Section 7.22 - Liquidated Damages
from "Best Practices Procurement Manual" FTA U.S. Department of Transportation

REQUIREMENT

Paragraph 13 of the Circular, discusses Liquidated Damages. A grantee may use liquidated damages if it may reasonably expect to suffer damages (increased costs on the project involved) from late completion and the extent or amount of such damages would be difficult or impossible to determine.

The assessment for damages shall be at a specific rate per day for each day of overrun in contract time The rate must be specified in the third party contract. Any liquidated damages recovered shall be credited to the project account involved unless FTA permits otherwise.

DEFINITION

Liquidated Damages : Liquidated damages are a specific sum (or a sum readily determinable) of money stipulated by the contracting parties as the amount to be recovered for each day of delay in delivery of the product; typically, the actual damage amount is unknown or difficult to estimate and is liquidated by the mutual agreement to the rate.

DISCUSSION

Liquidated damages clauses are most appropriately used when:

• The time of delivery or performance is of particular importance and you may reasonably expect to suffer damage if the delivery or performance is delinquent; and

• The extent or amount of such damage would be difficult, or impossible, to prove.

When determining whether to use a liquidated damages clause, the procuring official will wish to consider such factors as:

• The probable effect of use on pricing and competition; and

• The costs and difficulties of contract administration.

Liquidated damages may be used for supplies, services and construction.

Rate Determination The rate of liquidated damages must be reasonable and is usually figured on a case-by-case basis. This will ensures that the damages will not be held unenforceable. On the other hand, you do not want to set the liquidated damages at too low an amount. Once liquidated damages are included in a contract, you will be unable to recover actual damages in many jurisdictions.

Application. When it is determined that a liquidated damages clause will be included in the contract, the applicable clause and appropriate rate(s) must be contained in the solicitation. For construction contracts, the rate to be assessed can be for each day of delay and the rate typically, at a minimum, covers the estimated cost of inspection and superintendence for each day of delay in completion. If you will suffer other specific losses due to failure of timely completion, the rate can also include an amount for these items (for example, the cost of substitute facilities or the rental of buildings or equipment). The contract may include an overall maximum dollar amount or period of time, or both, during which liquidated damages may be assessed. This will help ensure that there is not an unreasonable assessment of liquidated damages.

Mitigation . The procuring official should take all reasonable steps to mitigate liquidated damages. If the contract contains a liquidated damages clause and a basis for termination for default exists, the procuring official should take appropriate action in a timely fashion to obtain performance or to terminate the contract. If the grantee still desires delivery or performance after termination for default, efforts must be made to obtain the delivery or performance elsewhere within a reasonable time.