Federal Acquisition Regulation; Liquidated Damages

Federal RegisterJan 13, 2000

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SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council (Councils) are proposing to amend the

Federal Acquisition Regulation (FAR) to rewrite guidance on liquidated

damages in plain language.

DATES: Interested parties should submit comments in writing on or

before March 13, 2000 to be considered in the formulation of a final

rule.

ADDRESSES: Interested parties should submit written comments to:

General Services Administration, FAR Secretariat (MVRS), 1800 F Street,

NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405.

Address e-mail comments submitted via the Internet to:

[email protected]. Please submit comments only and cite FAR case

1999-003 in all correspondence related to this case.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS

Building, Washington, DC, 20405, at (202) 501-4755 for information

pertaining to status or publication schedules. For clarification of

content, contact Ms. Victoria Moss, Procurement Analyst, at (202) 501-

4764. Please cite FAR case 1999-003.

SUPPLEMENTARY INFORMATION:

A. Background

The proposed rule amends guidance on liquidated damages in FAR

Parts 11, 22, 36, and 49 and associated clauses at FAR Part 52. The FAR

guidance on liquidated damages, particularly that at 11.502, is

difficult to understand. We have amended the guidance using the plain

language guidelines in a White House memorandum, Plain Language in

Government Writing, dated June 1, 1998.

This rule was not subject to Office of Management and Budget review

under Section 6(b) of Executive Order 12866, Regulatory Planning and

Review, dated September 30, 1993. This rule is not a major rule under 5

U.S.C. 804.

B. Regulatory Flexibility Act

This proposed rule is not expected to have a significant economic

impact on a substantial number of small entities within the meaning of

the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because the rule

does not change existing practices. An Initial Regulatory Flexibility

Analysis has, therefore, not been performed. Comments are invited from

small businesses and other interested parties. The Councils will

consider comments from small entities concerning the affected FAR

subparts in accordance with 5 U.S.C. 610. Interested parties must

submit such comments separately and should cite 5 U.S.C. 601, et seq.

(FAR case 1999-003), in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the changes to

the FAR do not impose information collection requirements that require

the approval of the Office of Management and Budget under 44 U.S.C.

3501, et seq.

List of Subjects in 48 CFR Parts 11, 22, 36, 49, and 52

Government procurement.

Dated: January 7, 2000.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, DoD, GSA, and NASA propose that 48 CFR parts 11, 22, 36,

49, and 52 be amended as set forth below:

1. The authority citation for 48 CFR parts 11, 22, 36, 49, and 52

continues to read as follows:

Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42

U.S.C. 2473(c).

PART 11--DESCRIBING AGENCY NEEDS

2. Revise Subpart 11.5 to read as follows:

Subpart 11.5--Liquidated Damages

Sec.

11.500 Scope.

11.501 Policy.

11.502 Procedures.

11.503 Contract clauses.

11.500 Scope.

This subpart prescribes policies and procedures for using

liquidated damages clauses in solicitations and contracts for supplies,

services, research and development, and construction. This subpart does

not apply to liquidated damages for subcontracting plans (see 19.705-7)

or liquidated damages related to the Contract Work Hours and Safety

Standards Act (see subpart 22.3).

11.501 Policy.

(a) The contracting officer must consider the potential impact on

pricing, competition, and contract administration before using a

liquidated damages clause. Use liquidated damages clauses only when--

(1) The time of delivery or timely performance is so important that

the Government may reasonably expect to suffer damage if the delivery

or performance is delinquent; and

(2) The extent or amount of such damage would be difficult or

impossible to estimate accurately or prove.

