Contractual Means of Achieving High-level Performance in Transit Contracts (2013)

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15 facture. [The] NYCT Access A Ride (Paratransit) man- agement team monitors contract performance for adher- ence to contractual requirements and standards through periodic surveys and submission of reports from contrac- tors. In addition, the team reviews trends in complaints for each contractor. The monitoring of the performance of the Paratransit call centers is conducted through a soft- ware application that provides real-time and historical comparison of actual performance by [the] agent and by [the] unit to the required contractual standards of per- formance.118 Other transit agencies’ methods of surveillance in- clude a full-time inspector during the entire perform- ance period of a construction or other contract;119 in- spection and oversight by the department’s construction office;120 visits by the project manager to the site daily, the inclusion of performance reports with monthly invoices, and verification by the project manager of the accuracy of any report;121 monitoring through on-site inspections by field personnel to assure compliance with a contract’s scheduling require- ments;122 contracting with third-party vendors for in- spection of large construction jobs and the use of an All-Agency Contractor Evaluation (ACE) and a quality assurance program;123 for service contracts, reliance on management, “ghost rider monitoring,” and video cam- eras on buses and at transit centers;124 the use of cam- eras to film progress on bridge replacement and the comparison by agency personnel of performance at the construction site with the contract’s schedule;125 review by program and contract managers of the schedule, product, and design; and the use of “pilot testing” and “on-site, off-site inspections.”126 V. TRANSIT AGENCY EXPERIENCE IN USING INCENTIVE PAYMENT AND LIQUIDATED- DAMAGES CLAUSES A. Best Practices in the Use of Incentive Clauses A TRB Synthesis states that “recent developments in establishing the construction time of contracts have proven effective in reducing the contract specified dura- tion and in further reducing the achieved construction duration. These techniques are called the A plus B 118 Survey response of NYCT. 119 Survey response of Capital MTA (providing a checklist for the construction of one project). 120 Survey response of CTDOT. 121 Survey responses of Fort Worth Trans. Auth. and San Joaquin RTD (visits by the project manager to the site and review and monitoring of payment inquiries and a calendar of “due or expiring events”). 122 Survey response of MBTA (providing a copy of its stan- dard schedule specifications § 01321 for details). 123 Survey response of MTA Metro-North. 124 Survey response of San Diego MTS. 125 Survey response of San Mateo County Transit Dist. 126 Survey response of SEPTA. method and the incentive/disincentive method of bid- ding contract time.”127 As explained in the Synthesis, the A represents the contractor’s bid price; the contractor’s time estimate for the contract is part of the bid that is multiplied by the daily cost rate, arriving at the B portion of the bid.128 “The number of days bid by the contractor then be- comes the contract completion date against which per- formance is measured.”129 Although the A + B method can be used to calcu- late liquidated damages for failure to complete the contract within the B days bid (plus any agreed exten- sions), “[a]n I/D [incentive/disincentive] modification of this practice has been used more extensively.”130 An incentive/disincentive contract would be bid similar to an A + B but would add the proviso that the contrac- tor is entitled to receive an incentive bonus payment each day that it finishes earlier than the bid time. The disin- centive part of the clause is that the contractor would be subject to deduction from its contract earnings of a simi- lar value for each day it finishes after the latest accept- able contract completion date. When using the incen- tive/disincentive bid process, many owners specify the maximum time that will be allowed under any circum- stances, but set the calculation of the incen- tive/disincentive from the number of days that the con- tractor bid.131 The Synthesis concluded that “[t]he use of I/D scheduling seems to present a significant opportunity to drastically reduce the construction time estimated by project engineers….”132 According to the Best Practices Procurement Manual,133 “[t]ransit agencies have had success in reducing project completion times by using a technique wherein bids are solicited and evaluated in terms of the prices offered and the best achievable completion schedule.”134 However, the Manual suggests that the use of incentives and liquidated damages “is important to keep the bidders ‘honest’ in their proposed com- pletion schedules. The use of bonuses will provide an even stronger incentive for the bidders to success- fully make their proposed schedules after contract award.”135 The Manual includes some guidance on the use of incentives. For example, the price-plus- schedule bid- ding technique of contracting “is likely to encourage efficient contractors to bid, and it offers the likelihood of shorter construction project durations because of the 127 CALLAHAN, supra note 19, at 1. 128 Id. at 13. 129 Id. 130 Id. at 13–14. 131 Id. 132 Id. at 14. 133 FED. TRANSIT ADMIN., BEST PRACTICES PROCUREMENT MANUAL, available at http://www.fta.dot.gov/grants/13054_ 6037.html. 134 Id. § 6.1.9. 135 Id.

