Construction delays: responsibilities, penalties and financial loss insurance for SMEs

Introduction

Construction delays are not simply technical issues: they expose SMEs to real legal and financial risks, including contractual liabilities, contractual penalties, and economic losses not covered by default. For managers, CFOs, and HR professionals, it is essential to understand who is responsible, what penalties may apply, and how to structure insurance to limit the impact on cash flow. After reading this, you will have a clear method for managing these risks and making informed decisions.

Contractual responsibilities and legal framework in Switzerland

Provider's responsibility

In a construction contract, the parties' obligations derive from the Swiss Code of Obligations (Articles 363 et seq.) and often from agreed private standards such as SIA Standard 118, if its application has been expressly stipulated in the contract. A contractor who fails to meet agreed deadlines may be considered in default if the delay falls within their sphere of responsibility and is attributable to them through negligence or fault.

Obligation of result vs. obligation of means

The content of the construction contract determines whether the obligation is for a specific, scheduled "result" or an obligation of means (to complete the work within a reasonable timeframe). In the absence of a specified date, the legal concept of a reasonable timeframe prevails, making proof of delay and liability more complex.

Role of SIA standards

The SIA standards, particularly SIA 118, are recognized standards in Switzerland that govern the rights and obligations of the parties, including in cases of delays, extensions of deadlines, or compensation arrangements. Their applicability depends on an express contractual clause.

Late payment penalties: mechanisms and management

Principle of contractual penalties

Late delivery penalties are contractual mechanisms agreed upon by the parties to encourage adherence to deadlines and compensate the client in the event of a delay beyond the agreed delivery date. They only apply if expressly stipulated in the contract, both in principle and in amount.

Calculation and methods

In practice, penalties can be defined as a daily rate applied to the project cost. While practices vary, they aim to reflect a contractual balance between incentive and compensation. Accurate documentation of contractual dates, delay notifications, and on-site occurrences is essential for uncontested enforcement.

Pilot steps to apply a penalty

1. Check the existing contractual clause (amount, rate, ceiling).

2. Document the initial deadline, any amendments and any element justifying an extension of time.

3. Issue a formal dated notification as soon as a deadline has been exceeded.

4. Consolidate a compelling case before requesting any payment of penalties.

Relevant insurance for financial losses

Construction site insurance and civil liability

In Switzerland, various insurance products protect against risks related to property damage or civil liability during construction. Construction work insurance covers material damage to the structure in progress, while owner's civil liability insurance protects against financial claims if third parties are affected by the construction site.

No automatic guarantee against financial losses due to delay

Standard construction insurance does not directly cover financial losses arising from a construction delay, such as lost operating income or additional operating costs, unless a specialized product is taken out for this type of risk (for example, a “business interruption” type solution or “liquidated damages cover” guarantees).

Additional products: Liquidated damages coverage

In some international markets, insurance products covering liquidated damage payments (“liquidated damage cover”) are offered to protect financial stability in the event of a breach of contractual obligations related to deadlines. These coverages require a prior assessment of contractual clauses and site risks.

Mini case study 1: Delay attributable to the contractor

A small business hired a contractor for the complete renovation of its offices, which were to be delivered by a specific date to allow tenants to move out. As the official schedule was not met, and after documenting the issues (team absences, repeated defects), the contractual penalty clause was triggered. The company signed a notice of delay with photographic evidence. The meticulous documentation allowed for the application of the stipulated penalties without major dispute.

Mini case study 2: Claims and indirect losses

On a construction site for a logistics facility, a technical incident not attributable to the contractor halts progress. Construction insurance covers material damage, but it does not cover lost revenue for the future operator. After reviewing the policy, the company purchases a supplementary "business interruption" product to protect future projects against this type of loss.

Guidelines and checklist for managing a construction delay

Contractual benchmarks

• Agreed deadlines (specific date or period)

• Penalty clauses and conditions

• Conditions for extending the deadline

Documentation references

• Signed schedule and updated versions

• Formal delay notifications

• Evidence of circumstances (photos, reports)

Insurance benchmarks

• Construction site police (works & liability)

• Exclusions and coverage limits

• Options for specific financial losses

Table: Responsibilities and insurance (concept)

Liability/Peril | Who is responsible | Typical insurance

Delay due to contractor negligence | Contractor | Professional liability insurance provider

Accidental damage on construction site | N/A | Construction work insurance

Customer business interruption losses | N/A | Business interruption insurance (if purchased)

Common mistakes and how to avoid them

• Failing to include a well-calibrated penalty clause: anticipate this during the contractual phase.

• Do not formalize notifications: systematize written reminders.

• Underinsurance against indirect financial losses: assess the need from the planning stage.

• Rely only on basic insurance: check exclusions and options.

Questions to ask your insurer/broker

1. Does my construction site insurance cover financial losses related to contractual delays?

2. What documentary evidence is required for a claim?

3. Does the policy include coverage for business interruption losses or liquidated damages?

4. What exclusions apply in terms of deadlines?

5. Can I add a specific extension for financial losses?

6. What are the limits and deductibles for each guarantee?

7. How does coverage interact with contractual responsibilities?

8. What complementary products do you recommend for my construction site risk?

9. What legal assistance is included in the event of a dispute?

10. What documents should I create and keep on file systematically?

Conclusion

Construction delays pose a multidimensional risk for SMEs: contractual liability, penalties, and exposure to financial losses. A structured approach—defining responsibilities, rigorously documenting, calibrating penalties, and structuring the appropriate insurance—transforms a risk into a manageable process. The next step: review your standard contracts and insurance policies with your broker to address the...

identified gaps.