Federal Government Assessed liquidated damages (LDs) against Design-Build contractor who failed to timely complete the final phase of a three-phase contract.  Armed Services Board of Contract Appeals held that the government failed to property apportion the daily LD rate  based on the fact that contractor had substantially completed the first two phases, and the government was unreasonably attempting to assess the full daily rate of LDs to the small percentage of work remaining to be completed under phase III.  Appeal of Sauer Inc., 21-1 BCA 37845, 2021 WL 1725380 (2021).

This project involved a design-build contract for the design and construction of the 82nd Airborne Division Headquarters in Fort Brag, North Carolina.  The Request for Proposals (RFP) identified a “primary facility” that included the “Command Headquarters”.   The RFP also identified what it called “supporting facilities” such as “water and sewer service”, etc.  A liquidated damages provision in the RFP stated damages of $4,365.81 per day would be assessed if the Contractor failed to complete the work within the time specified by the task order.

Three separate Project phases were identified in the RFP.  The Task Order specified LDs to be applied to completion of the project but did not tie these LDs to completion of the three separate phases of construction.  When the government issued notice to the contractor that it was assessing LDs in the amount of $144,071 for a total of 33 days late completion.  This was for work that the contractor performed on Phase 3 work.

On the appeal to the Board, the contractor asserted that 98.7 percent of the total construction-related costs were placed in Phase I – construction of the new headquarters building.  The government denied that allegation but failed to explain why.  In its certified claim to the contracting officer and ultimate appeal to the Board, the contractor claimed that the government improperly assessed LDs after substantial completion of the project had been achieved by the contractor.

In analyzing the issues on appeal, the Board noted that LDs cannot be assessed after substantial completion has been achieved, and that this particular case turns on the question of when a project with three phases has achieved substantial completion.  The contractor asserts that substantial completion was achieved when the government obtained beneficial occupancy of the headquarters building.

The government relies on previous Board decisions for the proposition “that a project requires completion of all phases to achieve substantial completion.”    That reliance was misplaced, said the Board because unlike those other cases, the “record here indicates no follow-on work waiting to be performed by another contractor at the site, or that the Project was not available for its intended use” because the parking lot had not been completed.

The Board also disagreed with the government’s assertion that “by parsing the contract into separate distinct phases, the parties agreed that each phase would have functionally equivalent importance regarding performance.”   No evidence here supported a finding that completion of the Phase III work was functionally equivalent to completion of Phase 1.  “The government offers no evidence that strict compliance of all three phases truly was “essential.”

Appellant was found by the Board to be entitled to summary judgment on the issue of substantial completion because the government “failed to reference sufficient evidence demonstrating that a reasonable fact finder could decide in favor of the government on the issue of substantial completion of Phases I and II”.  But the Board was unable to make this same determination regarding substantial completion of Phase III.  That issue will await determination by the fact finder at trial.

With regard to the LDs assessed by the government, the Board held that “The government’s assessment of the full amount of daily liquidated damages after substantial completion and acceptance of the first two phases is unreasonable”.  Regardless of whether the LD “rate” that was established pre-contract award was reasonable, the Board held that this contractor had the right to challenge the reasonableness of the government’s decision not to apportion that rate, even though contractor had completed Phases I and II.   Granting in part, the contractor’s motion for summary judgment, the Board held that “judgment is granted in part on the issue of [Contractor’s] challenge to the government’s assessment of liquidated damages and its failure to apportion liquidated damages based upon [contractor’s] substantial completion of Phases I and II of the Task Order.”   The case will now go to trial to determine the remaining factual issue regarding substantial completion of Phase III and the proper apportionment of the LD damage rate to Phase III – unless, of course, the parties are able to settle for some smaller LD amount acceptable to the contractor and the government.


About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with ConstructionRisk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk Report, Vol. 23, No. 6 (October 2021).

Copyright 2021, ConstructionRisk, LLC