16 strong financial incentives for achieving the best com- pletion schedule.136 However, with such a technique, [I]t is extremely important that the construction contractor have control over the work site, and that the Agency’s re- sponsibilities at the work site be minimal or, preferably, nonexistent. If the contractor is dependent upon the Agency to furnish support at the work site, or if the con- tractor’s work is dependent upon the activities of other contractors, the Agency can expect claims regarding the issue of delays, which in turn affect the incentive provi- sions of the construction contract. In view of the prob- abilities of claims and litigation, Agencies should avoid incentive contracts such as this unless they can turn a work site over to a construction contractor and allow the contractor to control that site and the scheduling of all work required to complete the project. Where contrac- tors lack the necessary control over the work site, Agen- cies may well have to pay higher prices, based on the contract bonuses and the contractor’s successful claims for delays, and still have a project that is late in comple- tion.137 Although the agencies provided copies of clauses with specified amounts of incentive payments or liqui- dated damages, no agency indicated how it arrives at a specific hourly or daily rate. Nevertheless, the agen- cies did not report any litigation involving the spe- cific amounts chosen for incentive payments or liqui- dated damages that were accepted by contractors in contracts applicable to construction projects or pro- curements of capital equipment or services. B. Incentive Payments Made by Transit Agencies In response to the survey, transit agencies re- ported on what they had paid in incentive awards or bonuses to a contractor for early or on-time completion for the most recent 3-year period (Table 5). Fourteen agencies using performance-based contracting had not made any incentive payments. Four agencies reported paying incentives amounting to $25,000,138 $28,000,139 $40,000,140 and $132,000.141 One agency, however, reported paying $2,500,000.142 Six agencies did not respond or stated that the information was not available. For example, the NYCT stated that it does not maintain a central database of incentive awards or 136 Id. 137 Id. 138 Survey response of MTA Metro-North (in connection with the completion of repairs to the West Hudson Line after Hurricane Irene). 139 Survey response of Orange County Transp. Auth. (re- porting $10,000 for passenger productivity incentive and $18,000 for on-time performance). 140 Survey response of Utah Transit Auth. (figure applicable to 2010). 141 Survey response of Capital MTA (stating that incentive payments for the 3-year period averaged $44,000 per year). 142 Survey response of Utah Transit Auth. bonuses paid to contractors for early or on-time comple- tion.143 143 Survey response of NYCT.

17 Table 5. Incentive Payments Made by Transit Agencies for the Most Recent 3-Year Period. Amount of Incentive Payments No. of Agencies $0 14 (58%) $25,000 to $30,000 2 (8%) $40,000 1 (3%) $132,000 1 (3%) $2,500,000 1 (3%) Information not available or no response 8 (30%) C. Examples of Incentive Payment Clauses Used by Transit Agencies The Connecticut DOT’s incentive payment and liqui- dated-damages clause establishes an “allowable comple- tion date” and an “incentive completion date.” If the contractor completes the specified work prior to the first date, the contractor receives a lump-sum incentive payment in the maximum amount. If the work is com- pleted after the allowable-completion date but before the incentive-completion date, there is a lump-sum in- centive payment less liquidated damages as calculated pursuant to a formula in the clause. If the contractor completes the work after the allowable-completion date, there is no incentive payment and liquidated damages are assessed for each day after the allowable completion date. Any incentive payment will not exceed $5,000,000, but liquidated damages that may be assessed are unlimited. Presumably, the unlimited range of liqui- dated damages has not precluded contractors from se- curing any necessary bonds or insurance as discussed in Section IV.B of the digest. The department’s incentive payment and liquidated- damages clause provides: Time will be of the essence in completing the stage con- struction for this project and in opening the new bridges, additional travel lanes and shoulders along I-95. In or- der to reduce the hazard, cost and inconvenience to the traveling public; the pollution of the environment; and the detriments to local businesses…, the following plan has been established and made a part of the Contract. The “Allowable Completion Date(s)” are the earliest pos- sible dates that the Department desires to complete the specified Contract Construction Stage elements. The “In- centive Completion Date(s)” are the latest dates that the Contractor will receive incentive payments from the De- partment to complete the specified Contract Construction Stage elements. Completion prior to the “Allowable Com- pletion Date(s)” will result in a Lump Sum Incentive Payment equal to the Maximum Incentive Payment Amount. Should the Contractor complete the specified Contract Construction Stage elements after the “Allowable Com- pletion Date(s)” and on or before the “Incentive Comple- tion Date(s)” the total payment shall be Lump Sum In- centive Payment less Total Liquidated Damages as de- fined below. Lump Sum Incentive Payment = Incentive Bonus Pay- ment Amount + (Incentive Daily Payment Amount x (number of days the Contract Construction Stage ele- ments complete before the “Incentive Completion Date”)) Total Liquidated Damages = Liquidated Damages Daily Amount x (number of days the Contract Construction Stage