(b) Liquidated damages are not punitive and are not negative

performance incentives (see 16.402-2). Liquidated damages are used to

compensate the Government for probable damages. Therefore, the

liquidated damages rate must be a reasonable forecast of just

compensation for the harm that is caused by late delivery or untimely

performance of the particular contract. Use a maximum amount or a

maximum period for assessing liquidated damages if these limits reflect

the maximum probable damage to the Government. Also, the contracting

officer may use more than one liquidated damages rate when the

contracting officer expects the probable damage to the Government to

change over the contract period of performance.

liquidated damages. If the contract contains a liquidated damages

clause and the contracting officer is considering terminating the

contract for default, the contracting officer should seek expeditiously

to obtain performance by the contractor or terminate the contract and

repurchase (see subpart 49.4). Prompt contracting officer action will

prevent excessive loss to defaulting contractors and protect the

interests of the Government.

(d) The amount of liquidated damages assessed under a contract is a

unilateral decision made solely at the discretion of the Government.

(e) The head of the agency may reduce or waive the amount of

liquidated damages assessed under a contract, if the Commissioner,

Financial Management Service, or designee approves (see Treasury Order

145-10).

11.502 Procedures.

(a) Include the applicable liquidated damages clause and liquidated

damages rates in solicitations when the contract

[[Page 2273]]

will contain liquidated damages provisions.

(b) Construction contracts with liquidated damages provisions must

describe the rate(s) of liquidated damages assessed per day of delay.

The rate(s) should include the estimated daily cost of Government

inspection and superintendence. The rate(s) should also include an

amount for other expected expenses associated with delayed completion

such as--

(1) Renting substitute property; or

(2) Paying additional allowance for living quarters.

11.503 Contract clauses.

(a) Use the clause at 52.211-11, Liquidated Damages--Supplies,

Services, or Research and Development, in fixed-price solicitations and

contracts for supplies, services, or research and development when the

contracting officer determines that liquidated damages are appropriate

(see 11.501(a)).

(b) Use the clause at 52.211-12, Liquidated Damages--Construction,

in solicitations and contracts for construction, other than cost-plus-

fixed-fee, when the contracting officer determines that liquidated

damages are appropriate (see 11.501(a)). If the contract specifies more

than one completion date for separate parts or stages of the work,

revise paragraph (a) of the clause to state the amount of liquidated

damages for delay of each separate part or stage of the work.

and contracts for construction that use the clause at 52.211-12,

Liquidated Damages--Construction.

PART 22--APPLICATION OF LABOR LAWS TO GOVERNMENT ACQUISITIONS

3. Revise section 22.302 to read as follows:

22.302 Liquidated damages and overtime pay.

(a) When an overtime computation discloses under-payments, the

responsible contractor or subcontractor must pay the affected employee

any unpaid wages and pay liquidated damages to the Government. The

contracting officer must assess liquidated damages at the rate of $10

per affected employee for each calendar day on which the employer

required or permitted the employee to work in excess of the standard

workweek of 40 hours without paying overtime wages required by the Act.

(b) If the contractor or subcontractor fails or refuses to comply

with overtime pay requirements of the Act and the funds withheld by

Federal agencies for labor standards violations do not cover the unpaid

wages due laborers and mechanics and the liquidated damages due the

Government, make payments in the following order--

(1) Pay laborers and mechanics the wages they are owed (or prorate

available funds if they do not cover the entire amount owed); and

(2) Pay liquidated damages.

determined liquidated damages due under paragraph (a) of this section

are incorrect, or that the contractor or subcontractor inadvertently

violated the Act despite the exercise of due care, the agency head

may--

(1) Reduce the amount of liquidated damages assessed for liquidated

damages of $500 or less;

(2) Release the contractor or subcontractor from the liability for

liquidated damages of $500 or less; or

(3) Recommend that the Secretary of Labor reduce or waive

liquidated damages over $500.

(d) After the contracting officer determines the liquidated damages

and the contractor makes appropriate payments, disburse any remaining

assessments in accordance with agency procedures.

4. Sections 22.406-8 and 22.406-9 are revised to read as follows:

22.406-8 Investigations.

Conduct labor standards investigations when available information

indicates such action is warranted. In addition, the Department of

Labor may conduct an investigation on its own initiative or may request

a contracting agency to do so.

