LEGAL IMPLICATIONS IN THE USE OF PENALTY AND BONUS PROVISIONS OF HIGHWAY CONSTRUCTION CONTRACTS: THE USE OF INCENTIVE AND DISINCENTIVE CLAUSES AS LIQUIDATED DAMAGES FOR QUALITY CONTROL AND FOR EARLY COMPLETION

Recently a number of states have expanded the application of incentive/disincentive (I/D) clauses beyond the concept of assuring a timely completion and are selectively using them to control the quality of performance or materials as incorporated into the work. Early examples of I/D clauses include adjustments up and down (plus and minus) in payment for materials to reflect the content of quality components. This paper does not advocate for or against the propriety or use of I/D clauses in any particular situations. Instead, it focuses on the legal considerations and implications that should be taken into account before deciding whether or not to employ such a clause as to a particular aspect of contract performance. At the same time this paper assists in drafting I/D provisions and in deciding to what extent these clauses will be enforced by the courts in a given situation. The legal basis for the I/D clause rests largely on the established foundations and enforceability of the liquidated damage provision found in the typical construction contract. Therefore, a brief review is made of the authority and vitality of the law of liquidated damages as it pertains to the field of construction contract law. A review is also made of additional concerns, constitutional, statutory and judicial, that can impact I/D clauses.