Don Mansfield Professor of Contract Management Defense Acquisition

Don Mansfield Professor of Contract Management Defense Acquisition University LIQUIDATED DAMAGES FOR SUBCONTRACTING PLANS

AGENDA � What are “liquidated damages”? � Why liquidated damages for subcontracting? � Determining liability for liquidated damages � Procedure for assessing liquidated damages � Calculation of liquidated damages � Agency practice pertaining to LD assessment � Discussion questions 2

WHAT ARE LIQUIDATED DAMAGES? �A punitive measure? �A negative performance incentive? � Both? � Neither? 3

WHAT ARE LIQUIDATED DAMAGES? �A variety of actual damages � Agreed to by the parties during contract formation � Used when actual damages, though real, would be difficult or impossible to prove 4

LIQUIDATED DAMAGES IN THE FAR � Late delivery/performance (FAR subpart 11. 5) � Failure to make a good faith effort to comply with small business subcontracting plan (FAR 19. 705 -7) � Underpayment of overtime pay to employees in contracts subject to Contract Work Hours and Safety Standards Act (FAR 22. 302) 5

LIQUIDATED DAMAGES IN THE FAR � FAR 19. 705 -7(a) � Small business subcontracting policy “a matter of national interest with both social and economic benefits” � Objectives not achieved when contractor fails to make good faith effort to comply with plan � 15 U. S. C. 637(d)(4)(F) directs assessment of liquidated damages 6

DETERMINING LIABILITY � Does failure to meet subcontracting goals make a contractor liable for LDs? � No. Legitimate excuses include— � Unavailability of anticipated sources � Unreasonable prices 7

DETERMINING LIABILITY � Standard for determining liability — “failure to make a good faith effort to comply with the subcontracting plan” � Defined as “willful or intentional failure to perform in accordance with the requirements of the subcontracting plan, or willful or intentional action to frustrate the plan. ” FAR 19. 701 8

DETERMINING LIABILITY � Indicators of failure to make a good faith effort � failure to attempt to identify, contact, solicit, or consider small business for contract award � failure to designate and maintain a company official to administer the subcontracting program and monitor and enforce compliance with the plan � failure to report subcontracting performance � failure to maintain records � failure to adopt procedures to comply with plan 9

CALCULATING DAMAGES � Step 1: Performance measured by applying percentage goals to total actual subcontract dollars (FAR 52. 219 -9(b)) � Damages are difference between dollar values calculated in Step 1 and actual subcontract dollars for each subcontract goal 10

ASSESSMENT PROCEDURE � ACO notifies contracting officer any indication of failure to make good faith effort (FAR 19. 706) � Contracting officer decides whether such failure occurred (FAR 19. 705 -7(d)) � Contractor notified, given 15 days to respond with explanation � Contracting officer makes final decision 11

CALCULATING DAMAGES Planned Subcontracting % Goal $ Goal 100% $1, 000 25% $250, 000 Small Disadvantaged Business 5% $50, 000 Women-owned small business 5% $50, 000 HUBZone small business 3% $30, 000 Veteran-owned small business 3% $30, 000 Service-disabled veteranowned small business 3% $30, 000 All Small Business 12

CALCULATING DAMAGES � Assume $800, 000 total actual subcontract dollars and failure to make a good faith effort % Goal %Goal x $800 k Actual Sub $ Damages 25% $200, 000 $40, 125 $159, 875 SDB 5% $40, 000 $34, 530 $5, 470 WOSB 5% $40, 000 $13, 477 $26, 523 HUBZone SB 3% $24, 000 $19, 954 $4, 046 VOSB 3% $24, 000 $18, 136 $5, 864 SDVOSB 3% $24, 000 $13, 200 $10, 800 Small Business Total Damages $212, 578 13

CALCULATING DAMAGES � Assume $1. 2 M total actual subcontract dollars and failure to make a good faith effort % Goal %Goal x $1. 2 M Actual Sub $ Damages 25% $300, 000 $250, 000 $50, 000 SDB 5% $60, 000 $50, 000 $10, 000 WOSB 5% $60, 000 $50, 000 $10, 000 HUBZone SB 3% $36, 000 $30, 000 $6, 000 VOSB 3% $36, 000 $30, 000 $6, 000 SDVOSB 3% $36, 000 $30, 000 $6, 000 Small Business Total Damages $88, 000 14

AGENCY PRACTICE � Assessment of liquidated damages pertaining to subcontracting plans extremely rare � According to one source, Army assessed liquidated damages ~4 years ago � No decisions by agency boards of contract appeals or Court of Federal Claims having to do with liquidated damages under subcontracting plans 15

DISCUSSION � To what extent does the inclusion of the liquidated damages clause affect contractor compliance with its subcontracting plan? � To what extent do contracting officers rely on the inclusion of the liquidated damages clause to motivate contractor performance? � What excuses are typically given and accepted for a failure to meet subcontracting goals? 16