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Sully

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  1. Mr. Edwards - Thank you for your post and your example; however, I still have three points which require further clarification. My first point in response is that a "negative delivery incentive," as I outlined the concept in my earlier post, would not be "punitive damages." The "negative delivery incentive" would be agreed-upon by the parties at the time of contract and amounts to a formulaic reduction in price, up to a stipulated maximum, for untimely delivery in exchange for the implied promise that the Government will not immediately terminate for default, at least not until the reduction in price reaches the max. The "punitive damages" are intended to penalize the Contractor for its failure to perform, the amount of which could be either determined by formula or expressly stated; such damages are assessed after termination by default for Contractor's failure to deliver on time, and throughout my course of studies I have never seen a common-law court or tribunal uphold such a penalty (although they seem to be very popular in many civil law systems). The negative delivery incentive, though seemingly a penalty at first glance, is in fact an agreement by the parties that, in the event of late delivery, the total price would be reduced at a rate established by the parties at the time of contract; the positive delivery incentive is the opposite, an agreement by the parties that early delivery would increase the total price at a party-established rate. This brings me to my second point: your example seems only to contain positive delivery incentives (i.e., bonuses for early delivery on top of the $970,000 price for timely delivery). There do not seem to be any negative incentives; just decreased positive incentives. Perhaps my problem (as I suspect) is that I don't know what a "negative delivery incentive" is. It seems to me that a "reward-penalty structure" suggests a sort of "sliding-price delivery-incentive" structure that would use positive incentives (bonuses) for early delivery (up to a stipulated max) and negative incentives (reductions in price; penalties, if you insist) for late delivery (up to a stipulated max, at which point the contract is terminated for default with no penalties assessed pursuant thereto; however, because the Government waited until the stipulated max before terminating the contract for default, the Contractor would still be obligated to pay the maximum amount required by the delivery incentive structure). If such a thing is not a "negative delivery incentive," then what is a negative delivery incentive? My third point is that your example does not seem to directly apply to my FFP hypothetical. Although I noted that a reward-penalty delivery-incentive structure is available for contract types other than FFP, my example of an acquisition for commercially-available body armor was an FFP contract with delivery incentives. So, to be responsive, the example you gave of positive delivery incentives should be: Delivery date: Mar 1, Price: $970,000 (plus $60,000 incentive); Delivery date: Apr 1, Price: $970,000 (plus $50,000 incentive); Delivery date: May 1, Price: $970,000 (plus $40,000 incentive); Delivery date: Jun 1, Price: $970,000 (plus $30,000 incentive); Delivery date: Jul 1, Price: $970,000 (plus $20,000 incentive); Delivery date: Aug 1, Price: $970,000 (plus $10,000 incentive); and Delivery date: Sep 1, Price: $970,000. Now, for the sake of argument, I will include the negative delivery incentives (applied by the Government in lieu of terminating for default, up to a stipulated maximum which I set at the inverse of the positive incentive amounts but over a shorter amount of time, roughly two weeks): Delivery date: Sep 3, Price: $970,000 (minus $10,000 incentive); Delivery date: Sep 5, Price: $970,000 (minus $20,000 incentive); Delivery date: Sep 7, Price: $970,000 (minus $30,000 incentive); Delivery date: Sep 9, Price: $970,000 (minus $40,000 incentive); Delivery date: Sep 11, Price $970,000 (minus $50,000 incentive); and Delivery date: Sep 13, Price $970,000 (minus $60,000 incentive). After this point, the Government terminates for default; the "grace period" is over. I know you do not like the Q/A grilling-sessions, so please feel free to put a stop to this if you feel this is going that way. If anyone else has any helpful suggestions, I would be immensely appreciative. I am embarrassed to admit that I was unable to find a case on-point; there were lots of cases about liquidated damages clauses being misused to create de facto penalties, but none about the use of a reward-penalty structure consisting of positive/negative delivery incentives. ~ Sully
  2. This prohibition applies only to contracts funded by a Military Construction Appropriations Act. It seems to me that if you have another kind of contract, and you want to use a "carrot and stick," you should see if you can find an appropriate incentive plan. For instance, if you have an FFP-type contract for, say, commercially-available body armor, and timely delivery is of the essence of the contract (i.e., the Government really means it this time), you can use delivery incentives pursuant to FAR 16.402-3. (See also, e.g., Fixed-Price Contracts with Economic Price Adjustment (FAR 16.203-1(; Fixed-Price Incentive Contracts (FAR 16.204); Cost-Plus-Incentive-Fee Contracts (FAR 16.304).) Here's my question, though: if you use delivery incentives IAW FAR 16.402-3(a), does that mean you can apply both positive (i.e., give something) and negative (i.e., take something) incentives? (C.f. FAR 16.402-3(, requiring incentive arrangements to specify the application of a "reward-penalty structure" in the event of delays beyond the contractor's control.) My reading is, yes! Provided there is a "carrot" incentive, and you can also have a "stick" incentive. The issue I have (and hence my question) which such "negative" delivery incentives is that a negative delivery incentive is essentially a penalty for late delivery. Does this mean that penalties are cool (shock!) as long as the incentive structure also contemplates a reward? ~Sully
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