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    Can the Government unilaterally deduct funds for liquidated damages although the project is not complete (ie the contractor is still working) and we are not preparing for close-out/final payment?


    First let’s consider the clauses that should be in your contract and come into play in these circumstances.
    If your contract in construction is greater than $700,000, then you are required to insert clause FAR 52.211-12 -- Liquidated Damages – Construction. If the Contractor fails to complete the work within the time specified in the contract, the Contractor shall pay liquidated damages to the Government based on the daily rate specified in the contract.

    FAR 52.228-15 - Performance and Payment Bonds – Construction – For all construction contracts over $150,000, the contracting officer is required to obtain 100% performance and payment bonds.  When the contract price is increased, an additional amount equal to 100 percent of the increase of both the performance and payment bonds are required per FAR 28.102-2(b).

    FAR 52.236-15 -- Schedules for Construction Contracts. Paragraph of (b) of this clause gives the contracting office the authority to direct the contractor to accelerate their work to get back on schedule at the contractor’s expense.  “If, in the opinion of the Contracting Officer, the Contractor falls behind the approved schedule, the Contractor shall take steps necessary to improve its progress, including those that may be required by the Contracting Officer, without additional cost to the Government. In this circumstance, the Contracting Officer may require the Contractor to increase the number of shifts, overtime operations, days of work, and/or the amount of construction plant, and to submit for approval any supplementary schedule or schedules in chart form as the Contracting Officer deems necessary to demonstrate how the approved rate of progress will be regained.”

    FAR 52.232-5 -- Payments Under Fixed-Price Construction Contracts – This clause discusses what the contracting officer should consider in retainage and what to do when the work is substantially complete.
    (e) Retainage. If the Contracting Officer finds that satisfactory progress was achieved during any period for which a progress payment is to be made, the Contracting Officer shall authorize payment to be made in full. However, if 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.

    The following are the steps to take in with the limited information provided:

    1. Make sure that all modifications/change orders that could impact time owed the contract have been completed and the approved schedule is updated to reflect any time extension due.
    2. Under the Schedules clause FAR 52.236-15, with your contractor being behind schedule, the contracting office under the authority of this clause can direct the contractor to accelerate their work to get back on schedule at the contractor’s expense. This should be done in writing. One caution is once the contractor is back on schedule make sure the acceleration order is withdrawn so you do end up in a constructive change.
    3. As for invoicing and payments, there are two ways that funds can be held back: withholdings or retainage. Withholding differs from retainage.  Retainage can only be 10%.  Withholding can be an amount determined to cover the government’s risk based on the situation.  Under FAR 52.232-5, this clause allows retainage is for unsatisfactory progress this should have been withheld from previous and current invoices as you have seen issues on the contract.  Withholdings or deductions for Liquidated damages, found in clause FAR 52.211-12, must be withheld for any days, within the invoice period, beyond the contract completion date, considering all valid time extensions. If the construction project has been phased, verify if there are separate LD rates for each phase.
    4. FAR 52.232-5(d) provides for refund of unearned amounts. If the Contractor, after making a certified request for progress payments, discovers that a portion or all of such request constitutes a payment for performance by the Contractor that fails to conform to the specifications, terms, and conditions of this contract (hereinafter referred to as the “unearned amount”), the Contractor shall --
    (1) Notify the Contracting Officer of such performance deficiency; and
    (2) Be obligated to pay the Government an amount (computed by the Contracting Officer in the manner provided in paragraph (j) of this clause) equal to interest on the unearned amount from the 8th day after the date of receipt of the unearned amount until --
    (i) The date the Contractor notifies the Contracting Officer that the performance deficiency has been corrected; or
    (ii) The date the Contractor reduces the amount of any subsequent certified request for progress payments by an amount equal to the unearned amount.
    (j) Interest computation on unearned amounts. In accordance with 31 U.S.C. 3903(c)(1), the amount payable under subparagraph (d)(2) of this clause shall be --
    (1) Computed at the rate of average bond equivalent rates of 91-day Treasury bills auctioned at the most recent auction of such bills prior to the date the Contractor receives the unearned amount; and
    (2) Deducted from the next available payment to the Contractor.
    What does all this mean?  If you overpaid the contractor, under the payment clause the contractor could owe you back the LD’s due plus interest to cover the terms and conditions of the Liquidated Damages clause, FAR 52.211-12 as the contractor failed to meet terms and conditions of the contract (Schedule, LD clauses, etc.).
    5. With this contract having a performance bond under FAR 52.228-15 and having performance issues, I would consider contacting the bonding company and informing them of the performance issues.  Also if you cannot get the funds repaid from the contractor, under item 4 above, I would also notify the bonding company of this.
    6. As a final option to retrieve liquidated damages, the Contracting Officer can proceed under FAR 33.206(b) -- Initiation of a Claim and the Disputes clause, FAR 52.233-1 of the contract. The contracting officer shall issue a written decision on any Government claim initiated against a contractor within 6 years after accrual of the claim, unless the contracting parties agreed to a shorter time period.

    Overall, this is not a simple one step solution.  There are lots of issues to consider and steps you must take. Make sure you read your contract and understand your rights and authority under the clauses.  Document what you are doing and communicate with your contractor, bonding company, legal, finance and others involved in administering the contract.

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