There are few topics that get more debate in real estate and construction circles than this one: Should you use late penalties in your contractor agreements?

We get it. Jobs fall behind. Timelines slip. And when you're staring down interest payments, holding costs, or frustrated buyers, it's tempting to reach for the stick. For a lot of investors, that stick looks like a penalty clause.

But here’s the uncomfortable truth: penalty clauses might give you a short-term sense of control, but they often create long-term problems that are much harder to fix.

The real issue isn’t just that they create fear. It’s that they lead you to build your entire team on the wrong foundation.

The Illusion of Control

Let’s walk through what happens when you use penalties to enforce performance.

You hire a contractor. They start slipping on schedule. You point to the clause. Suddenly, they’re more responsive. They pick up the pace. You breathe a sigh of relief and think, "This is working."

But is it?

What you’ve actually done is incentivize someone to act outside their natural performance level under pressure. They're not a great contractor — they're just afraid of the fee.

So you keep working with them. And on the next job, the same dynamic plays out. They rush. They avoid honest conversations about issues. They cut corners to avoid penalties.

And before you know it, you’ve built a team of contractors who aren’t excellent — they’re compliant. That’s not a team. That’s a liability.

You're Always at the Negotiating Table, Not the Job Site

Here’s another problem with penalty clauses: they keep you locked in negotiation mode.

Who decides what counts as a valid delay? A sick crew member? A truck that won’t start? A delivery that didn't show?

With late penalties in place, every hiccup becomes a debate. You spend more time arguing over accountability than actually solving the problem.

It puts you and your contractor on opposite sides of the table, not the same team. Instead of collaborating to move the job forward, you’re constantly watching your back and covering yours.

That’s not momentum. That’s friction.

Good Contractors Don’t Want to Sign Them

I’ll speak from personal experience here: I would never sign a contract with a late penalty. And every good contractor or subcontractor I work with wouldn’t either.

Why? Because we know how construction works. We know how much can go wrong that we don’t control.

We can manage employees, but we don’t own them. We can schedule deliveries, but we don’t drive the trucks. We can communicate with subs, but we don’t hold their hands to every job.

No matter how well we plan, we understand the reality: delays happen. And trying to pre-define every exception in a contract is a losing battle.

It turns what should be a partnership into a defensive standoff.

Many Delays Start on Your Side

Here’s something most investors don’t want to admit: a large number of delays don’t start with the contractor.

They start with you. With unclear scopes. With slow decision-making. With change orders. With miscommunications about materials. With late checks or last-minute revisions.

And yet, while the contractor gets penalized for being late, you aren’t penalized for any of that.

It’s an imbalanced relationship. You're expecting perfection from them while giving yourself room to adapt. And the moment something slips, the contractor is at risk of losing money, even when they were reacting to your moves.

That doesn’t just create resentment — it destroys trust. And without trust, the project will always suffer.

Great Teams Aren’t Built on Fear

Fear-based systems don’t produce excellence. They produce hesitation, blame-shifting, and minimum effort. They kill the kind of proactive ownership you want from your team.

What builds great teams is alignment.

You lay out clear expectations.

They perform to the best of their ability.

And then you decide if that performance is what you want to work with again.

That’s it.

No threats. No fines. Just real accountability based on results.

So Why Don’t We Use Late Penalties?

Because we don’t want to waste time managing behavior. We want to spend time building relationships.

We don’t want to distort outcomes with fear. We want to reveal the truth about someone’s capability, so we can decide if we want to bring them back.

We don’t want to penalize our way to the finish line. We want to collaborate with people who care about doing the job right.

What We Do Instead

Here’s how we actually run our projects:

• We set clear scopes, expectations, and timelines upfront.
• We communicate consistently throughout the job.
• We address issues quickly and directly.
• And if someone underperforms, we don’t fine them. We finish the job and never call them again.

This process filters for the right people. Over time, you build a team that doesn’t need penalties to perform. They do the job well because that’s who they are.

Final Thought: Fire Fast. Build Right.

If there’s one shift we recommend, it’s this: Stop trying to fix bad contractors with good paperwork. You can’t legal your way to a better crew.

We understand the frustration. We’ve been there. When a contractor drops the ball and your whole schedule is wrecked, it’s tempting to say, "Never again" and add another clause to the contract.

But that reaction leads you down a slippery slope. Instead of building trust, you build tension. Instead of growing a team, you grow your own resentment.

The faster you fire, the faster you find the right ones. And the right ones don’t need to be threatened. They want to win with you.

Inside TRP, this is how we build. With systems that work, teams that perform, and relationships that last.

If this blog resonated with you, you’re probably our kind of builder.

Check out the TRP Membership → https://www.therehabbersplaybook.com/TRP-membership