Policy
Liquidated damages clauses must be used judiciously, only when timely performance is critical and damages are hard to estimate, with rates set to reasonably compensate the Government—not to punish contractors.
Overview
FAR 11.501 establishes the policy for the use of liquidated damages clauses in government contracts. Contracting officers must carefully evaluate the necessity and appropriateness of such clauses, considering their impact on pricing, competition, and contract administration. Liquidated damages should only be used when timely performance is critical and actual damages would be difficult to estimate or prove. The clause is intended to compensate the Government for probable damages, not to punish contractors or serve as a negative performance incentive. The rate set must reasonably forecast the Government's likely harm, and limits or multiple rates may be used if justified. Contracting officers are also required to mitigate damages and act promptly in cases of default. The head of the agency, with appropriate Treasury approval, may reduce or waive assessed liquidated damages.
Key Rules
- Use of Liquidated Damages Clauses
- Only use when timely performance is essential and damages are hard to estimate.
- Purpose and Calculation
- Damages must be compensatory, not punitive, and rates must reflect a reasonable forecast of probable harm.
- Mitigation and Default
- Contracting officers must mitigate damages and act quickly in default situations to minimize losses.
- Reduction or Waiver
- Agency heads may reduce or waive damages with Treasury approval.
Responsibilities
- Contracting Officers: Assess necessity, set reasonable rates, mitigate damages, and act promptly in defaults.
- Contractors: Understand the basis and limits of liquidated damages in their contracts.
- Agencies: Oversee application and, if needed, approve reductions or waivers with Treasury involvement.
Practical Implications
- Ensures liquidated damages are used fairly and only when justified.
- Protects both Government and contractors from unreasonable penalties.
- Requires careful documentation and justification for inclusion and calculation of damages.