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

  • Understanding the ins and outs of how the liquidated damages clause in construction contracts can benefit your company or harm it is the first step to dealing with the immediate issue.

In some situations, the government in return to your contract disputes claim, would then decide to assess construction liquidated damages. You have to be ready to aggressively defend them and to decide whether it is truly liquidated vs penalty.

What are Liquidated Damages?

A liquidated damage clause is a provision that allows for estimated damages in case the other contracting party does not perform, or in the event of a breach of contract.  Courts will enforce a liquidated damages provision in a government construction contract if they find that is generally difficult to estimate the cost or harm of a breach.  Construction and service contractors should be also aware that a court may find that liquidated damages are unreasonable compensation and disproportionate to the actual or anticipated damage.

If damages can be proven, then the liquidated damages provision may not serve its purpose and might be voided. However, if the parties agree to a set amount, then the court will more than likely imposed the amount. If the amount is disproportionate to the harm or damage, then the court may look at it as a penalty clause. 

  • Penalty clauses, as a matter of public policy, are usually excluded from contracts.

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. To do so can immediately minimize your chances of paying the government liquidated damages. See Filing Contract Disputes Act Claims Civilian Board of Contract Appeals.

 If the government wins at the litigation stage by showing that there is truly an enforceable clause, 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.

  • Construction liquidated damages are damages that the parties in a contract agree to ahead of time.
  • Calculating liquidated damages in construction contracts for the federal government can be tricky. See also Service Contract Act Wage Determination & Fringe Benefits.
  • Understand when the government’s actions constitute a waiver of damages.

Basic Contractor Legal Defenses 

The key to overcoming the government’s allegations is to apply the available legal defenses to your set of facts. When looking at the construction law liquidated damages clause, 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. Read information about quantum merit damages and CPARS Ratings, Fapiis Past Performance and Contractor Integrity Data – What Every Federal Government Contractor Needs to Know.

Having an experienced government construction attorney can be helpful. The following are a few of the common defenses used when the government tries to recoup damages.

  • Waiver and Excusable Delays: the liquidated damages clause in a federal construction contract 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.
  • Contracting officer failed to take reasonable steps to mitigate liquidated damages: the government delay of work clause can be beneficial and 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. Avoid the Government’s Defense of Anticipatory Repudiation in Government Contracts.
  • The government failed to consider waiver of liquidated damages clause for the construction project: Once a company has requested a waiver, the head of the agency can consider waiver, 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. See Contract Disputes Act of 1978 — General Contractor and Subcontractor Pass-Through Rights & Contract Claims.

In one case, the Federal Circuit Court of Appeals ruled that when facing a government counterclaim for 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).

Tip: Boards of Contracts appeals and other Courts apply the decision in United States vs. United Engineering and Contracting Co., 234 U.S. 236 (1914). In that case, the court decided that in order to assess the amount of 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 construction 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.

Read About Basic Tips on How to Respond to Federal Government Investigations

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 damages in a suit before the United States Court of Federal Claims (“Court of Federal Claims”). Read information about Contract Disputes Act Certification Requirements.

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 the violation of the government delay of work clause to GSA. In the same vein,  and when considering the defense of waiver of liquidated damages 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 over the 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”).

The CO should also use the liquidated damages clause in the construction contract 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 under government construction liquidated damages construction clause or waiver of damages, you should carefully assess the legal merits of your case.

Learn About More Critical Contract Claims and CDA Topics

For help with the federal liquidated damages provision in government construction contracts, call Watson & Associates for a FREE INITIAL CONSULTATION. 1-866-601-5518.