Overview
FAR 11.501 establishes the policy for using liquidated damages clauses, restricting their application to situations where timely performance is critical and potential damages are difficult to quantify. It emphasizes that these clauses must be compensatory rather than punitive, representing a reasonable forecast of the Government's expected losses.
Key Rules
- Conditions for Use: Contracting officers may only use liquidated damages when time of delivery is essential and actual damages are difficult or impossible to prove.
- Compensatory, Not Punitive: Liquidated damages are not penalties or negative performance incentives; the rate must be a "reasonable forecast of just compensation."
- Rate Flexibility: The Government may use multiple rates if damages are expected to fluctuate over time and should apply maximum caps or time limits if they reflect the maximum probable damage.
- Mitigation Requirement: Contracting officers must take active steps to mitigate damages, including acting expeditiously when considering termination for default to prevent excessive contractor loss.
- Waiver Authority: The head of an agency has the authority to reduce or waive assessed liquidated damages, provided the Treasury Department (Financial Management Service) approves.
Practical Implications
- Contracting officers must carefully document the "reasonable forecast" used to derive the liquidated damages rate to ensure it is not legally overturned as an unenforceable penalty.
- Contractors can challenge liquidated damages if the Government fails to take prompt action to mitigate losses or if the rate bears no logical relationship to the actual harm suffered by the Government.