Subpart 11.5 - Liquidated Damages

Overview

FAR Subpart 11.5 prescribes the policies and procedures for using liquidated damages clauses in federal solicitations and contracts. These clauses are designed to provide a predetermined amount of compensation to the Government in the event of a contractor's failure to deliver or perform on time, specifically when the actual damages would be difficult or impossible to estimate accurately.

Key Rules

• Purpose and Limitation: Liquidated damages are strictly compensatory, not punitive. They must represent a "reasonable forecast" of the harm caused by late performance and cannot be used as negative performance incentives.
• Criteria for Use: Contracting Officers (COs) may only use liquidated damages when:
  1. The timing of delivery or performance is critical to the Government.
  2. The actual damages resulting from a delay would be difficult or impossible to prove or estimate.
• Calculation Requirements: The rate must be based on a reasonable forecast of just compensation. In construction contracts, the rate must specifically include the estimated daily cost of Government inspection, superintendence, and potential expenses like renting substitute property.
• Exclusions: This subpart does not apply to subcontracting plans, Contract Work Hours and Safety Standards (labor law violations), or paid sick leave requirements.
• Waiver Authority: Only the Head of the Agency (with Treasury Department approval) has the authority to reduce or waive the amount of liquidated damages already assessed.

Responsibilities

• Contracting Officer (CO):
  • Determines if liquidated damages are appropriate based on the impact on pricing and competition.
  • Calculates the reasonable forecast rate and documents the justification.
  • Takes "all reasonable steps" to mitigate damages during a delay.
  • Expeditiously decides whether to seek performance or terminate for default to prevent excessive loss to the contractor.
• Head of Agency: Responsible for the formal reduction or waiver of assessed liquidated damages, subject to Treasury Department oversight.
• Commissioner, Financial Management Service (Treasury): Provides the final approval for any reduction or waiver of assessed damages.

Practical Implications

• Risk vs. Price: Contractors often view liquidated damages as a high-risk factor. If a CO sets the rate too high or the conditions too stringently, it may discourage competition or lead to significantly higher bid prices as contractors "bake in" the risk of potential assessments.
• Legal Enforceability: If the Government cannot demonstrate that the rate was a "reasonable forecast" at the time of contract award, the clause may be deemed an unenforceable "penalty" by a Board of Contract Appeals or the Court of Federal Claims. Documentation of how the daily rate was derived (e.g., using historical inspection costs) is critical for the Government’s legal defense.
• Mitigation Duty: The Government cannot simply sit back and let liquidated damages accumulate. COs must actively manage the contract during a delay—either by working with the contractor to achieve performance or by terminating the contract—to fulfill their duty to mitigate costs.
• Construction Complexity: For construction projects with multiple phases, COs should use specific rates for different stages of work. This ensures that the Government is only compensated for the specific harm related to that phase, further protecting the clause from being struck down as punitive.