Liquidated damages in government contracts: LD rates

GFR 2017 Rule 225(xvi) says all contracts shall contain a provision for recovery of liquidated damages for defaults by the contractor. An exemption is allowed only in exceptional circumstances, justified in writing. The Goods Manual explains that the law allows recovery of a pre-estimated loss when the term is in the contract, without the buyer proving the actual loss.

The default rate is 0.5% for each week of delay or part of a week, capped at 5% of the total contract value. For goods it is charged on the delivered price of the delayed goods. For works it is 0.5% of the contract value a week, or 1% a week for repair works costing up to Rs 20 lakh. For non-consultancy services it is charged on the delayed portion. The cap rises to 10% in the case of inordinate delay, which the Goods Manual defines as inexcusable delay of more than one quarter (25%) of the total completion period.

LD comes off what you are paid, so it cuts margin rather than being a separate bill. The manuals say that, for GST, LD is shown as a deduction on the invoice value. As an illustration, on a Rs 20 lakh goods order where Rs 10 lakh of goods arrives three weeks late, the deduction is 0.5% x 3 weeks x Rs 10 lakh, which is Rs 15,000. The 5% cap would be Rs 1 lakh.

It applies only to delay you are responsible for. Where the delay is the buyer's, such as a late sample approval, the delivery period is re-fixed without LD. Where both sides share the blame, the Goods Manual leaves the levy of LD to be decided on merits. If nothing was supplied and the contract is cancelled, only the loss actually caused can be recovered. The Goods Manual says development and indigenisation contracts do not carry LD.

Late supply is a breach of the delivery schedule, because the Goods Manual treats time as the essence of the contract (para 9.3.3). Under paras 9.3.10 and 9.3.11, buyers are told to hold late supplies provisionally under a franking clause that says retention is not an extension or condonation, and to ask the supplier to obtain an extension. The Manual also says LD should normally not be waived, and that a waiver needs the approval of the competent authority and recorded reasons.

The percentages are defaults. The goods and services text allows another percentage if the contract prescribes it, so the bid and contract terms are what bind you. Keep this term apart from the Integrity Pact, whose model Section 4 uses the words liquidated damages for a remedy after corruption, measured by contract value or Performance Bank Guarantee amount, not by delay.