Did the ASBCA get performance and delivery incentives wrong?

[FrankJon]

In Red Bobtail Transportation (ASBCA No. 63771 (A.S.B.C.A.), 2024 WL 2873960), the ASBCA found what USTRANSCOM asserted were negative performance incentives pursuant to FAR 16.402-2(b) to be unenforceable penalties against the contractor. The contract type was FFP, and the contractor had made two late deliveries for which USTRANSCOM deducted partial payment. (It's not clear why USTRANSCOM characterized these as performance incentives instead of delivery incentives.)The contract contained a deduction schedule in the PWS, but no clauses pertaining to incentives.

What caught my eye was the following quote by the ASBCA:

Quote

Further, FAR subpart 16.4, Incentive Contracts, does state that positive and negative performance incentives shall be considered for certain service contracts. FAR 16.402-2(b). However, FAR subpart 16.4 applies when “a firm-fixed-price contract is not appropriate.” FAR 16.401(a). The government cites to no clauses in the contract or any modification identifying it as a fixed-priced incentive contract (or any type of incentive contract) nor could we find any based on the record presented. Therefore, this subpart does not apply.

In my view, the ASBCA clearly errs here by overlooking FAR 16.202-1:

Quote

The contracting officer may use a firm-fixed-price contract in conjunction with an award-fee incentive (see 16.404) and performance or delivery incentives (see 16.402-2 and 16.402-3) when the award fee or incentive is based solely on factors other than cost. The contract type remains firm-fixed-price when used with these incentives.

In doing so, it wrongly assumes that a FFP contract cannot contain incentives as described in subpart 16.4. It also wrongly assumes that such a contract must be formally designated as "a fixed-priced incentive contract (or any type of incentive contract)."

Do others agree that the ASBCA in this case fundamentally misunderstands the use of performance/delivery incentives in a FFP contract, or am I missing something?

 

Additional reading on the subject:

PERFORMANCE INCENTIVES: Follow the Rules  (38 Nash & Cibinic Rep. NL ¶ 50) (This is where I first learned about the ASBCA holding, although I was surprised that the article doesn't question the quoted text.)

 

 

[Retreadfed]

1 hour ago, FrankJon said:

Do others agree that the ASBCA in this case fundamentally misunderstands the use of performance/delivery incentives in a FFP contract, or am I missing something?

I think you are missing something.  The parties were in dispute as to the nature of the deductions added to the contract post award.  The contractor contended they were liquidated damages and the government contended they were incentives.  The Board did not say the deductions could not be incentives or that the contract could not contain incentives.  Instead, it merely held the government had not proved its case.  In this regard, see FAR 16.401(d).  There is no mention of a D&F in the decision.

[FrankJon]

16 hours ago, Retreadfed said:

I think you are missing something.  The parties were in dispute as to the nature of the deductions added to the contract post award.  The contractor contended they were liquidated damages and the government contended they were incentives.  The Board did not say the deductions could not be incentives or that the contract could not contain incentives.  Instead, it merely held the government had not proved its case.  In this regard, see FAR 16.401(d).  There is no mention of a D&F in the decision.

Thanks, Retreadfed. Your interpretation assumes that a FFP contract with performance/delivery incentives is an "incentive contract" as the FAR uses that term, but I don't think the FAR is clear on this point at all. For example --

• FAR 16.202-1 states that such a contract "remains firm-fixed-priced."
   
• FAR 16.401(a) states that "Incentive contracts as described in this subpart are appropriate when a FFP is not appropriate."
   
• FAR 16.401(c) states that "the two basic categories of incentive contracts" are addressed in FAR 16.403, 16.404, and 16.405 (not 16.402).
   