(a) Contracting agency responsibilities. Conduct an investigation

when a compliance check indicates that substantial or willful

violations may have occurred or violations have not been corrected.

(1) The investigation must--

(i) Include all aspects of the contractor's compliance with

contract labor standards requirements;

(ii) Not be limited to specific areas raised in a complaint or

uncovered during compliance checks; and

(iii) Use personnel familiar with labor laws and their application

to contracts.

(2) Do not disclose contractor employees' oral or written

statements taken during an investigation or the employee's identity to

anyone other than an authorized Government official without that

employee's prior signed consent.

(3) Send a written request to the Administrator, Wage and Hour

Division, to obtain--

(i) Investigation and enforcement instructions; or

(ii) Available pertinent Department of Labor files.

(4) Obtain permission from the Department of Labor before

disclosing material obtained from Labor Department files, other than

computations of back wages and liquidated damages and summaries of back

wages due, to anyone other than Government contract administrators.

(b) Investigation report. The contracting officer must review the

investigation report on receipt and make preliminary findings. The

contracting officer normally must not base adverse findings solely on

employee statements that the employee does not wish to have disclosed.

However, if the investigation establishes a pattern of possible

violations that are based on employees statements that are not

authorized for disclosure, the pattern itself may support a finding of

noncompliance.

contracting officer must do the following:

(1) Provide the contractor any written preliminary findings and

proposed corrective actions, and notice that the contractor has the

right to request that the basis for the findings be made available and

to submit written rebuttal information within a reasonable period of

time.

(2) Upon request, provide the contractor with rationale for the

findings. However, under no circumstances will the contracting officer

permit the contractor to examine the investigation report. Also, the

contracting officer must not disclose the identity of any employee who

filed a complaint or who was interviewed, without the prior consent of

the employee.

(3)(i) The contractor may rebut the findings in writing within 60

days after it receives a copy of the preliminary findings. The rebuttal

becomes part of the official investigation record. If the contractor

submits a rebuttal, evaluate the preliminary findings and notify the

contractor of the final findings.

(ii) If the contracting officer does not receive a timely rebuttal,

the contracting officer must consider the preliminary findings final.

(4) If appropriate, request the contractor to make restitution for

underpaid wages and assess liquidated damages. If the request includes

liquidated damages, the request must state that the contractor has 60

days to request relief from such assessment.

(d) Contracting officer's report. After taking the actions

prescribed in

[[Page 2274]]

paragraphs (b) and (c) of this subsection--

(1) The contracting officer must prepare and forward a report of

any violations, including findings and supporting evidence, to the

agency head. Standard Form 1446, Labor Standards Investigation Summary

Sheet, is the first page of the report; and

(2) The agency head must process the report as follows:

(i) The contracting officer must send a detailed enforcement report

to the Administrator, Wage and Hour Division, within 60 days after

completion of the investigation, if--

(A) A contractor or subcontractor underpaid by $1,000 or more;

(B) The contracting officer believes that the violations are

aggravated or willful (or, also, there is reason to believe that the

contractor has disregarded its obligations to employees and

subcontractors under the Davis-Bacon Act);

(D) Future compliance has not been assured.

(ii) If the Department of Labor expressly requested the

investigation and none of the conditions in paragraph (d)(2)(i) of this

subsection exist, submit a summary report to the Administrator, Wage

and Hour Division. The report must include--

(A) A summary of any violations;

(B) The amount of restitution paid;

(D) The amount of liquidated damages assessed under the Contract

Work Hours and Safety Standards Act;

(E) Corrective measures taken; and

(F) Any information that may be necessary to review any

recommendations for an appropriate adjustment in liquidated damages.

(iii) If none of the conditions in paragraphs (d)(2)(i) or (ii) of

this subsection are present, close the case and retain the report in

the appropriate contract file.

(iv) If substantial evidence is found that violations are willful

and in violation of a criminal statue, (generally 18 U.S.C. 874 or

1001), forward the report (supplemented if necessary) to the Attorney

General of the United States for prosecution if the facts warrant.

