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TIME FOR EVALUATING REASONABLENESS OF LIQUIDATED DAMAGES


Rodolfo

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Good evening to everyone. I am writing from Italy because I have a very important question and I am sure somebody will be able to help me. The company I am working for has been awarded a construction contract for the installation of new heating lines. IT IS IMPORTANT TO KNOW THAT THE STATEMENT OF WORK DOES NOT REQUIRE THE REPLACEMENT OF THE EXISTING HEATING LINES BUT ONLY THE INSTALLATION OF NEW LINES. IN OTHER WORDS, THE BARRACKS WILL NOT REMAIN W/OUT HEATING IN CASE OF A DELAY.

The contract consists of a basic project and an option project. Each item has its own performance period. The contract contains the liquidated damages clause (FAR 52.211-12) in the amount of Euro 2.104,73 (same amount for both the basic and the option) for each day of delay beyond the contract completion date.

The basic project was completed on schedule; however, the firm has been experiencing problems with the option. When it was evident that the option would not have been completed on schedule, the Government issued a bilateral modification to reduce drastically the amount of the liquidated damages (only for the option) from Euro 2.104,73 to Euro 242,50. The KO stated, in writing, that the reduction was due to the fact that also the Government caused delay. However, later the Government extended the completion date under the changes clause w/out explanation. Notwithstanding the extension, the firm missed the completion date (19 Dec 2011) and estimates to complete the option project not earlier than 28 Feb 2012. The Government issued a letter stating that the company from 20 Dec 2011 will work under L.D.

In accordance with FAR, liquidated damages are a fixed amount set forth in a contract by an agency to compensate the agency for unexcused delay in the performance of the contract and are established by the Government prior to the issuance of the solicitation. These damages, expressed as a daily amount to be assessed against the contractor for each day of delay beyond the contract completion date, must be a reasonable forecast of the damages the Government will incur for each day of delay and not be in the nature of a penalty, however. If the liquidated damages do not meet this test, then they could be deemed an unenforceable penalty by a court or administrative contract appeals board. We are convinced that the amount set forth in the contract was greatly disproportionate to the presumable actual damages that should have been anticipated and that they erroneously included other ?specific losses?. Therefore, we believe that the readjustment was due to reflect a much more realistic and reasonable forecast of the damages the Government will incur for each day of delay (inspection and superintendence costs only). In fact, as stated above, the new heating lines DO NOT interfere with the existing ones. At present all the buildings are heated by the existing heating lines.

I know that to be enforceable, the liquidated damages must be a reasonable forecast of the likely or actual damages if a delay occurs and not disproportionate to the presumed loss or injury to the non-breaching party. I also know that if forecast of damages was unreasonable and excessive, then the courts and boards will consider these damages to be a penalty and, hence, unenforceable. I also know that THE TIME FOR EVALUATING REASONABLENESS OF LIQUIDATED DAMAGES IS THE TIME OF CONTRACT FORMATION AND NOT THE TIME OF BREACH.

Here comes the question:

IN YOUR OPINION, THE REASONABLENESS OF THE GOVERNMENT'S FORECAST OF LIQUIDATED DAMAGES SHALL BE LOOKED TO THE CIRCUMSTANCES AT THE TIME OF CONTRACT FORMATION (WHICH WAS SEP 2010), OR THE TIME OF THE MODIFICATION WAS ISSUED TO REDUCE THE AMOUNT (WHICH WAS NOV 2011) WHEN THE GOVERNMENT WELL KNEW THAT THE FIRM WAS BEHIND SCHEDULE AND BY NO WAY COULD HAVE COMPLETED THE OPTION PROJECT BY THE REQUIRED COMPLETION DATE? IN OTHER WORDS, IS THE CLAUSE ENFORCEABLE BECAUSE THE GOVERNMENT READJUSTED THE AMOUNT WITH THE MODIFICATION OR IT IS NOT ENFORCEABLE BECAUSE WHEN THE CONTRACT WAS FORMED THE AMOUNT WAS A UNREASONABLE?

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Guest Vern Edwards

You wrote that the government "issued" a bilateral mod to change the rate of liquidated damages. To me that means that you signed a mod agreeing to a change of the rate of liquidated damages. I assume that the rate being charged is the new rate. That being the case, if you challenge the reasonableness of the rate I expect that a court would look to the reasonableness of the rate as of the time of the modification.

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Thanks for your quick reply. I was afraid to hear what you just said. It makes sense; the mod was bilateral and probably the Government issued it in that knew that otherwise the clause could not be enforced. We have three (3) outstanding differing site conditions and we have proposed to the Government to trade them for a time extension. The amount claimed by us is greater than the amount of L.D the Government will assess; however, we?d prefer to loose some money rather than to look bad. Government stated that it is too late (completion date was 19 Dec 2011). I remember when I was a KO we have issued modifications such this (but maybe we were wrong). I know that only Compt General can make remission of the whole or any part of the damages, but I do not know what prevents an agency from trading claims for L.D.? Do you mind to provide your comment? Thanks

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Guest Vern Edwards

My only comment is that I hope that you followed the notification procedures in the differing site conditions clause and have good documentation.

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  • 2 weeks later...

Was the mod which established the new completion date for the option also bilateral? What was the cause of the extension? Was it the differing site condition which you mention in post 5? A Government caused delay would not change the daily amount of LDs through it may be cause for the time extension. Is the Differing Site condition discussion only open for settling the cost or will there be another time extention when it is resolved?

You might find these links useful:

http://redbook.gao.gov/3/fl0013961.php

http://www.gao.gov/assets/410/406969.pdf

http://openjurist.org/341/f2d/998/southwest-engineering-company-v-united-states

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