Government Contracting Database
Liquidated damages are a fixed amount set forth in a contract by an agency to compensate the agency for unexcused delay in the performance of the contract. The purpose of the liquidated damages clause is to establish, in advance, a reasonable estimate of the damages that would be incurred by the agency if there is an unexcused delay, or a breach of contract, which causes the work to be extended beyond the contractual completion date. This establishment of damages is designed to avoid arguments about the reasonableness of the actual damages an owner may have due to unexcused delays by the contractor.
If the amount of liquidated damages is later found to be greater than the number of actual damages that should have been anticipated, the liquidated damages may be deemed a penalty, and, hence, unenforceable. The liquidated damages set forth in the contract provision must be a reasonable forecast of the actual anticipated damages. If the liquidated damages do not meet this test, then they could be deemed an unenforceable penalty by a court or administrative contract appeals board.
Since liquidated damages are only imposed for delays in project completion, it is manifest that only those delays should be considered which actually affect project completion. By their nature, the delayed activities involved must necessarily lie on the critical path of the project as it was actually completed. In terms of the concurrent delay rule then, the concurrent delay must pertain to activities whose completion was critical to completion of the project itself. A contractor cannot successfully urge that because critical contractor-caused delays . . . were concurrent with noncritical government delays . . . the imposition of liquidated damages may be avoided. Relief from the imposition of liquidated damages must depend upon showing concurrent delay with respect to activities on the critical path. See Fishbach & Moore International Corp., ASBCA No. 18146, 77-1 BCA ¶ 12,300.
Liquidated damages are generally used where it is difficult, if not impossible, to accurately estimate the harm to the agency if late, unexcused performance of the contract occurs. Liquidated damages are established by the government prior to the issuance of the solicitation. These damages, expressed as a daily amount to be assessed against the contractor for each day of delay beyond the contract completion date, must be a reasonable forecast of the damages the government will incur for each day of delay. The daily amount must not be in the nature of a penalty, however.
Even though the parties may agree to a contract with a liquidated damages clause, such contract provisions are strictly construed by the courts and boards of contract appeals because of the potential that the liquidated damages may be in the nature of a penalty, which is onerous and unenforceable. American Construction Company, ENGBCA No. 5728, 91-2 BCA ¶ 24,009. To be enforceable, the liquidated damages must be a reasonable forecast of the likely or actual damages if a delay occurs and not disproportionate to the presumed loss or injury to the non-breaching party. Mitchell Engineering & Construction Co.,Inc., ENGBCA No. 3785, 89-2 BCA ¶ 21,753. If the forecast of damages prior to contract performance was unreasonable and excessive, then the courts and boards will consider these damages to be a penalty and, hence, unenforceable. Appeal of Jem Dev. Corp., ASBCA No. 42645, 92-1 BCA ¶ 24428 (citing Engineered Electric, ENGBCA No. 4944, 84-2 BCA ¶ 17,316; and Jennie-0 Foods, Inc. v. United States, 580 F.2d 400, 414 (Ct. Cl. 1978)).
Liquidated damages are not punitive and are not negative performance incentives (see 16.402-2). Liquidated damages are used to compensate the government for probable damages. Therefore, the liquidated damages rate must be a reasonable forecast of just compensation for the harm that is caused by late delivery or untimely performance of the particular contract.
Moreover, FAR 11.502 enumerates the procedures for calculating liquidated damages in accordance with the above stated policy and advises contracting officers that the damages should be based upon inspection and superintendence costs, but may include other “specific losses” such as the cost of substitute facilities, rental of buildings or equipment or the payment of quarters allowance. The boards of contract appeals have upheld liquidated damage provisions based upon the cost of inspection and superintendence of the work, Mitchell, supra, and Robert E. McKee, Inc., ASBCA No. 33643, 90-1 BCA ¶ 22,391, recognizing that the extended effort by the Corps’ staff is a reasonable, foreseeable damage that could be estimated with some certainty during the pre-bid calculation of the liquidated damage amount.
It should also be noted that the Boards and the Courts have long applied the rule first stated in United States vs. United Engineering and Contracting Co., 234 U.S. 236 (1914), that in order to assess liquidated damages the government cannot have prevented the performance of the contractor within the contract time, otherwise the government would be permitted to recover damages for delay caused by its own conduct. (Fortec Constructors v. U.S., 8 Ct.Cl. 490, (1985) (internal citations omitted)). The Armed Services Board has also found that liquidated damages should be set aside when the government is responsible for critical delay. Darwin Construction Company, Inc., ASBCA No. 32500, 86-3 BCA ¶ 19,295.
In Winslow Tele-Tronics, Inc., ASBCA No. 15,036, 72-1 BCA ¶ 9234, it was stated that:
It has been observed that basic to a consideration of liquidated damages provisions in a contract is the fact that it is one of the contractual undertakings to which the parties themselves have agreed, and their agreement should not be lightly set aside. Suburban Magnesium Foundry. Inc., ASBCA No. 11,237, 67-2 BCA ¶ 6666; Helge Hultgren, ASBCA No. 14,397, 70-2 BCA ¶ 8585. A provision for liquidated damages will be regarded as valid, and not a penalty, when three conditions are met: (1) the damages to be anticipated from the breach are uncertain in amount or difficult to prove, (2) there was an intent by the parties to liquidate them in advance, and (3) the amount stipulated is a reasonable one, not greatly disproportionate to the presumable loss or injury. Suburban Magnesium Foundry, Inc., supra, and authorities cited therein.
The time for evaluating reasonableness of liquidated damages is the time of contract formation. Priebe & Sons, Inc. v. United States, 332 U.S. 407 (1947); Appeal of George Ledford Const., Inc., ENGBCA No. 6218, 97-2 BCA ¶ 29172. Once the Respondent has presented evidence that the daily rate of the liquidated damages was determined in a reasonable manner, the burden shifts to Appellant to establish that the damages calculated were a penalty or that it was entitled to excusable delays for which the LDs should be remitted. John W. Schade, ASBCA Nos. 19,521, 19,724, 75-1 BCA 11,001.
Updated: June 29, 2018