elements complete after the “Allowable Completion Date”) Total Payment = Lump Sum Incentive Payment – Total Liquidated Damages Should the Contractor fail to complete the specified Con- tract Construction Stage elements by the “Incentive Completion Date(s)” no Incentive Bonus Payment will be made and Liquidated Damages will be assessed for each day that the specified Contract Construction Stage ele- ments complete after the “Allowable Completion Date(s)”. Total Liquidated Damages = Liquidated Damages Daily Amount x (number of days the Contract Construction Stage elements complete after the “Allowable Completion Date”). The Contractor shall complete all Contract stage con- struction work which would impede the corresponding traffic shift and be prepared to open the subject travel ways to traffic at their required widths, with travel lanes and shoulders before the corresponding dates and times, and total combined incentive payment(s) made by the Department to the Contractor under this Contract, if any are due, shall not exceed $5,000,000 for the Project. The total amount of liquidated damages that may be as- sessed and taken by the Department under this Con- tract shall not be limited.144 The department’s contract also includes incentive and liquidated damages tables in connection with the foregoing.145 SANDAG’s contracts may include a provision allow- ing for early-completion incentives and a table for cal- culating the amounts. It should be noted that the clause provides that if the contractor accelerates the 144 CTDOT, App. 3, at A3-61–A3-65. 145 See id.

18 work to meet a milestone established by the contract, any additional costs incurred in doing so are for the contractor’s account, not for the agency’s account.146 If the Engineer determines that all work included in a Milestone described in Section 5-1.05, “Order of Work,” is completed before the time provided for in Sec- tion 8-1.06, “Time of Completion,” less the time specified in the table below, the Contractor is entitled to an Early Completion Incentive in the amount as specified in the table below. Milestone Time Incentive Amount A less 7 working days $20,000.00 B less 14 working days $30,000.00 C less 21 working days $40,000.00 D less 28 working days $50,000.00 E less 35 working days $60,000.00 The early completion incentive time period is defined as the number of working days specified to complete the Milestone in Section 8-1.06, “Time of Completion,” less the time specified in the table above. Should the Contractor choose to accelerate its work to complete the Work specified in each Milestone by the early completion incentive time period, then any addi- tional labor, material, equipment, supervision, and over- head cost for acceleration of this work shall be performed at the Contractor’s expense regardless of whether the Early Completion Incentive is achieved. If the Contractor elects to accept the Early Completion Incentive, then the Contractor agrees to waive all claims for the Work activities performed within that milestone as specified in Section 5-1.18, “Maintaining Rail Traffic,” on page 5-41, in the “Table–ORDER OF WORK.” Contractor must request each incentive amount within 15 working days following completion of the work contained in the Milestone. The Contractor shall submit a signed, written notice to the Engineer that the Contractor has completed the work within the early completion incentive time period. The notice shall state that the Contractor is waiving any and all: (a) Notice of Potential Claims as described in Section 9- 1.04, “Notice of Potential Claim,” for all contract work ac- tivities occurring during the entire early completion in- centive time period; 146 SANDAG, App. 3, at A3-88–A3-92. (b) resulting claims during the entire early completion in- centive time period, and (c) any and all other disputes and claims arising during the entire early completion incentive time period between SANDAG and the Contractor arising under and by virtue of the contract. The Early Completion Incentive shall not be paid by the Engineer if the written request does not conform to all requirements set forth in this section.147 Other transit agencies provided copies of their per- formance-based contracting standards and conditions, including the following: • A quality assurance program and related contrac- tual provisions.148 • Specific liquidated damages with performance measures all paid on a monthly basis.149 • A contractor performance evaluation rating.150 • A contract modification with key performance in- dicators regarding quality of service, including on- board times and on-time performance and efficiency of service.151 • A liquidated-damages clause and a checklist in connection with providing transit services.152 • Performance matrices for contracted route ser- vice,153 paratransit services,154 and university shuttle services.155 • A performance matrix for maintaining sched- ule/run assignments and operator information; bidding- operator assignment selection; vehicle assignment and scheduling; operator availability and scheduled as- signment changes; operator check-in; service dispatch- ing and completion; operator communications; general process control, reporting, security, and performance; and interface requirements.156 • Performance bonuses and penalties (e.g., a com- pleted trips incentive bonus or penalty).157 147 Id. 148 MBTA, App. 3, at A3-73–A3-76. 149 San Diego MTS, App. 3, at A3-93–A3-98; see also San Joaquin RTD, App. 3, at A3-100–A3-107, § 3.4 (service per- formance standards and incentives). 150 CTDOT, App. 3, at A3-60. 151 COTA, App. 3, at A3-11–A3-12. 152 LYNX, App. 3, at A3-13–A3-14. 153 Capital MTA, App. 3, at A3-1–A3-2. 154 Id. at A3-3–A3-5. 155 Id. at A3-8–A3-10. 156 LYNX, App. 3, at A3-16–A3-44. 157 San Diego MTS, App. 3, at A3-93–A3-98.