• FAR 12.207(d) explicitly permits the use of such incentives when purchasing commercial goods and services (likely since an "incentive contract" would be barred from use by 12.207(a)). (See also FAR Case 2000-013: "The changes made in this rule are intended to facilitate greater use of FAR Part 12 for commercial services acquisitions by providing the contract type flexibility embodied in statute." https://www.federalregister.gov/documents/2000/12/29/00-33153/federal-acquisition-regulation-contract-types-for-commercial-item-acquisitions)

 

Putting that aside, I personally don't think the Board made its decision based on the absence of a D&F, or it would have pointed that out. Instead, the Board in its opinion is stating that subpart 16.4 "does not apply" because it's a FFP contract. It doesn't see how the positive or negative incentives discussed at 16.402-2(b) could apply unless the contract were other than FFP.

But its reference to a "fixed-price incentive contract" completely misses the mark, since such contracts are defined at FAR 16.204, and this is clearly not what USTRANSCOM was doing. And its reference to "any type of incentive contract" is vague. Moreover, which clauses the Board would have wanted to see are unclear, as neither the FAR, DFARS, nor TRANSFARS prescribes a clause for FFP + performance/delivery incentives.

Bottom line for me, it's not clear what beyond a deduction schedule and agreement from the contractor USTRANSCOM needed to establish negative performance incentives. If the ASBCA was indeed tracking FAR 16.202-1, I would have liked to have seen it explain that instead of discussing an unrelated concept like fixed-price incentive contracts or expecting clauses that are not prescribed.

 

 

 

[Voyager]

@FrankJon I am just diving into this case this week.  Do you think everything written after this statement at p. 3 in the decision is just poor justification for what the judge sensed to be a cardinal change?

Quote

The initial contract did not contain a section on deductions for missions completed a day late, which is the issue in this appeal...

 

[Vern Edwards]

On 9/17/2024 at 8:28 AM, FrankJon said:

negative performance incentives

FAR uses that phrase twice, but does not explain it. How is an NPI supposed to work?

Would someone please provide an explanation and perhaps an illustration?

The ASBCA decision is very poorly written.

[formerfed]

I just know from practical use and terminology, negative performance incentive is a credit or deduction from earned incentives.  For example an agency establishes a 95% performance objective.  If the contractor exceeds that level, they earn an incentive amount for each point above 95% - $100 for 96%, $200 for 97%,, and so on up to $500 for $100%.  If performance drops below 95%, the contractor loses $100 of the earned amount for each point less than 95%.  

[Vern Edwards]

1 hour ago, formerfed said:

If performance drops below 95%, the contractor loses $100 of the earned amount for each point less than 95%.  

Why?

Would performance less than 95% render the performance unacceptable as per the inspection of services clause?

If not, why the reduction in payment? If so, is the loss of $100 per percentage point shortfall based on a calculation of the damages suffered by the government for each point of shortfall?

If not, why isn't it a prohibited penalty? If so, why isn't the negative incentive liquidated damages?

[formerfed]

1 hour ago, Vern Edwards said:

Why?

What is the rate of loss per point based on?

Is the loss of $100 per percentage point shortfall based on a calculation of the damages suffered by the government for each point of shortfall?

If not, why isn't it a prohibited penalty? If so, why isn't the negative incentive not liquidated damages?

All good points.  I asked in one case.  The response was “we are paying for excellence.  If the contractor slacked off, why should they keep the bonus?”  I always ask agencies if they did market research and was incentives discussed, make sense, and motivated performance.

The negative incentive is just the flip side of the bonus.  If excellence is worth $100, why should performance below the threshold not be nicked the same $100?  This all is above the contract minimum standard of acceptability.  This just is the rational many agencies use.  I doubt if anyone measures the effectiveness of the bonus or deductions.
 

 

[Vern Edwards]

On 9/17/2024 at 8:28 AM, FrankJon said:

Do others agree that the ASBCA in this case fundamentally misunderstands the use of performance/delivery incentives in a FFP contract, or am I missing something?

The court's judge's explanation for the board's decision is obscure:

Quote

Because the government has failed to provide any support for its negative incentive, we grant RBT's appeal and find it nothing more than an unenforceable penalty.

I don't understand what the judge meant by "support". Maybe she wanted the government's lawyers to provide a better explanation of why their "negative performance incentive" wasn't a penalty. The couldn't, and so they lost.

