Construction Delays and Contract Penalties: The 12% Cap, Damages and the Right to Terminate under the 2025 Construction Law

In construction practice in Vietnam, delay is one of the most common and costly sources of dispute between owners and contractors. A project that runs late is not merely a matter of extended time; it brings additional costs for labour and idle equipment, bank loan interest, and knock-on damage to the owner’s exploitation and business plans. For FDI enterprises accustomed to international contract standards such as FIDIC, correctly understanding how Vietnamese law treats delay is all the more important, because the penalty mechanism in Vietnam has its own limits which, if not properly grasped, can leave a contract clause partially void from the very moment of signing.

From 1 July 2026, Construction Law No. 135/2025/QH15 takes effect, replacing the 2014 Construction Law. The rules on construction-contract bonuses, penalties and damages have been carried over and rearranged in Article 86 of the new law. This article analyses the legal nature of the contractual penalty remedy, clarifies the scope of the 12% cap, the relationship between penalty and damages, and the right to suspend and terminate the contract when the contractor falls behind schedule, together with a concrete worked example for ease of understanding.

Mục 01Penalty and damages are two independent remedies

The most common mistake when drafting a contract is to equate "penalty for breach" with "compensation for damages", when these are two remedies of different legal nature that may be applied at the same time. A penalty for breach is a sum the breaching party must pay the non-breaching party under the agreement recorded in the contract, regardless of whether actual damage has occurred. It is a deterrent and preventive remedy: the mere existence of a breach of a committed obligation — for instance, late handover against a progress milestone — gives rise to the right to claim the penalty, and the non-breaching party need not prove how much it lost.

Compensation for damages is the opposite: it is tied to the actual and direct damage caused by the breach. The party claiming damages must prove the specific loss and the causal link between the breach and that loss. Under Article 86 of the 2025 Construction Law, in addition to the agreed penalty, the breaching party must also compensate the other party and any third party for damage (if any). Thus, construction law allows both remedies to be cumulated — unlike the principle in some foreign legal systems where liquidated damages usually exclude the right to claim additional compensation. Separating the two concepts within the contract clause itself helps the owner preserve both the right to a penalty and the right to recover actual loss.

Mục 02Who the 12% cap applies to — and who it does not

The most easily confused point is the 12% penalty cap. Under Article 86(3) of the 2025 Construction Law, for construction works in public-investment projects and PPP projects, the construction-contract penalty must not exceed 12% of the value of the breached portion of the contract. Particular attention must be paid to the words "the breached portion of the contract" — the cap is calculated on the value of the breached portion, not on the entire contract value. This approach is carried over from Article 146(2) of the 2014 Construction Law and has been explained on several occasions by the Ministry of Construction in guidance documents.

What matters for private and FDI enterprises is that this 12% cap binds only contracts in projects using public-investment capital and PPP projects. For construction contracts between private parties that do not use State capital, the Construction Law does not fix a specific penalty cap. In that case the contractual relationship is governed by the general law: if the activity is determined to be commercial, Article 301 of the 2005 Commercial Law limits the penalty to a maximum of 8% of the value of the breached contractual obligation; if the 2015 Civil Code applies, Article 418 allows the parties to agree the penalty freely without any cap. The interplay of these three statutes creates a legal grey area: the same 10% penalty clause may be valid for a purely civil contract but exceed the cap if a court or arbitrator characterises the relationship as commercial. This is precisely why a penalty clause should be reviewed by a lawyer in conjunction with correctly characterising the nature of the contract and the project’s source of funding.

Mục 03Liquidated damages and the trend of the 2025 Construction Law

One notable point is that the 2025 Construction Law continues to recognise a mechanism for determining damages based on actual loss, on a pre-agreed amount corresponding to the breached obligation, and on the degree of breach. The concept of "pre-determined damages" (approaching liquidated damages in international practice) allows the parties to fix in advance, in the contract, a sum of compensation for each day of delay, instead of having to prove actual loss when a dispute arises. This practice is very common in the FIDIC contracts that foreign contractors are used to.

However, enterprises must be cautious, because adjudication practice in Vietnam is not yet fully consistent on the validity of a liquidated-damages clause where it takes on the appearance of a disguised penalty. If a clause providing for "compensation of 0.5% of the contract value for each day of delay" does not in fact reflect actual loss but merely serves to deter, the adjudicating body may re-characterise it as a penalty remedy and apply the corresponding cap. Therefore, when including a liquidated-damages clause in a contract, the figure should be tied to a reasonable basis of calculation — for example loan interest cost, replacement rental cost, or lost revenue — in order to protect the validity of the clause should litigation later become necessary.

