The Law on penalty clauses has been the subject of two recent Court cases, neither of which involved the Construction Industry. However the principles set out in those cases are worth bearing in mind as they will apply to construction contracts.
Traditionally there is a distinction between a liquidated damages clause and a penalty clause. You look to establish whether the liquidated damages clause is a genuine pre-estimate of loss. In addition now Courts will look at the commercial justification for the clause being reviewed. Courts will consider whether the predominant function of the clause is to deter a breach of contract rather than provide for the payment of compensation. If it is designed to deter breaches of contract then it may be penal. On the other hand if it is aimed at providing compensation it may not be penal even if the amount has the effect of encouraging performance of the contract.
It also appears the clause is unlikely to be penal where agreed between two experienced business parties who have had the benefit of legal advice in the drafting of the clause.
The Courts want to allow parties the freedom to contract with each other, and enforce the sanctity of a contract. Identifying whether a clause is penal is not straightforward, the amount claimed will not be the only relevant factor in determining whether it is and could be consequentially be unenforceable.