19 D. Best Practices in the Use of Liquidated- Damages Clauses 1. Legal Requirements for an Enforceable Liquidated- Damages Clause The parties may stipulate to the measure of dam- ages for breach of a contract, including a public con- struction contract.158 Of course, a construction contract may incorporate both an incentive clause and a disin- centive or liquidated- damages clause. As a federal court stated in Mega Construction Co., Inc. v. United States,159 a liquidated-damages clause is particularly “useful…when damages are uncertain in nature or amount or are unmeasurable, as in the case in many government contracts.” (internal quotation marks omit- ted). Indeed, the federal government and all the states have statutes and regulations applicable to the use of liquidated damages in public construction and other contracts.160 In general, although state statutes and regulations, as well as judicial precedents, should be consulted, a liquidated-damages clause must be a reasonable fore- cast of the damages caused by a breach of the con- tract.161 The enforcement of a liquidated-damages clause is a question of law determined by the court.162 The burden of establishing whether a liquidated- damages clause is enforceable is on the party seeking to invalidate the provision.163 In the absence of a statute, the courts typically de- termine the validity of a liquidated-damages clause based on the interpretation in that jurisdiction of the rule set forth in the Restatement of the Law Second, Contracts 2d.164 As the Restatement provides, “[d]amages for breach by either party may be liquidated in the agreement, but only at an amount that is reason- able in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.”165 First, the amount of liquidated damages must 158 Monsanto Co. v. Swann, 308 F. Supp. 2d 937, 944 (E.D. Mo. 2003). 159 29 Fed. Cl. 396, 503 (1993) (citation omitted). 160 Scott M. Tyler, No (Easy) Way Out: “Liquidating” Stipu- lated Damages for Contractor Delay in Public Construction Contracts, 44 DUKE L.J. 357, 374 (1994). 161 Fuqua Constr. Co. v. Pillar Dev., Inc., 293 Ga. App. 462, 463, 667 S.E.2d 633, 635 (2008); Paragon Group, Inc. v. Am- pleman, 878 S.W.2d 878, 881 (Mo. App. 1994). 162 Loomis v. Lange Financial Corp., 109 Nev. 1121, 1125– 26, 865 P.2d 1161, 1163 (1993). 163 Seven Seventeen HB Charlotte Corp. v. Shrine Bowl of Carolinas, Inc., 182 N.C. App. 128, 641 S.E.2d 711, 714 (2007); Harmony v. Sawyer, 98 Nev. 544, 547, 654 P.2d 1022, 1023 (1982). 164 Tyler, supra note 160, at 374–75 (citing James A. Weisfield, Note, “Keep the Change!”: A Critique of the No Actual Injury Defense to Liquidated Damages, 65 WASH. L. REV. 977, 980 (1990)). 165 Restatement (Second) of Contracts 2d, § 356(1). More- over, the Restatement states, “[a] term fixing unreasonably be reasonable in that the sum must “approximate[] the actual loss that has resulted from the particular breach, even though it may not approximate the loss that might have been anticipated under other possible breaches.”166 Second, the more difficult it is to prove that a loss has occurred or to establish the amount of the loss “with the requisite certainty…, the easier it is to show that the amount fixed is reasonable.”167 There are various judicial formulations of the re- quirements for a valid liquidated-damages clause. To uphold a liquidated-damages clause in Georgia, the injury caused by the breach must be difficult or impos- sible of accurate estimation; the parties must have in- tended to provide for damages rather than for a pen- alty; and the sum stipulated must be a reasonable preestimate of the probable loss.168 In Kansas, the courts distinguish unenforceable penalties from enforceable liq- uidated damages using “two considerations”: first, whether the amount is “conscionable,” that is, whether it is “reasonable in view of the value of the subject matter of the contract and of the probable or presumptive loss in case of breach”; second, whether the “nature of the trans- action is such that the amount of actual damage resulting from default would not be easily and readily determin- able”’…Kansas law echoes traditional common-law