Can the government use the withheld retainage to cover the anticipated liquidated damages?
1. The FAR references quoted below in pertinent part are applicable to this response.
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FAR 32.103 -- Progress Payments Under Construction Contracts
When satisfactory progress has not been achieved by a contractor during any period for which a progress payment is to be made, a percentage of the progress payment may be retained. … Upon completion of all contract requirements, retained amounts shall be paid promptly.
FAR 43.103 -- Types of Contract Modifications
(a) Bilateral. A bilateral modification (supplemental agreement) is a contract modification that is signed by the contractor and the contracting officer. Bilateral modifications are used to --
(3) Reflect other agreements of the parties modifying the terms of contracts.
FAR 52.211-12 -- Liquidated Damages – Construction
(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.
FAR 52.232-5 -- Payments Under Fixed-Price Construction Contracts
(e) Retainage. … [I]f satisfactory progress has not been made, the Contracting Officer may retain a maximum of 10 percent of the amount of the payment until satisfactory progress is achieved. When the work is substantially complete, the Contracting Officer may retain from previously withheld funds and future progress payments that amount the Contracting Officer considers adequate for protection of the Government and shall release to the Contractor all the remaining withheld funds. Also, on completion and acceptance of each separate building, public work, or other division of the contract, for which the price is stated separately in the contract, payment shall be made for the completed work without retention of a percentage.
2. As indicated in FAR 32.103 and as expressly stated in clause FAR 52.232-5(e) as described above, all retainage must be paid to the contractor once the work is completed and accepted by the Government. There are no provisions in either of these references that would permit the Government to “unilaterally” withhold any of the retainage dollar amounts for the purpose of offsetting any liquidated damages payments owed by the contractor. However, because the contractor must eventually pay these liquidated damages pursuant to clause FAR 52.211-12, the parties could negotiate a bilateral modification to the contract in accordance with FAR 43.103(a)(3) that would revise the contract terms to permit the use of all or part of the retainage to offset the contractor’s liquidated damages liability and to implement a downward contract price adjustment accordingly.