As to the judge's interpretation of FAR concerning the use of incentives in an FFP contract, it was unclear. They did not seem to know what they were talking about. You can have an incentive in an FFP contract. The question is: How does it work?

"Negative performance incentive" is a vague concept, at best. The FAR does not explain the concept, and I found no reference to it in the DAU Contract Pricing Reference Guides.

I first wrote about the concept in 1997, and I felt then that it was a dubious idea. See Performance Based Contracting: Negative Incentives--Liquidated Damages or Penalties?  8 NashCibinic ¶ 40, August 1997. The only agency that has provided additional coverage in its FAR supplement is NASA, and even there the concept is fuzzy. The statement in FAR Part 11 that liquidated damages are not a negative incentive is ridiculous.

Ordinarily, incentives apply only to ranges of contractually acceptable performance. Acceptable performance is that which conforms to contract requirements. See FAR 52.246-4, Inspection of Services. In an FFP contract with a performance incentive, acceptable performance might fall within a range that runs from minimally acceptable to best possible, with a target or goal usually somewhere between the two. Under a fixed-price formula-type incentive you might have an delivery incentive arrangement such as follows:

• Best Delivery: 1 day after shipment. Price: $50.00
• Target Delivery: 3 days after shipment. Price: $25.00
• Minimally Acceptable Delivery: 5 days after shipment. Price: $10.00

The incentive there is clear. It involves no "deductions". It's just a scale of firm-fixed pricing.

Anything other than acceptable would be breach of contract. At that point the inspection of services clause would kick in, paragraph (e):

Quote

 

(e) If any of the services do not conform with contract requirements, the Government may require the Contractor to perform the services again in conformity with contract requirements, at no increase in contract amount. When the defects in services cannot be corrected by reperformance, the Government may-

(1) Require the Contractor to take necessary action to ensure that future performance conforms to contract requirements; and

(2) Reduce the contract price to reflect the reduced value of the services performed.

That seems like an incentive not to fail.

So I don't know what people mean by "negative performance incentive" or how they work.

And I don't think the policymakers that introduced the concept to FAR in the early 1990s knew. It "sounded" like it made sense, but they never made sense of it. I doubt they thought it through.

The government lawyers (three of them!) in the Red Bobtail case were grasping at straws by calling the government's scheme a "negative performance incentive", thereby hoping to keep the scheme from being ruled a penalty. They lost.

The FAR coverage of "negative performance incentives" is a classic example of dunderheaded policymaking.

[FrankJon]

18 minutes ago, Vern Edwards said:

I first wrote about the concept in 1997, and I felt then that it was a dubious idea. See Performance Based Contracting: Negative Incentives--Liquidated Damages or Penalties?  8 NashCibinic ¶ 40, August 1997.

Thanks, Vern. I also came across Using Incentives on Commercial Item Contracts, 14 No. 9 Nash & Cibinic Rep. ¶ 44, in which you advocate for "award purchase" incentives in lieu of profit-based incentives for commercial goods and services. This sounds similar to the present-day "award term" contract.

[FrankJon]

17 hours ago, Voyager said:

@FrankJon I am just diving into this case this week.  Do you think everything written after this statement at p. 3 in the decision is just poor justification for what the judge sensed to be a cardinal change?

 

Well, my thoughts in this post are specific to the quoted text. But overall I think that:

1. USTRANSCOM erred first by apparently failing to cite to FAR 16.202-1 or attempt to distinguish performance incentives from delivery incentives (the latter of which are not expressly addressed in part 37) in its argument.

2. ASBCA's finding that the NPIs were impermissible because they weren't tied to performance standards as required by FAR 37.601(b)(3) seems reasonable to me.

2. ASBCA erred by refusing to even consider FAR 16.402-2 or 16.402-3 based on the rationale that this was a FFP contract.

[C Culham]

Here are my thoughts.

