Overbudget penalty for contractors

[Stephen R.]

I recently decided to add a deadline penalty for a contractor that does not meet their agreed upon project completion date. Would a budget penalty be appropriate as well?

I know many contractors will underbid a project in order to secure the job only to inflate the cost before completion. I would think a 15% or 20% contingency would be appropriate but that anything beyond that shows the GFE was nothing more than wildly speculative. 

Would a penalty, or a firm fixed price, be appropriate? Does anyone have any clause language I can use to amend my contract?

[Dylan Long]

You could go with a fixed firm price, but ultimately you might pay a bit more than it otherwise would have cost to have those assurances, as they'll pad their bid to cover unknowns.

Unless you're willing to pay a bonus if they come in under time (and of sufficient quality) I'd be hesitant to try and push a penalty.