Traps on the money trail

In the current climate of collaboration and with market pressure to fast-track the completion of projects, incentive mechanisms in contracts are back in vogue.

A contract may expressly provide that a contractor is entitled to an addition to the contract sum if it completes the works before the specified completion date but, as the clause below highlights, care is needed in formulating a bonus mechanism and reflecting this in appropriate wording so each party is clear about the nature of the bonus and when it is triggered.

A contractor presented with this clause might well be puzzled and seek guidance on just what it should expect and when.

Here are a few general legal thoughts:

• The bonus should be identifiable – for example, a fixed sum – or calculable. If it is a percentage, is this by reference to the agreed contract sum fixed at the outset or increased by project variation costs? If an escalating incentive mechanism is used so that the bonus increases in relation to the completion date, the relevant amounts should be clearly calculable at the applicable stage of completion.

• What triggers the entitlement to the bonus and, if different, when it is payable? A trigger established by issue of a certificate of completion by an independent third party administering the contract is commonly seen. Where determination rests with the employer, arguments can arise, for example, over late certification or notification.

• A contractor may claim damages where an act on the part of the employer (or those for whom it is responsible) prevents the contractor from earning the bonus. The measure of damages will not necessarily be the same as the amount of the bonus.

• Where the contract has confusing language, the court will look to interpret the wording having regard to its view of what the parties’ intended objectives were. This could have an uncertain outcome.

• Several industry standard forms contain a simple bonus mechanism. Take care when completing these. For example, the JCT Major Projects form includes a bonus calculated at a daily rate for early practical completion. Consider whether the bonus should apply for each day the project was early, or whether there should be a maximum period in respect of which the bonus should be payable, or a financial cap.

If the project is to be completed in phases, consider whether the bonus should apply to each section or a particular section or completion of all sections. Modification of the standard form may be needed to reflect commercial drivers for early completion.

• Is there a need for a particular dispute resolution mechanism, or will the general provisions for contract disputes suffice? Where bonus mechanisms are complex and relate to valuation criteria outside the contract, expert assessment or determination may be valuable.

• Does your clause “say what you mean and mean what you say”? Commonly, bonus arrangements are agreed at a late stage and documented in short form. A final read through is always wise. The consequences of an incorrect currency notation or a misplaced decimal point may be significant. As in the clause below, check the mechanism isn’t lost in translation.