Notify the Administrator, Wage and Hour Division, when the report is

forwarded for the Attorney General's consideration.

(e) Department of Labor investigations. The Department of Labor

will furnish the contracting officer an enforcement report detailing

violations found and any corrective action taken by the contractor, in

investigations that disclose--

(1) Underpayments totaling $1,000 or more;

(2) Aggravated or willful violations (or, when the contracting

officer believes that the contractor has disregarded its obligations to

employees and subcontractors under the Davis-Bacon Act); or

(3) Potential assessment of liquidated damages under the Contract

Work Hours and Safety Standards Act.

(f) Other investigations. The Department of Labor will provide a

letter summarizing the findings of the investigation to the contracting

officer for all investigations that are not described in paragraph (e)

of this subsection.

22.406-9 Withholding from or suspension of contract payments.

(a) Withholding from contract payments. If the contracting officer

believes a violation exists (see 22.406-8), or upon request of the

Department of Labor, the contracting officer must withhold from

payments due the contractor an amount equal to the estimated wage

underpayment and estimated liquidated damages due the United States

under the Contract Work Hours and Safety Standards Act. (See 22.302.)

(1) Contracting officers must, if the contracting officer believes

a violation exists or upon request of the Department of Labor, withhold

funds from any current Federal contract or Federally assisted contract

with the same prime contractor, that is subject to either Davis-Bacon

Act or Contract Work Hours and Safety Standards Act requirements.

(2) If a subsequent investigation confirms violations, the

contracting officer must adjust the withholding as necessary. However,

if the Department of Labor requested the withholding, the contracting

officer must not reduce or release the withholding without written

approval of the Department of Labor.

(3) Use withheld funds as provided in paragraph (c) of this

subsection to satisfy assessed liquidated damages, and unless the

contractor makes restitution, validated wage underpayments.

(b) Suspension of contract payments. If a contractor or

subcontractor fails or refuses to comply with the labor standards

clauses of the Davis-Bacon Act and related statutes, the agency upon

its own action or upon the written request of the Department of Labor,

must suspend any further payment, advance, or guarantee of funds until

the violations cease or until the agency has withheld sufficient funds

to compensate employees for back wages, and to cover any liquidated

damages due.

Forwarding wage underpayments to Secretary of the Treasury. Upon final

administrative determination, if the contractor or subcontractor has

not made restitution, the contracting officer must forward to the

appropriate disbursing office Standard Form (SF) 1093, Schedule of

Withholdings Under the Davis-Bacon Act (40 U.S.C. 276(a)) and/or

Contract Work Hours and Safety Standards Act (40 U.S.C. 327-333).

Attach to the SF 1093 a list of the name, social security number, and

last known address of each affected employee; the amount due each

employee; employee claims if feasible; and a brief rationale for

restitution. Also, the contracting officer must indicate if restitution

was not made because the employee could not be located. The Government

may assist underpaid employees in preparation of their claims. The

disbursing office must submit the SF 1093 with attached additional data

and the funds withheld (by check) to the Secretary of the Treasury.

(2) Returning of withheld funds to contractor. When funds withheld

exceed the amount required to satisfy validated wage underpayments and

assessed liquidated damages, return the funds to the contractor.

(3) Limitation on forwarding or returning funds. If the Department

of Labor requested the withholding or if the findings are disputed (see

22.406-10(e)), the contracting officer must not forward the funds to

the Secretary of the Treasury, or return them to the contractor without

approval by the Department of Labor.

(4) Liquidated damages. Upon final administrative determination,

the contracting officer must dispose of funds withheld or collected for

liquidated damages in accordance with agency procedures.

PART 36--CONSTRUCTION AND ARCHITECT-ENGINEER CONTRACTS

36.206 [Amended]

5. Amend section 36.206 by removing ``shall'' and adding ``must''

in is place.

