor determinations, variation and extension of time procedures) and aligns them with the applicable Romanian law. For non-FIDIC contracts, drafted ad hoc or on the parties' own templates, the review focuses on identifying gaps and reconciling them with the Codul civil (Civil Code) and the practice of the Romanian courts and arbitral tribunals.
Private procurement vs public procurement - in private projects there is greater scope for contractual negotiation, and BSA can also be involved at the clause negotiation stage. In public procurement projects, the contracts are more rigid (tender specifications, award documentation, standard clauses), and BSA's role focuses on the correct interpretation and application of the existing clauses, the handling of notices and, where appropriate, challenges and disputes relating to the performance of the public procurement contract.
What BSA does not cover directly - award procedures for public procurement contracts (the tender/challenge stage before the CNSC), which are a distinct specialism; in such cases, BSA can refer the client to a targeted collaboration while retaining coordination of contract performance and any subsequent litigation.

Concrete deliverables and turnaround times

So that contractors can plan internally, BSA works to indicative timeframes, adapted to the urgency of the matter:

Preliminary review of the contract and documentation (contract, notices, correspondence, minutes) - initial response within 24 hours at most of receipt of the request, in line with the firm's standard commitment.
First draft of a strategic document (notice of default, notice activating the termination clause, legal opinion on a penalty clause or on a request for termination) - usually delivered within 3–5 working days of completion of the document review, depending on complexity.
Drafting or full review of a construction/subcontracting agreement (including clauses on deadlines, acceptance, variations, guarantees, penalties and termination) - first draft within 5–10 working days, followed by review cycles with the client.
Review cycles - as a rule 1–2 rounds based on the client's comments, with a response time of 2–3 working days per round.
Site support / support during works - for live matters (contested acceptances, disputed variations, cross-notices), BSA can provide ongoing support at a steady cadence, with availability for urgent points the same day or the next day, and periodic reviews of the correspondence and evidence as the matter develops.
Representation in litigation/arbitration - the timeframes depend on the procedure (court or arbitration) and on the timetable set by the court or arbitral tribunal, but the internal preparation of the case (claims, statements of defence, expert reports) follows the same drafting and review cycles described above.

These timeframes are indicative and may be adjusted according to the complexity of the matter and the urgency communicated by the client, but they reflect how BSA structures, in practice, the relationship between speed of response and the quality of the legal analysis.