If the other party breaches the contract, you can take legal action against them to claim damages. Normally, you would need to prove how much loss you had suffered as a result of the breach of contract. You might not be able to recover all your losses.
Alternatively, the contract itself can state what damages will be payable for a particular breach of contract. For example, if you want a service provided by a certain date, the contract could state that your supplier would have to pay a certain amount per week if the work was not completed on time. An agreement like this helps to reduce uncertainty, both for you and for the other party, and might reduce your costs in the event of a dispute.
For this to be effective, when you negotiate the contract the level of damages specified must be a reasonable estimate of the loss you would be likely to suffer. If you attempt to include a penalty clause - for example, where the level of damages you specify is clearly excessive, or the aim of the clause is to intimidate the other party - then you are unlikely to be able to enforce it.
