Are Caring about the Penalty Clause in a Mega Construction Project? 3 Questions Need to be Addressed!

Gleeym offers in-depth integrated project schedule and cost risk analysis.
Gleeym offers in-depth integrated project schedule and cost risk analysis.

Construction Project - Better way to Envisage Your Project's Future. How? 4 Graphs are Enough to Illustrate!

Key Words

Construction, penalty, Delay, Contractor, Client, Owner, Construction Project, Project Delivery, Project Controls, Brown Field, Green Field, Cost Estimates, Schedule, Integrated Cost Risk Analysis, Risk Register, Execution, Planning, Remote Area, Skilled Labor, Material Handling, Bulk Material, Construction Equipment

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Delays in construction projects can lead to hefty penalties. These cost implications shouldn’t be overlooked and should be planned for in a variety of ways by both contractors and subcontractors. The importance of understanding and planning for these delays shouldn’t be underestimated, considering that contractors and subcontractors are often the ones responsible for paying the penalties. By understanding the consequences of delays, you can work to prevent those delays and avoid paying the penalties!

Read article on Project Cost and Risk analysis:

Case Study

Access Road Construction Project that is required to be done well before commencing process plant construction. The project schedule, schedule and cost risk analysis have already been discussed in the previous article.

As per the penalty clause in the contract, $5,000/day penalty will be imposed to the contractor in case of delay for each day after the target date. Interestingly, there is no cap on penalties.

Top Risks

The top identified risks are:

  1. Flash Flood
  2. Delay in Delivery of Material
  3. Unavailability of Skilled Labor


Is it important to focus on Access Road Construction for mega Complex remote project? 4 Figures Depict a Complete Story!

Important Consideration

The construction industry is a high-risk, high-reward industry. It’s important for builders, contractors, and subcontractors to have a thorough understanding of the full cost implications of delays in construction projects. Understanding the potential penalties for delays can help your business plan better and potentially reduce your overall cost.

Construction delays can be a result of many different factors, but they are rarely the fault of the contractor doing work. The best way to avoid being placed in that situation is to make sure your project is documented with proper project controls. One of the factors to consider when maintaining project controls is the role that cost plays. It’s hard to estimate cost without knowing the impact of the delay you’re facing, which is why it’s so important to analyze the cost risks before projects begin. It’s also vital to integrate the risk analysis into your schedules and plans so that you can have well-executed plans that are also cost conscious. By making sure you understand cost implications before you plan, you can be sure that you have a plan that works well for your business!

Risk assessment for a mega complex construction
Pic. 1 - Risk Assessment for Mega Complex Projects

Delays can happen to anyone who’s involved in construction projects. Contractors, subcontractors, and builders are required to understand the cost implications of delays. Knowing the penalties associated with uncompleted projects can provide valuable insight into how much money is available to complete a project. If you’re involved in a construction project, you should be aware of the different types of penalties that may be implemented. The most notable of these penalties are completion delays, mobilization delay, and liquidated damages.

Construction risk
Pic. 2 - Construction Risk Assessment Services by GleeYM

Project Scenario

Project complete target date is 26-8-2021 with the cost estimates of $9 M.

The project owner put a penalty clause that if the project delays after the contractual deadline i.e., 26-9-2021, then there will be a penalty of five thousand ($5,000) dollars per day.

This analysis provides an equal opportunity to the client and the contractors including subcontractors to revise the schedule accordingly and negotiate the timelines and the budget.

Why to develop a model and run a Monte Carlo simulation? The simple answer is to forecast your project execution while planning in present.


There are three important questions that can be addressed for a client and a subcontractor:

  1. What are the chances that the project schedule will be delayed, and cost overrun?
  2. What will be the 50th percentile for a penalty in case of project delay?
  3. What will be the probabilities of occurrence of different possible outcomes for a penalty?

Quantitative Risk Analysis

GleeyM Offer services to identify risks and perform Quantitative Schedule Risk Analysis (QSRA) and Quantitative Cost Risk Analysis (QCRA) for mega complex projects!
Probability distribution graph by
Pic. 3 - Probability Distribution for a Project Schedule

There is 50% (mean) chance that project will be delayed by 62 days. Furthermore, there is 80% chance that project will be delayed by 85 days.

Project cost overrun distribution graph by
Pic. 4 - Probability Distribution Graph for a project Cost

There is 50% chance that the project cost overrun will be $4.474 M. Whereas cost overrun will be $3.194M between P50 – P80.


Penalty S-Curve by
Pic. 5 - Penalty S-Curve

It’s crystal clear that based on the current schedule and mapped uncertainties and risks; the penalty will be substantial.

As per the contract, the penalty will be $5,000 per day. Therefore, there is a 50% chance that the penalty will be $160 K in case of project delay beyond the contractual deadline of 26-9-2021.

What if a project delays further? Then from a distribution graph, there is an 80% chance that the penalty will be $325 K.

The question is what will be the monetary benefit to the contractor? How to address it while negotiating the contract and mitigate plans during the project planning? In case of delay, will there be an impact on CAPEX? Will there be an impact on OPEX?

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Integrated risk analysis is an equally important for both Client and Contractor. Risk Based Decision Making is required to demonstrate ALARP/ALARA. By incorporating what if analysis in ITB, contracts and planning will definitely help to forecast project health and EVM.

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