The contract is what counts, regardless of what the FAR may or may not say.  The Board decision is saying there was no clause/term and condition  to enforce the deduction.  "If the deduction was meant to have RBT perform at a level appropriate to the government’s needs, then the deduction should have correlated somehow to the performance requirements set forth in the contract (the 90/95/98 percent performance standards). Since the deduction does not, or at least the government does not explain how it does, we cannot buy into the government’s argument the deduction was part of its performance based acquisition plan."

With this thought and to the discussion in the thread,  I admit I have not attempted to formulate a monetary "negative performance incentive" but could there not be nonmonetary negative performance incentives?  Or in other words I am not too hung up on the lack of FAR discussion on negative performance incentive as it seems the guiding principles leave it to the contract drafters to determine what a "negative' might be, monetary or nonmonetary.

As to breach I have this question.   By having a contract clause/term and condition that defines and provides for a "negative performance incentive" is not breach of contract parameters narrowed?  By simple example what if I had a contract that included definitive clauses/terms and conditions for "liquidated damages" , "penalty" and "negative performance incentive" could they not all exist in a contract?  Another way on my part to say it is what is in the contract that counts. 

And I will add my "who cares" on what the FAR says as it seems to me that the Board erred in trying substantiate its position by bringing in the guiding principles of the FAR.  Again what counts is what the contract did or did not say.

[Vern Edwards]

2 hours ago, FrankJon said:

Well, my thoughts in this post are specific to the quoted text. But overall I think that:

1. USTRANSCOM erred first by apparently failing to cite to FAR 16.202-1 or attempt to distinguish performance incentives from delivery incentives (the latter of which are not expressly addressed in part 37) in its argument.

2. ASBCA's finding that the NPIs were impermissible because they weren't tied to performance standards as required by FAR 37.601(b)(3) seems reasonable to me.

2. ASBCA erred by refusing to even consider FAR 16.402-2 or 16.402-3 based on the rationale that this was a FFP contract.

@FrankJon I think you have misread the decision. I think this is the language that is bothering you:

Quote

And so we look to the government's argument that the negative incentive used here is permissible...

***

Further, FAR subpart 16.4, Incentive Contracts, does state that positive and negative performance incentives shall be considered for certain service contracts. FAR 16.402-2(b). However, FAR subpart 16.4 applies when “a firm-fixed-price contract is not appropriate.” FAR 16.401(a). The government cites to no clauses in the contract or any modification identifying it as a fixed-priced incentive contract (or any type of incentive contract) nor could we find any based on the record presented. Therefore, this subpart does not apply.

Am I correct that this is what you find troubling?

[FrankJon]

37 minutes ago, Vern Edwards said:

Am I correct that this is what you find troubling?

That’s right. That specific paragraph strikes me as unsound. The board appears to be seeking something formal—such as a clause or assigned contract type—to show it’s an incentive contract before considering subpart 16.4. If true, this contradicts FAR 16.202-1, which allows for the contract to remain FFP while incorporating certain incentives addressed under subpart 16.4.
 

That’s my view anyway. Which part have I misunderstood?

[Vern Edwards]

3 hours ago, C Culham said:

And I will add my "who cares" on what the FAR says as it seems to me that the Board erred in trying substantiate its position by bringing in the guiding principles of the FAR.  Again what counts is what the contract did or did not say.

Judge Eyester did not write very clearly, and that's obviously caused some confusion. Read what follows.

@FrankJon The important part of the judges decision begins on page 8, with the paragraph that begins, "And now we finally reach the merits." From that point on she seeks to determine whether the deduction provisions in the contract were, in fact, (a) part of an incentive, as envisioned by the FAR, or (b) an impermissible penalty provision. In the latter regard, Amercan law is that contracts may not include penalty provisions.

See Restatement (Second) of Contracts § 355 (1981):

Quote

Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable.

