I had people suggest this penalty if not completed on time thing when I remodeled my kitchen. I opted not to do this because if the contractor ran into surprises and things took longer than expected, I didn't want him to rush to done to avoid the penalty. I wanted the job done right. So I did my homework and got an excellent GC and everything was done as scheduled without the threat of a penalty. I also did not pay any bonus - I just paid immediately when due - which I think these guys very much appreciate.

I don't usually add a penalty clause to my contracts, and gibby3000 made some good points about this, however I would add an estimated completion date (if you haven't already). This way if it ever comes into question, you have something to go by as to what was expected by both parties.

I personally haven't paid bonuses, but if you plan to do this, I wouldn't add it to the contract ahead of time. This way you are not obligated to pay extra, should you be disappointed with the work. I also wouldn't pay anything extra before the entire job has been completed. If you are referring to a bonus clause to compel the contractor to finish by a certain date, it's not usually included in an ordinary residential remodeling contract. (It's more often used by large businesses or by a town, for instance, when it may be very costly if the job is not completed in time.) A payment schedule is usually sufficient incentive for a contractor to keep the job moving.

By the way, it's great that you are adding things to your contract. Everything that is agreed to should be included in the terms. The who, what, when, where, why, how and how much should all be spelled out. Also, make sure any important dimensions, measurements and types or quality of materials to be used (if provided by the contractor) are included.

Nothing can be unreasonable or unbalanced, excessively favoring one party over another. If it is, a judge will toss the contract clause or the contract in its entirety should you ever end up in litigation.

There's normally an expected date of completion. After that date, there's usually a grace period before any performance penalties come into play. The length of grace depends on the scale of the project (replacing a toilet seat versus remodeling an entire bathroom), the work conditions (site access, indoor/outdoor, high-rise co-op versus single family residence, etc), and if it's new construction or remodeling. New construction can be straightforward once excavation is complete and the foundation is in. Remodeling can be a can of worms whenever a wall or floor is opened up.

After the grace period you can add a penalty. I recommend something small, roughly 5% or so. Then after another length of time, the penalty can be increased to a total of 10%, then later to 15%, etc.

Realize that when you start getting into penalties and holding parties' feet to the fire, you need to stay on top of any change orders, or changes to the initial scale and design of the project. A contractor will hold you to anything you do that causes delay to the project, and rightfully so.

If he's waiting for a faucet that you ordered off the internet to be delivered, that's your delay. If you ordered the wrong material, or an insufficient amount, or a certain shower valve without its accompanying trim kit, etc. If you change the design, it's a change order. If someone catches the flu...you get the flu and prevent them from creating dust in your house for a few days...or a sub gets the flu and can't work for a few days...common sense should prevail, but in the end the legal document is what can rule the roost.

If penalty clauses are in effect, then performance bonuses can be asked for by the contractor.

I built a house several years ago for a married couple, both lawyers. While they were acquaintances, they were a bit difficult. Were they not friends, I wouldn't have built for them. They modified the contract and insisted on several scaled penalties in case of late completion. I in turn added a few scaled bonuses for early completion bonuses.

I told my crew that any late penalties we incurred would come from my pocket, but that they would affect year-end profit sharing. I told them that any early completion bonuses would be divided up amoungst themselves and go right into their pockets.

While we didn't work any faster, and no shortcuts were taken, the guys did put in extra hours here and there, and they collected. Big.

I'm not a big fan of bonuses or penalties, only because I prefer a friendly and harmonious "us" relationship on site versus what could otherwise be a "me" versus "you" relationship. You can still have a harmonious relationship with a clause-filled contract, but it can create stress should the time line be threatened.

Where the situation can be flipped around is in city living, in a co-op or high-rise. We have rigid work restrictions in cases like that, and penalties are almost the norm.