Contractual Penalty in Public Procurement Law

A contractual penalty is a fixed lump-sum payment stipulated in the public contract for breach – in particular delay or defective performance by the contractor.

Definition: A contractual penalty (in Austria: "Pönale") is a contractually agreed lump-sum payment obligation of the contractor that falls due upon the occurrence of a specified breach of contractual duty – in particular delay or defective performance – without the contracting authority having to prove a concrete loss.

Last updated: January 2026 · Legal basis: § 1336 ABGB, BVergG 2018, §§ 339 et seq. BGB, § 11 VOB/B

What is a contractual penalty?

The contractual penalty – referred to in Austrian legal usage as "Pönale" – is a central instrument for securing timely and quality-compliant performance in public procurement. It is stipulated in the tender documents before tenders are submitted and so automatically becomes part of the public contract.

The key advantage of the contractual penalty from the contracting authority's perspective is that, when the secured event occurs (e.g. exceeding a completion date), the contracting authority does not have to assert and prove the specific consequences of the loss. The penalty is owed regardless of the actual loss incurred.

Significance and function

In a procurement context, the contractual penalty performs a dual function: it acts as a means of pressure to secure performance and ensures a lump-sum compensation for breach of duty.

Areas of application

In procurement practice, contractual penalties are typically agreed for the following breaches of duty:

Delay: failure to meet agreed delivery or completion dates; often structured as a percentage daily amount (e.g. 0.1 % of the net contract sum per working day of delay)
Defective performance: falling short of defined quality metrics or service levels
Failure to comply with documentation or reporting obligations
Breach of subcontracting duties or disclosure obligations

Stipulation in the tender

Contractual penalties must already be clearly and unambiguously stipulated in the tender documents. Subsequent agreements that do not arise from the procurement documents can be problematic from a procurement-law perspective, as they could constitute an impermissible modification of the contract.

The provision typically covers:

The triggering event (the precise circumstance giving rise to the penalty)
The amount of the penalty or the calculation method (daily rate, percentage)
An overall cap on the total penalty
The relationship to any claim for damages (set-off or cumulation)

Proportionality and caps

Contractual penalties must comply with the principle of proportionality and must not result in immoral overreaching of the contractor. Customary caps in practice lie between 5 and 10 per cent of the net contract sum. Excessive contractual penalties can be reduced by the courts to a reasonable amount.

In Austria, § 1336 para. 2 ABGB expressly provides for a judicial right of reduction: a court can, upon application, reduce an excessive contractual penalty to a reasonable amount. In Germany, reduction follows from § 343 BGB.

Relationship to damages

Under Austrian law (§ 1336 ABGB), the contracting authority cannot claim further damages in addition to the contractual penalty if the actual loss exceeds the penalty – unless the parties have expressly agreed otherwise. Under German law (§ 341 BGB) the creditor may, in the event of non-performance, claim the contractual penalty; in the event of defective performance any loss exceeding it can be recovered. § 11 VOB/B contains specific rules on the contractual penalty for construction works.

Legal basis

The contractual penalty is anchored both in general civil law and in special procurement-law provisions.

Austria (general civil law): § 1336 ABGB (conventional penalty, right of reduction)
Austria (procurement law): BVergG 2018; ÖNORM B 2110 (general contract terms for construction works, contractual-penalty section)
Germany (general civil law): §§ 339–345 BGB (contractual penalty; forfeiture; reduction)
Germany (works procurement): § 11 VOB/B (contractual penalty); § 9 para. 4 VOB/A (provision in the tender documents)

Related terms

FAQ

Can a contractor refuse a contractual penalty if it is not responsible for the delay? Yes. As a rule, contractual penalties require fault on the part of the contractor. If the delay is caused by unforeseeable circumstances outside the contractor's sphere (force majeure, obstacles caused by the contracting authority), the penalty does not accrue. The contractor must give notice of obstruction and demonstrate the lack of responsibility.

Can the contractual penalty be set off against the contract sum? That depends on the contractual agreement. The tender documents will typically specify whether the contractual penalty is to be set off against any claim for damages or whether the two claims are cumulative. Clear wording in the tender conditions is therefore essential.

May the contracting authority stipulate a contractual penalty of 20 % of the contract sum? Such a high contractual penalty is generally disproportionate and can be reduced by a court on application of the contractor. In Austrian and German practice, caps of 5–10 % of the net contract sum are regarded as appropriate. Higher figures require particular justification.

Last updated: January 2026 All information is provided without guarantee. For legally binding advice please consult a law firm specialising in public procurement law.