See 24 Williston on Contracts § 65:1 (4th ed.):

Quote

Compensation not punishment. The purposes of awarding contract damages is to compensate the injured party. See Introductory Note to this Chapter. For this reason, courts in contract cases do not award damages to punish the party in breach or to serve as an example to others unless the conduct constituting the breach is also a tort for which punitive damages are recoverable. Courts are sometimes urged to award punitive damages when, after a particularly aggravated breach, the injured party has difficulty in proving all of the loss that he has suffered. In such cases the willfulness of the breach may be taken into account in applying the requirement that damages be proved with reasonable certainty (Comment a to § 352); but the purpose of awarding damages is still compensation and not punishment, and punitive damages are not appropriate. In exceptional instances, departures have been made from this general policy. A number of states have enacted statutes that vary the rule stated in this Section, notably in situations involving consumer transactions or arising under insurance policies.

So the judge looked for evidence that the deductions were part of an incentive rather than a penalty. She considered (1) what the government lawyers said about the deductions, (2) the FAR provisions it cited, and (3) the contract itself, and concluded (1) FAR does not require the inclusion of incentives in service contracts, (2) the terms of the deduction provision were not consistent with FAR requires of contract incentives, and (3) the government cites no clause in the contract that identifies it as an incentive contract. Thus, if it does not look like a duck, walk like a duck, or quack like a duck, it must not be a duck. And thus, the deduction provision in the contract was an impermissible penalty.

The judge did not rule that incentives are impermissible in FFP service contracts. She only ruled that the deduction provision in the contract in question was not an incentive, it was an impermissible penalty.

Now, you may disagree with the judge's analysis. But I have obtained the original RFP and the statement of work, and I think that if the government had actually thought of the deduction provisions as part of an incentive, as described in FAR Parts 16.4 and 37, then they did a crappy job of it. I think they came up with that argument as part of their defense at the ASBCA, but just could not sell it.

BTW, the judge had been a Navy procurement lawyer. I will say, however, that her decision is not well written, somewhat confusing, and that she was careless with her use of certain phrases. But see Footnote 3, in which I think she was trying to say that negative incentives are permissible if they meet the requirements of FART Parts 16 and 37.

But it's an interesting case. Professor Nash has written it up, and I'm going to do so as well. What's important to me is the lack of clarity about the concept of "negative performance incentives" and lack of guidance about their proper construction so as to avoid claims that they are penalties.

The Question: How do you have a "negative incentive" that is neither damages for breach nor punitive?

[formerfed]

Vern, using my prior example, if the negative incentives only apply against to what the contractor earned, is that considered punitive or damages?  I’ll add that the overall amount can’t go below zero. 
 

Quote

For example an agency establishes a 95% performance objective.  If the contractor exceeds that level, they earn an incentive amount for each pointabove 95% - $100 for 96%, $200 for 97%,, and so on up to $500 for $100%.  If performance drops below 95%, the contractor loses $100 of the earned amount for each point less than 95%.  

 

[C Culham]

19 hours ago, Vern Edwards said:

Read what follows.

Thanks Vern.  I was wrapped up on other matters yesterday.  My final thoughts for whatever they are worth.

19 hours ago, Vern Edwards said:

Amercan law is that contracts may not include penalty provisions

I struggle with this as I believe it depends.  After all in some cases American law might provide for penalties.  By example while not specific to this case and this thread, how about 10 USC 4328?

 

19 hours ago, Vern Edwards said:

She only ruled that the deduction provision in the contract in question was not an incentive, it was an impermissible penalty.

I agree.  Once again what was in the contract counts.  The discussion about what the FAR allows or does not allow was to counter what the government was alleging.  Bolstered I might add by Footnote 3 at the end of the decision.   

Here I would add that @FrankJon concerns should be alleviated to some extent by the footnote as it is a "non-precedential case".

20 hours ago, Vern Edwards said:

The Question: How do you have a "negative incentive" that is neither damages for breach nor punitive?

In my view and as I stated before, clearly provide for a "negative incentive" by a definitive clause/term and condition.  This will be thought of as a crazy statement on my part but especially in a negotiated procurment anything is negotiatable including the specifics of a monetary negative incentive.

[Vern Edwards]

15 minutes ago, C Culham said:

I struggle with this as I believe it depends. 

