Liquidated Damages

1. Liquidated Damages Denna Lambert Contract Specialist Institutional Procurement – Code 210.I Greenbelt, MD

2. What is the #1 Responsibility of the Government? “The whole duty of government is to prevent crime and to preserve contracts.” -- Lord Melbourne (1779 – 1849)

3. Liquidated Damages • Definition of Liquidated Damages (LDs) • Administration of LDs • Examples of successful and unsuccessful use of LDs • Specific application to NASA and GSFC • Questions and Comments

4. What are Liquidated Damages? • Generally, LDs are an agreed upon sum of money to which the government will be entitled in the event the contractor fails to perform as directed in the contract. • See FAR 11.5 • Liquidated Damages associated with socioeconomic programs: FAR 19.705-7 – The Small Business Subcontracting Program: Liquidated Damages FAR 22.302 – Contract Work Hours and Safety Standards Act: Liquidated Damages and Overtime Pay

5. When can they be used? • In supply, service, research and development, and construction contracts: • The time of delivery or performance is such an important factor in the award of the contract that the Government may reasonably expect to suffer damage if the delivery or performance is delinquent. FAR 11.501(a)(1) • The extent or amount of such damage would be difficult or impossible to ascertain or prove. FAR 11.501(a)(2)

6. When can they be used? (Cont’d) • The liquidated damages rate must be a reasonable forecast of just compensation for the harm that is caused by late delivery or untimely performance. FAR 11.501(b) • Applicable LDs clause and rates should be identified in the solicitation. Rates should include an amount for other expected expenses associated with delayed completion. After award, LDs can be incorporated into the contract as a supplemental agreement, though it would be difficult to have a contractor to agree without objection. FAR 11.502

7. When are LD’s not used? • LDs are mostly used in fixed price contracts. Though, LDs can be used in cost reimbursement subcontracting plans. FAR 19.705-7 Reasoning: • LDs are based on cost incurred by the government as the result of delinquent delivery or performance by the contractor. LDs are not based on cost incurred by the contractor. FAR 11.503(a) and (b) • The FAR is silent on the use of LDs in Architecture and Engineering contracts.

8. Determining How Much? • The rate of liquidated damages used must be: • Reasonable • Considered on a case by case basis • Reasoning: Damages that are fixed without any reference to actual probable damage may be held to be a penalty and deemed to be unenforceable. FAR 11.501(b)

9. Enforceability of Liquidated Damages Clauses • There is a two part test that has been followed in most of the government contract cases. • Reasonableness of Forecast • Time of the Forecast • Accuracy of Measurement • Difficulty of accurate estimation

10. Reasonableness of the ForecastTime of the forecast • Government contract rule is that the reasonableness of the forecast of LDs is evaluated by looking at the situation AT THE TIME the contract is made instead of the time of breach. • Therefore, the amount of loss incurred by the government is immaterial.

11. Reasonableness of the ForecastTime of the Forecast (cont’d) • Review boards/courts have refused to enforce LDs when the government should not have anticipated incurring any actual damages AND when the government did not incur any damage or loss.

12. Reasonableness of ForecastAccuracy of Measurement • In Construction contracts most LDs assessed at a fixed rate of dollars per calendar day have been considered to be reasonable. • In other contracts, LDs will be held to be a reasonable forecast if the amount assessed varies in proportion to the anticipated harm to the Government at the time of contract award.

13. Reasonableness of ForecastAccuracy of Measurement • LDs have been upheld on the basis that they are to cover the administrative expenses the government will incur if a delay occurs. • Ex. Inspection, superintendence, engineering, contract administration, and/or legal costs • Remember damages must be determined on a CASE BY CASE BASIS.

14. Reasonableness of the ForecastAccuracy of Measurement • Assessment of LDs at a per unit per day rate is generally upheld. Though allowances should be made for partially submitted units if they have some useable value. • Reasoning: LDs are based on calculating disruption, loss of profit, and value. • LDs not containing a time limit or maximum amount of LDs does not make it unreasonable and a penalty. Though it is recommended by the FAR to establish a maximum value for LDs.

15. Difficulty of Accurate Estimation • Interestingly, this requirement is rarely rigorously tested in a court of law. • Testimony by a Government witness to the difficulty of accurately estimating the amount of damages due to the delay is usually adequate proof of difficulty.

16. Substantial Completion • LDs will not be assessed after the date on which the work is “substantially completed.” • Applies to construction contracts where a high percentage of the work is completed and the project is available for its intended use.

17. Excusable Delays FAR 52.249-14 (1) acts of God or of the public enemy, (2) acts of the government in either its sovereign or contractual capacity, (Ex. Untimely responses to contractor’s requests, improper inspections) (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (contractor must show it acted reasonably) (8) freight embargoes, and (9) unusually severe weather.

18. Excusable Delays A contractor must also demonstrate that: • the event was beyond the contractor's control (including that it was not foreseeable at the time of contract signing); • the contractor could not have prevented the event; • the contractor could not overcome the effects of the event; • no contractor fault or negligence contributed to the event; and • the event caused a delay to the overall completion of the contract.

19. Example GSFC Cases TDRS-I Launch Delay • This FFP contract incorporated Clause F.6 “Liquidated Damages…” with consideration to the contract’s impact to the government if a delay occurred. This clause allowed for a thirty day cumulative grace period identified in Clause H.6 “Launch Delays.” • The LDs clause identified a $50,000 per day assessment not to exceed $9,000,000.

20. Example GSFC Case • The contract established a launch date at the end of October. • Due to numerous delays solely caused by the contractor and documented by the CO, the satellite did not launch until early March, five months after initial launch date. • Without protest, the contractor paid NASA $5.3 million for assessed LDs, costs incurred by a delayed launch contract, and costs associated with delayed network support efforts.

21. Code 210.1 Contracts • The TDRS-I LDs example is the only contract that enforced the clause in the past five years. • Within Code 210.1, there are at least three contracts that have a LDs clause in the contract.

22. The Challenge

23. The Challenge • Legal ramification: • Burden of proof and justification is placed upon the government. • Enforcing LDs, in a contract with a small business, could produce opposition from SBA, Ombuds, Congressional Representative, etc. • Contract Administration: • Increased weight and urgency in the level and thoroughness of documentation regarding correspondence with internal and external entities.

24. The Challenge • Communication: • CO should take all reasonable steps to mitigate LD’s. If a LD and Termination for Default clause exists, CO should try to obtain performance by the contractor or to terminate the contract. • See FAR 11.501(c)

25. In Conclusion Government Customers Contractors