PART 49--TERMINATION OF CONTRACTS

6. In section 49.402-7, revise paragraph (a); and amend paragraph

(b) by removing ``shall'' and inserting ``must'' in its place. The

revised text reads as follows:

[[Page 2275]]

49.402-7 Other damages.

(a) If the contracting officer terminates a contract for default or

follows a course of action instead of termination for default (see

49.402-4), the contracting officer promptly must assess and demand any

liquidated damages to which the Government is entitled under the

contract. Under the contract clause at 52.211-11, these damages are in

addition to any excess repurchase costs.

* * * * *

7. Revise section 49.404 to read as follows:

49.404 Surety-takeover agreements.

(a) The procedures in this section apply primarily, but not solely,

to fixed-price construction contracts terminated for default.

(b) Since the surety is liable for damages resulting from the

contractor's default, the surety has certain rights and interests in

the completion of the contract work and application of any undisbursed

funds. Therefore, the contracting officer must consider carefully the

surety's proposals for completing the contract. The contracting officer

must take action on the basis of the Government's interest, including

the possible effect upon the Government's rights against the surety.

the contract, unless the contracting officer believes that the persons

or firms proposed by the surety to complete the work are not competent

and qualified or the proposal is not in the best interest of the

Government.

(d) There may be conflicting demands for the defaulting

contractor's assets, including unpaid prior earnings (retained

percentages and unpaid progress estimates). Therefore, the surety may

include a ``takeover'' agreement in its proposal, fixing the surety's

rights to payment from those funds. The contracting officer may (but

not before the effective date of termination) enter into a written

agreement with the surety. The contracting officer should consider

using a tripartite agreement among the Government, the surety, and the

defaulting contractor to resolve the defaulting contractor's residual

rights, including assertions to unpaid prior earnings.

(e) Any takeover agreement must require the surety to complete the

contract and the Government to pay the surety's costs and expenses up

to the balance of the contract price unpaid at the time of default,

subject to the following conditions:

(1) Any unpaid earnings of the defaulting contractor, including

retained percentages and progress estimates for work accomplished

before termination, must be subject to debts due the Government by the

contractor, except to the extent that the unpaid earnings may be used

to pay the completing surety its actual costs and expenses incurred in

the completion of the work, less its payments and obligations under the

payment bond given in connection with the contract.

(2) The surety is bound by contract terms governing liquidated

damages for delays in completion of the work, unless the delays are

excusable under the contract.

(3) If the contract proceeds have been assigned to a financing

institution, the surety must not be paid from unpaid earnings, unless

the assignee provides written consent.

(4) The contracting officer must not pay the surety more than the

amount it expended discharging its liabilities under the defaulting

contractor's payment bond. Payments to the surety to reimburse it for

discharging its liabilities under the payment bond of the defaulting

contractor must be only on authority of--

(i) Mutual agreement among the Government, the defaulting

contractor, and the surety;

(ii) Determination of the Comptroller General as to payee and

amount; or (iii) Order of a court of competent jurisdiction.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

8. Revise sections 52.211-11 through 52.211-13 to read as follows:

52.211-11 Liquidated Damages--Supplies, Services, or Research and

Development.

As prescribed in 11.503(a), insert the following clause in

solicitations and contracts:

Liquidated Damages--Supplies, Services, or Research and Development

(Date)

(a) If the Contractor fails to deliver the supplies or perform

the services within the time specified in this contract, the

Contractor shall, in place of actual damages, pay to the Government

liquidated damages of $ ______________ per calendar day of delay

[Contracting Officer insert amount].

(b) If the Government terminates this contract in whole or in

part under the Default--Fixed-Price Supply and Service clause, the

Contractor is liable for liquidated damages accruing until the

Government reasonably obtains delivery or performance of similar

supplies or services. These liquidated damages are in addition to

excess costs of repurchase under the Termination clause.

when the delay in delivery or performance is beyond the control and

without the fault or negligence of the Contractor as defined in the

Default--Fixed-Price Supply and Service clause in this contract.

(End of clause)

52.211-12 Liquidated Damages--Construction.