Carl, why on Earth are you struggling with the idea that in our legal system a party cannot recover punitive damages for non-tortious breach of contract? For pities sake, I cited and quoted the Restatement of the Law, Contracts, and the Corbin treatise. Have you read something authoritative that suggests otherwise? Here is Farnsworth, 3d ed., §12.18, Liquidated Damages, Penalties, and Other Agreed Remedies:

Quote

To what degree is the law of remedies for breach of contract amenable to contrary agreements by the parties? Compared with the extensive power that contracting parties have to bargain over their substantive contract rights and duties, their power to bargain over their remedial rights is surprisingly limited. The most important restriction is the one denying them the power to stipulate in the contract a sum of money payable as damages that is so large as to be characterized as a "penalty"... If a provision is condemned as a penalty, it is unenforceable. 

Struggle with something else, like how a "negative incentive" should be properly structured!

[C Culham]

9 minutes ago, Vern Edwards said:

Carl,

Sematics!  I appreciate your thoughts.   I guess I will leave it to the boards and courts to parse what something really is!  And why they might do so.  Rule of law that sets precedent or whatever!

10 USC 4328 - " The Secretary shall encourage the use of incentive fees and penalties as appropriate and authorized in paragraph (2) in all covered contracts for weapons systems"....From paragraph (2)...."or the imposition of penalties to be paid by the contractor to the Government for failure to achieve such design specification requirements. Information about such fees or penalties shall be included in the solicitation for any covered contract that includes such fees or penalties."

As refelcted in the instant case discussed in this thread the struggle is real, yet I suspect there are those that have created, agreed to and have applied, proper or not in the eyes of the rule of law,  negative incentives through the wonders of a contract, agreed to by the parties that is not argued after the fact where the arguement is left to the boards and courts to decide.  Perfectly agreed to in the imperfect world of contracting!

Thanks again for the exchange of thoughts.

[Retreadfed]

1 hour ago, C Culham said:

I struggle with this as I believe it depends.  After all in some cases American law might provide for penalties.  By example while not specific to this case and this thread, how about 10 USC 4328?

Carl, there are several sources of "American law."  One is the common law.  Another is statutory law.  Under the former, a penalty cannot be imposed by contract.  However, under statutory law, it appears that penalties can be imposed by contracts if authorized by statute overruling the common law prohibition.  In this regard, compare 10 U.S.C. 4328 with 15 U.S.C. 637(d).

[Vern Edwards]

Just now, Retreadfed said:

Carl, there are several sources of "American law."  One is the common law.  Another is statutory law.  Under the former, a penalty cannot be imposed by contract.  However, under statutory law, it appears that penalties can be imposed by contracts if authorized by statute overruling the common law prohibition.  In this regard, compare 10 U.S.C. 4328 with 15 U.S.C. 637(d).

True, but such penalties are usually for breaking a some law that the contract requires you to comply with and provides for criminal or civil penalties in cases of violations. The penalties are not imposed by the contract, but by the law itself. Such violations may also be breaches of contract for which damages may also be sought. But such damages cannot be punitive.

[Retreadfed]

1 hour ago, Vern Edwards said:

True, but such penalties are usually for breaking a some law that the contract requires you to comply with and provides for criminal or civil penalties in cases of violations.

We are in agreement.  As regards the Red Bobtail case, I am unaware of any law that imposes a penalty under the circumstances described there.  Thus, the common law prohibition on penalties would apply.

[Vern Edwards]

Just now, Retreadfed said:

As regards the Red Bobtail case, I am unaware of any law that imposes a penalty under the circumstances described there.  Thus, the common law prohibition on penalties would apply.

But I keep finding myself coming back to a basic question: What the heck is a "negative incentive" in the context of contracting if it's not liquidated damages or a penalty, and how does such an incentive work so that it is not interpreted as a kind of liquidated damages or penalty?

[Voyager]

On 9/18/2024 at 4:18 PM, Vern Edwards said:

FAR uses that phrase twice, but does not explain it. How is an NPI supposed to work?

Would someone please provide an explanation and perhaps an illustration?