Mục 04A worked numerical example

Suppose an FDI owner signs a contract for the structural construction of a factory worth VND 50 billion, in a privately funded project, and the two parties determine this to be a commercial relationship. The contract agrees a penalty for delay, and the breached portion of the obligation (the late-handed-over item) is worth VND 20 billion. Because it is a commercial contract, the maximum penalty is capped at 8% of VND 20 billion, i.e. VND 1.6 billion — even if the parties record a 15% penalty agreement, the portion exceeding 8% still risks not being recognised. If the same project used public-investment capital, the cap would be 12% of VND 20 billion, equivalent to VND 2.4 billion.

Beyond the penalty, if the late handover forces the owner to rent external warehousing and incur loan interest totalling VND 3 billion, the owner still has the right to claim that VND 3 billion of actual damages, independently of the VND 1.6 billion penalty, provided it can fully prove the supporting documents and the causal link. The contractor’s total financial liability could therefore reach VND 4.6 billion. This example shows the real value of drafting tight clauses and preserving damage records from the moment the incident arises, rather than waiting until litigation to start gathering evidence.

Mục 05The right to suspend and terminate the contract for delay

Penalty and damages are financial remedies, but in many cases what the owner needs more is the ability to end the contractual relationship with a contractor that has lost the capacity to perform. Construction law and the Civil Code allow one party to unilaterally terminate or suspend performance of the contract where the other party seriously breaches its obligations, of which prolonged delay is a typical ground. However, the line between "ordinary delay" and "serious breach permitting termination" depends heavily on how the contract defines the key progress milestones and the consequences of missing them.

In practice, many owners find themselves in a passive position because the contract records only the final completion date without setting measurable intermediate milestones. When the contractor falls behind, the owner has no clear basis to issue warnings, impose stage-by-stage penalties or terminate early, and is forced to wait until the entire deadline has passed — by which point the damage is already too great. A good progress clause should break the work down into intermediate acceptance milestones, tying each milestone to the right to warn, to withhold payment and to terminate if delay exceeds a defined threshold, while clearly prescribing the notice procedure so that a later termination is not treated as unlawful and turned back into damage against the owner itself.

Mục 06Common risks and our lawyers’ recommendations

The greatest risk HTIC Law Firm commonly encounters when reviewing construction contracts is a penalty clause copied from an old template without cross-checking it against the source of funding and the legal nature of the transaction, leading to a penalty exceeding the cap and being void as to the excess. The second risk is lumping penalty and damages into a single figure, which makes it difficult, in a dispute, for the aggrieved party to separate them in order to claim both at once. The third risk lies in evidence: actual damage, even where real, can hardly support a successful compensation claim if it is not recorded in minutes and the supporting documents are not preserved in time.

To control these risks, enterprises should review several core elements of the remedy clauses, including:

• Correctly determining the project’s source of funding and the nature of the contract (commercial or civil) in order to choose the appropriate penalty cap (12%, 8% or no cap).
• Separating the penalty-for-breach clause from the compensation-for-damages clause, clearly stating that the two remedies apply simultaneously.
• Setting intermediate progress milestones tied to the right to warn, to withhold payment and to terminate the contract.

In addition, as soon as signs of delay appear, the owner should send a written notice, prepare site minutes and preserve all records of the costs incurred. These seemingly administrative steps largely determine the prospect of winning a case or reaching a favourable settlement when a dispute escalates. Consulting a lawyer with in-depth expertise in construction law from the negotiation stage, rather than once a dispute has already arisen, often saves an enterprise far more in cost and time.

Mục 07Frequently asked questions

Is a construction contract between two private enterprises subject to the 12% penalty cap? No. The 12% cap under Article 86 of the 2025 Construction Law applies only to works in public-investment projects and PPP projects. Private contracts are governed by the 2005 Commercial Law (an 8% cap if it is a commercial relationship) or the 2015 Civil Code (the parties agree freely). Correctly identifying the applicable legal framework is a precondition for the penalty clause to be effective.

Can a party claim both a penalty and damages at the same time? Yes. Article 86 of the 2025 Construction Law provides that, in addition to the agreed penalty, the breaching party must also compensate for damages. However, to claim damages the aggrieved party must prove the actual loss and the causal link, so preparing documentation in good time is very important.

If the contractor is in prolonged delay, may the owner unilaterally terminate the contract? The owner has the right to terminate unilaterally where the contractor seriously breaches, but must comply with the agreed grounds and notice procedure. Termination without proper grounds may turn the owner itself into the breaching party and liable to pay compensation, so it is advisable to consult a lawyer before deciding.

Mục 08Contact us

HTIC Law Firm provides in-depth legal advice on Construction and Real Estate for both domestic and FDI enterprises — from reviewing and negotiating contractual remedy clauses to resolving delay disputes. For advice tailored to your specific matter, please contact our Hotline +84 379 044 299.