“It’s Too Late, Baby”^[i]—Liquidated Damages Add Up Quickly on a Late Construction Project

BY IRVIN GRAY, JD, MBA, CPCM, CFCM, CCCM

By the nature of government contracting, a wide array of standard contract clauses and provisions is available to agencies and contractors to apply as needed. Each clause is like a tool in the toolbox. Observing a clause through a case study helps contract managers to recognize the fact pattern, select the appropriate clause, and use the clause to solve a problem.

This month’s Clause Corner examines a case study on the Federal Acquisition Regulation (FAR) Liquidated Damages Clause.^[ii] This article will review specific uses for the Liquidated Damages Clause, how the clause has been used in practice, and a few best practices that will help agencies and contractors to administer the clause.

Uses for the Liquidated Damages Clause:

●The Liquidated Damages Clause may only be used when 1) the time of delivery or performance is such an important factor that the government can reasonably expect to suffer damage due to lateness and 2) the extent or amount of the damage would be difficult or impossible to determine or to prove.

●The daily rate of liquidated damages must be reasonable through a reference to probable actual damages.

●If the daily rate of liquidated damages is too high or poorly documented, a court may determine that the daily amount is an unenforceable penalty.

Case Study—Fortis^[iii]

            In July 2014, the U.S. Army Corps of Engineers (USACE) awarded a Single Award Task Order Contract (SATOC) indefinite-delivery, indefinite-quantity (IDIQ) contract to Fortis Networks, Inc. The SATOC IDIQ included one base year and four one-year options for construction services.

            The SATOC included FAR 52.211-11, Liquidated Damages—Supplies, Services, or Research and Development (SEP 2000) (See Figure 1). The daily rate for liquidated damages was $988 per day. The Liquidated Damages Clause states that the contractor does not need to pay the daily liquidated damages if a delay is beyond the contractor’s control or one of a list of “force majeure” events listed in FAR 52.249-8 Default—Fixed Price Supply and Service (See Figure 2).

            In August 2014, the USACE issued a solicitation for a task order under the SATOC IDIQ contract. The task order solicitation included $735 per day liquidated damages. The task order contract required the contractor to finish the contract within 592 calendar days after notice to proceed, issued on October 28, 2014. The required finish date was June 11, 2016. The awarded task order contract included six separate contract line item numbers (CLINs):

1. To replace existing mechanical equipment and add cooling to Building 1643: $433,457,

2. To replace all sanitary and domestic water plumbing and renovate the first-floor restrooms in Building 500: $865,927,

3. To provide a new fire sprinkler system and alarm system in Building 443: $551,078,

4. To provide sound-proofing in ductwork in Building 700: $28,406,

5. To replace an existing oil-water separator in Building 2245: $225,258, and

6. To provide a new Heating, Ventilation, and Air Conditioning (HVAC) system in Building 443 (listed as an option): $845,636.

            The contract delivery date remained June 11, 2016. Beginning in February 2016, the USACE contracting officer (CO) informed Fortis that the contract was behind schedule, and that the agency would withhold 10 percent of each payment as retainage. As of February 2016, CLIN 1 was 49 percent complete, CLIN 2 was 62 percent, CLIN 3 was 20 percent, CLIN 4 was 100 percent , CLIN 5 was 96 percent, and CLIN 6 was at 0 percent. In April 2016, the USACE began assessing liquidated damages, and continued to do so each month. As each month passed, the amount of liquidated damages increased by about $21,000. The six CLINs were delivered in mid-2015, late 2016, mid-2017, and mid-2018.

Claim and Appeal. Through a CO’s Final Decision (COFD), on November 7, 2018, the USACE CO assessed $735 per day for 787 calendar days of delay from June 11, 2016, to August 7, 2018, for a total of $578,445. Fortis filed an appeal to the Armed Services Board of Contract Appeals on January 16, 2019.

Summary Judgment Motion. Summary judgment is a final determination by the judge if there are no disagreements about the facts of the case. The agency provided a list of 32 facts, and Fortis had no “specific disagreement” with the agency’s list. The USACE moved for summary judgment based on the 32 facts.

Case Study Findings

●Because Fortis failed to raise any issues with the list of 32 facts, the USACE was entitled to summary judgment.

●However, because this contract included six separate CLINs, the USACE should have apportioned the liquidated damages to those CLINs based on their acceptance dates.

●To assess liquidated damages for the completed CLINs until the last CLIN was completed would be an unenforceable penalty.

Practice Points for the Agency

●When determining an appropriate amount for liquidated damages in a request for proposals, calculate the probable damages to the agency. For instance, for a barracks construction project for 100 soldiers, calculate how much it costs to house those soldiers without the barracks, e.g., $150/night per soldier in a local hotel.

●When calculating the liquidated damages for a contract for multiple deliverables or CLINs, determine how they will be assessed if the CLINs are delivered on different dates.

●Ensure that liquidated damages are withheld and documented with each payment after the required delivery date.

●Where the facts are not in dispute in an appeal, consider a summary judgment motion to resolve any differences in legal or contractual interpretation.

Practice Points for Contractors

●Review solicitations carefully for due dates and liquidated damages.

●Develop a resource-loaded schedule that includes both cost and time to deliver the project.

●Deliver contract deliverables on time and communicate any delays early.

●If you encounter an excusable delay, e.g., weather days, submit a request for equitable adjustment to the CO as soon as possible.

●Be careful when responding to pretrial requests such as discovery requests or summary judgment motions since they can have severe consequences.

●Seek experienced government contracts counsel, especially if a contract dispute is likely.

Irvin Gray, JD, MBA, CPCM, CFCM, CCCM

●Assistant general counsel, Honeywell Federal Manufacturing & Technologies, LLC, Kansas City, MO.

●Provides legal advice to executives, buyers, and contract managers with an emphasis on federal government contracts and commercial subcontracts.

●LLM candidate, government procurement, The George Washington Law School, anticipated graduation in May 2022.

●President, NCMA Kansas City Chapter.

The information provided in this article is for informational purposes only and does not, and is not intended to, constitute legal advice. With respect to any particular legal matter, readers should consult with an attorney.

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