Liquidated Damages for subcontracting plans 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

What are liquidated damages? A punitive measure? A negative performance incentive? Both? Neither?

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

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)

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

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

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

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

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

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

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

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

calculating damages Assume $1.2M total actual subcontract dollars and failure to make a good faith effort % Goal %Goal x $1.2M Actual Sub $ Damages Small Business 25% $300,000 $250,000 $50,000 SDB 5% $60,000 $10,000 WOSB HUBZone SB 3% $36,000 $30,000 $6,000 VOSB SDVOSB Total Damages $88,000

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

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?