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What are liquidated damages?

Liquidated damages are a predetermined rate of payment, specified in the contract, payable to the government by the contractor, for the contractor's delay in performance. They are assessed when:

Time of delivery or performance is such an important factor in the award of the contract that the government may reasonably expect to suffer damage if the delivery or performance is delinquent

and

The extent or amount of such damage would be difficult or impossible to ascertain or prove.

What factors must the COR consider when rejecting nonconforming supplies or services?

Supplies or services that do not conform to the terms of the contract should be rejected. Inspection and acceptance clauses in the contract provide the basis for rejecting supplies and services. After a product or service has been accepted, the government cannot later reject it; acceptance is final, except when:

Latent defects exist in the items accepted

The government determines that fraud has been committed by the contractor

Gross mistakes amounting to fraud are discovered.

When a nonconformance is critical or significant, the CO must ordinarily reject the nonconforming supplies or services. Even in those circumstances, however, acceptance may be in the government's best interest (e.g., for reasons of economy or urgency). In such circumstances, a CO must base a decision to accept supplies or services on the following factors:

The requiring activity's (the program or project office) assertion that the nonconforming deliverable is safe to use and will meet the intended purpose.

Information concerning the nature and extent of nonconformance.

A request from the contractor for acceptance of the deliverable.

A recommendation from the requiring activity for acceptance or rejection with supporting rationale.

Legal consideration for the nonconformance. A contract adjustment might be considered appropriate, as well as any other adjustment offered by the contractor, such as a reduction in unit price for the end items, or perhaps the provision of additional units at no cost.

What are latent defects?

A defect is considered latent (hidden) when the defect was not known or could not have been known through reasonable inspection and testing at the time of acceptance. Generally, the contractor is responsible for latent defects discovered at any time after final acceptance. For a defect to be latent, it must be:

Not susceptible to discovery using inspection methods that are reasonable under the circumstances

and

In existence at the time of acceptance.

A "reasonable" inspection of an item is one that would normally be performed as a matter of routine in the industry for that item.

What is fraud?

Fraud is "an intentional deception of the government by the contractor and is . . . covered by the False Claims Act, 18 U.S.C. 287, 31 U.S.C. 231, and the False Statements Act, 18 U.S.C. 1001.

If the government charges the contractor with fraud, it will usually elect to proceed under one of these statutes since the remedies include civil penalties of double damages in addition to criminal penalties. If the government proceeds under the terms of the inspection clause, its success will result only in defeating the finality of acceptance."[1]

To demonstrate that the contractor has committed fraud under a contract, the evidence must show:

A misrepresentation of fact (actual or implied) or a concealment of a material fact

Contractor knowledge of facts that were concealed or misrepresented

An intent to mislead the government into accepting a misrepresentation or concealment as fact

Government injury suffered as a result of the misrepresentation or concealment.

Evidence is defined as "all means by which any alleged matter of fact, the truth of which is submitted to investigation at judicial trial, is established or disproved. Evidence includes the testimony of witnesses, introduction of records, documents, exhibits, or any other relevant matter offered for the purpose of inducing the tier of fact's (fact finder's) belief in the party's contention."[2]

  • [1] John Cibinic, Jr., and Ralph C. Nash, Jr., Administration of Government Contracts (Washington, D.C.: George Washington University Press, 1981), p. 378.
  • [2] Steven H. Gifis, Barron's Dictionary of Legal Terms, 3rd ed. (Hauppauge, NY: Barron's Educational Services, Inc., 1998), p. 165.
 
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