Abstract

Setting contractual penalties in construction procurement requires balancing the interests of both parties to the contractual relationship (the contracting authority and the contractor). A contractual penalty that distributes the burden of the risk of contract performance disproportionately to the amount of remuneration to which the contractor is entitled is not fulfilling its role. Penalties should therefore be set after calculating the future hypothetical damage that the ordering party may suffer as a result of the non-performance or improper performance of the contract. Unfortunately, things are usually different in practice, with the amount of contractual penalties in most cases of construction procurement set completely arbitrarily, without any rational connection to the actual damage that the ordering party might incur. A certain limitation of this type of practice is the obligation to include provisions in the procurement contract specifying the total maximum amount of contractual penalties that can be claimed by the parties.