As prescribed in 11.503(b), insert the following clause in

solicitations and contracts:

Liquidated Damages--Construction (Date)

(a) If the Contractor fails to complete the work within the time

specified in the contract, the Contractor shall pay liquidated

damages to the Government in the amount of ______________

[Contracting Officer insert amount] for each calendar day of delay

until the work is completed or accepted.

(b) If the Government terminates the Contractor's right to

proceed, liquidated damages will continue to accrue until the work

is completed. These liquidated damages are in addition to excess

costs of repurchase under the Termination clause.

(End of clause)

52.211-13 Time Extensions.

As prescribed in 11.503(c), insert the following clause:

Time Extensions (Date)

Time extensions for contract changes will depend upon the

extent, if any, by which the changes cause delay in the completion

of the various elements of construction. The change order granting

the time extension may provide that the contract completion date

will be extended only for those specific elements related to the

changed work and that the remaining contract completion dates for

all other portions of the work will not be altered. The change order

also may provide an equitable readjustment of liquidated damages

under the new completion schedule.

(End of clause)

9. Revise section 52.222-4 to read as follows:

52.222-4 Contract Work Hours and Safety Standards Act--Overtime

Compensation.

As prescribed in 22.305, insert the following clause:

Contract Work Hours and Safety Standards Act--Overtime Compensation

(Date)

(a) Overtime requirements. No Contractor or subcontractor

employing laborers or mechanics (see Federal Acquisition Regulation

22.300) shall require or permit them to work over 40 hours in any

workweek unless they are paid at least 1\1/2\ times the basic rate

of pay for each hour worked over 40 hours.

(b) Violation; liability for unpaid wages; liquidated damages.

The responsible Contractor and subcontractor are liable for unpaid

wages if they violate the terms in paragraph (a) of this clause. In

addition, the Contractor and subcontractor are liable for liquidated

damages payable to the Government. The Contracting Officer will

assess such liquidated damages at the rate of

[[Page 2276]]

$10 per affected employee for each calendar day on which the

employer required or permitted the employee to work in excess of the

standard workweek of 40 hours without paying overtime wages required

by the Contract Work Hours and Safety Standards Act.

Contracting Officer will withhold from payments due under the

contract sufficient funds required to satisfy any Contractor or

subcontractor liabilities for unpaid wages and liquidated damages.

If amounts withheld under the contract are insufficient to satisfy

Contractor or subcontractor liabilities, the Contracting Officer

will withhold payments from other Federal or federally assisted

contracts held by the same Contractor that are subject to the

Contract Work Hours and Safety Standards Act.

(d) Payrolls and basic records. (1) The Contractor and its

subcontractors shall maintain payrolls and basic payroll records for

all laborers and mechanics working on the contract during the

contract and shall make them available to the Government until 3

years after contract completion. The records shall contain the name

and address of each employee, social security number, labor

classifications, hourly rates of wages paid, daily and weekly number

of hours worked, deductions made, and actual wages paid. The records

need not duplicate those required for construction work by

Department of Labor regulations at 29 CFR 5.5(a)(3) implementing the

Davis-Bacon Act.

(2) The Contractor and its subcontractors shall allow authorized

representatives of the Contracting Officer or the Department of

Labor to inspect, copy, or transcribe records maintained under

paragraph (d)(1) of this clause. The Contractor or subcontractor

also shall allow authorized representatives of the Contracting

Officer or Department of Labor to interview employees in the

workplace during working hours.

(e) Subcontracts. The Contractor shall insert the provisions set

forth in paragraphs (a) through (d) of this clause in subcontracts

exceeding $100,000 and require subcontractors to include these

provisions in any lower tier subcontracts. The Contractor shall be

responsible for compliance by any subcontractor or lower tier

subcontractor with the provisions set forth in paragraphs (a)

through (d) of this clause.

(End of clause)

[FR Doc. 00-738 Filed 1-12-00; 8:45 am]

BILLING CODE 6820-EP-P

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.