A good answer to this question by Vern can be found in the Cibinic, Nash, and Nagle discussion on withholds in Administration of Government Contracts.  Their use of the term "withholding" refers to an intra-contractual right that allows the government to refuse payment to which the contractor is not entitled.  See Chapter 12, PAYMENT AND DISCHARGE, II. PAYMENT PROCEDURES, F. Withholding (pp. 1166-70 in my 4th Ed.).

To me, a negative incentive is no afterthought to be arranged post-award.  It should be the crux of the contract, upon which all offerors decided to offer and upon which there was then a mutual agreement of the parties, via negotiation.  You can throw into your RFP the standard payment clauses like FAR 52.232-5 with its construction retainage terms and conditions, but without an additional, nonstandard clause assented to by the parties together setting up the negative incentive as a withhold amount and, if necessary, a sliding scale of reductions to that amount, you will likely find you only have an illegal penalty in a judge's eyes.

[C Culham]

19 hours ago, Retreadfed said:

Carl, there are several sources of "American law."  One is the common law.  Another is statutory law.  Under the former, a penalty cannot be imposed by contract.  However, under statutory law, it appears that penalties can be imposed by contracts if authorized by statute overruling the common law prohibition.  In this regard, compare 10 U.S.C. 4328 with 15 U.S.C. 637(d).

Okay.

19 hours ago, Vern Edwards said:

True, but such penalties are usually for breaking a some law that the contract requires you to comply with and provides for criminal or civil penalties in cases of violations. The penalties are not imposed by the contract, but by the law itself. Such violations may also be breaches of contract for which damages may also be sought. But such damages cannot be punitive.

Are all 164 "penalty" references in the FAR for the "usually" or are some specific to the FAR?  No research on my part to figure out but intriging to me is the use of penalty at FAR 16.402-3. 

 

17 hours ago, Retreadfed said:

We are in agreement.  As regards the Red Bobtail case, I am unaware of any law that imposes a penalty under the circumstances described there.  Thus, the common law prohibition on penalties would apply.

Why "common law"?  Afterall the discussion is regarding a contract written pursuant to the FAR for a negative performance incentive.  

 

17 hours ago, Vern Edwards said:

But I keep finding myself coming back to a basic question: What the heck is a "negative incentive" in the context of contracting if it's not liquidated damages or a penalty, and how does such an incentive work so that it is not interpreted as a kind of liquidated damages or penalty?

So the point I am trying to get to is that in the context of a contract structured and written pursuant to the FAR a "negative performance incentive" is just that if structured correctly.   While the term is not defined specifically, its use in context of the FAR it is not a liquidated damage nor a penalty.  Reference FAR 11.501(b) "Liquidated damages are not punitive and are not negative performance incentives (see 16.402-2)."

Or stated more simply the attempt to apply American Law, Common Law or even Statutory Law is misplaced.  I think  "FAR Law" applies and is the very reason the Board decision is written as is.  Application of FAR as opposed to reaching to the concepts of American Law, etc.  Reference Footnote 3 in decision  "To be clear, we are not holding that the challenged provisions of the PWS would be unallowable in all circumstances; merely that the arguments presented by the government here, in this non-precedential case, did not persuade us that the negative incentive was permissible."

I conclude that the effort to apply American Law etc. is misplaced, just apply the FAR and the FAR allows for "negative performance incentives"!

PS - My conclusion is based in part on research of tree planting contracts.   In FAR tree planting contracts there is a deduct for trees not planted correctly.  One might call it a negative performance incentive.   However in looking at non-FAR based contracts issued non-Federal public entities not subject to the FAR, the use of the term "liquidated damages" is common for effecting a deduction for trees not planted correctly.  Ergo, as contracts subject to American Law the negative performance incentive is framed as a liquidated damage and not a penalty or negiative performance incentive.

Examples -

https://www.hoodrivercounty.gov/vertical/Sites/{4BB5BFDA-3709-449E-9B16-B62A0A0DD6E4}/uploads/Conifer_Tree_Planting_2024_RFP.pdf

Go to SAM.gov "Contract Opportunities" and "search" for solicitation number 127EAV24R0004.  Uncheck the "Active Only" box.