Understanding the Liquidated Damages Provision in Government Construction Contracts

Understanding the Liquidated Damages Provision in Government Construction ContractsPrime contractors on a federal construction contract can find itself in serious jeopardy when the completion of the project is delayed. This is when the government exercises its rights under the liquidated damages provision in the contract.

Under the Default Clause, the government will seek the common law recovery of putting itself in a position had the delay not occurred. The best approach for any construction contractor would be to assess the delay to see if it was excusable or not.

How to calculate liquidated damages in construction

 If the government wins at the litigation stage by showing that there is truly an enforceable liquidated damages provision, it can calculate damages by multiplying the per diem rate by the number of days that the construction project was delayed.

  • Most government construction contracts state that the government can assess liquidated damages until the scope of work is completed.

Liquidated Damages Contractor Legal Defenses

 Liquidated damages can cripple a government contractor. Therefore, the first approach would be to assert any legal defenses to the government’s claim. An example would be to show that the government acted unreasonably when re-procuring work. If the government failed to act promptly and in a reasonable manner, this can serve as a defense at the litigation stage. When looking at  how to calculate liquidated damages in construction, government contractors should always assert any legal defenses before the appeal or litigation stage – preferably in writing. A federal construction lawyer should be able to walk you through this phase.

Contracting officer failed to take reasonable steps to mitigate liquidated damages: This is often present because the agency sometimes thinks that once there is clear evidence that a contractor has defaulted that this is the end of the analysis. This simply not so. Each contracting party, including the federal government, must take steps to mitigate any damages.

The government failed to consider waiver of the assessed amount of liquidated damages for the constructing project: Once a company has requested a waiver, the head of the agency can consider waiver of liquidated damages, if the Commissioner, Financial Management Service, or designee approves the request. See Treasury Order 145-10.)

The government failed to grant time for excusable delays: the basic contract termination for default clause gives the contractor some level of relief for excusable delays by giving an extension to the original completion date. However, a dispute occurs when the contracting officer denies an extension of time. In this situation, the burden is on the construction company to request an adjustment or submit a claim. Failure to do so can be problematic at the appeal stage.

In one case, the Federal Circuit Court of Appeals ruled that when facing a government counterclaim for liquidated damages, a contractor cannot assert an affirmative defense that would result in the modification of contract terms (e.g., an increase in the contract price or an extension of the time for contract performance) unless that contractor had filed a claim with the contracting officer pursuant to the Contract Disputes Act of 1978 (“CDA”). See M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010).

In Maropakis, the Federal Circuit Court also ruled that a Contract Disputes Act claim alleging excusable delay was a jurisdictional prerequisite to asserting an affirmative defense of excusable delay against a government counterclaim for liquidated damages in a suit before the United States Court of Federal Claims (“Court of Federal Claims”).

The basis for the liquidated damages provision is to compensate the government for anticipated losses. P&D Contractors, Inc. V. United States, 25 Cl. Ct.237 (1992). However, contractors must realize that by definition courts presume that liquidated damage clauses by the government are reasonable. Therefore, this level of defense can be a huge hurdle to overcome.  The court will look at the clause at the time the contract was formed and not at the time when damages occurred.

Note: Federal Supply Schedule contract, the government may lack the authority to terminate a contract for default because it did not refer contractor’s allegations of excusable delay to the GSA. In the same vein, a claim against the contractor by the government on an FSS construction contract could be held as invalid if the contracting officer fails to meet the GSA requirement to first notify.  The Appeals court would have no jurisdiction to the liquidated damages claim resulting from a termination for default. Accord BearingPoint, Inc. v. United States, 77 Fed. Cl. 189 (2007).

See also FAR 52.249-10(b)(1) (indicating that delay is excusable if it “arises from unforeseeable causes,” such as acts of the government or delays of subcontractors or suppliers, that are “beyond the control and without the fault or negligence of the Contractor”).

Basic LD Clause / Language See in Contracts

“ you are hereby notified that this contract is terminated for default for failure to make progress and failure to prosecute the work with the diligence that will insure its completion within the time specified in the contract including any extensions. Therefore, your right to proceed with work under this contract is terminated AS OF THIS DATE. The Government may cause the contract to be completed by others in accordance with the above clause and you will be held liable for any increased costs occasioned thereby. These costs will include liquidated damages in the amount specified in the contract that will accrue from the current contract completion date to actual completion of work. The Government reserves all rights and remedies provided by law or under the contract in addition to charging excess costs occasioned by completion of the defaulted contract.”

The CO should also use the liquidate damages clause when: Delivery time or timely performance is so important that the agency may be reasonably expected to suffer damages as a result of untimely performance.

Whether you are at the initial claims stage or considering litigation or appeals, you should carefully assess the legal merits of your case.

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