prin- ciples in this respect.169 (citations omitted). In Missouri, [l]iquidated damages are a measure of compensation that, at the time of contracting, the parties agree will represent damages for breach. …Under Missouri law, liquidated damages provisions are generally enforceable. …The re- quirements for a liquidated damages provision to validly fix damages are (1) that the harm is of a kind difficult to accurately measure and (2) that the amount fixed as damages is a reasonable forecast of the harm caused by a breach.170 (citations omitted). Thus, for a liquidated-damages clause to be upheld, the parties must have intended that the specified liqui- dated damages are a reasonable forecast of damages, which at the time of contracting were incapable of be- ing estimated or were very difficult to estimate. Oth- erwise, a court may determine that the clause in ques- tion is an unenforceable penalty, thereby leaving the party seeking damages for breach to have to prove the actual damages caused by the breach. In a case involving a public contract for the con- struction of a power and fiber-optic line for a city, a large liquidated damages is unenforceable on grounds of public policy as a penalty.” 166 Id. § 356, cmt. b. 167 Id. 168 Fuqua Constr. Co., 293 Ga. App. at 463, 667 S.E.2d at 635. 169 Hutton Contracting Co., Inc. v. City of Coffeyville, 487 F.3d 772, 781 (10th Cir. 2007). 170 Monsanto Co. v. Swann, 308 F. Supp. 2d at 944.

20 federal court in Kansas held that the liquidated- damages clause was reasonable because the district court’s award of liquidated damages approximated the increased administration and engineering costs to the city caused by the delay.171 In a Pennsylvania case, involving a prime contractor on a renovation project for the State’s higher education system, the court affirmed a Board of Claims’ determi- nation that the experienced contractor had agreed to a liquidated-damages clause in a project in which delay was a risk and damages were difficult to prove. The court held that the Board properly assessed liquidated damages based on the period of delay, reduced by the number of days of delay that were beyond the contrac- tor’s control or that were due to the acts or omis- sions of the public entity.172 In contrast, in another Pennsylvania case, the court held that the contractor carried its burden of proving that the full liquidated- damages award allowed by the contract would have been unreasonable and in the nature of a penalty under the circumstances of that case.173 One source argues that “[a] majority of jurisdictions consider whether an amount stipulated as liquidated damages bears a reasonable relation to the dam- ages that reasonably might be expected to result from a breach.”174 (footnote omitted). However, in at least some states, the courts have held that in contracts for public projects a liquidated-damages clause will be en- forced without proof that the public entity suffered any actual damages. As a Missouri court has held: Although we believe the liquidated damages clause was properly invoked under the Restatement standard, there is another reason we believe the assessment of liquidated damages by the Commission against Penzel was cor- rect. The case before us involves a public works project, not a private owner. The southern district in Sides Con- struction Co. v. City of Scott City, 581 S.W.2d 443 (Mo. App. 1979), a case involving a contract to build a swimming pool, bathhouse, and related items in a city park, expressed its view that, in a public works project, the public entity may recover liquidated damages solely upon proof of a violation of the contract.175 171 Hutton Contracting Co., 487 F.3d at 781 (applying Kan- sas law). 172 A.G. Cullen Constr., Inc. v. State Sys. of Higher Educ., 898 A.2d 1145, 1162 (Pa. 2006). 173 Wayne Knorr, Inc. v. Dep’t of Transp., 973 A.2d 1061, 1091 (Pa. 2009). 174 Tyler, 44 DUKE L.J. 357, 377. 175 Taos Constr. Co., Inc. v. Penzel Constr. Co., Inc. 750 S.W.2d 522, 526 (Mo. App. 1988) (also acknowledging other state court opinions in Melwood Constr. Corp. v. State, 126 Misc. 2d 156, 481 N.Y.S.2d 289, 292–93 (1984), aff’d 119 A.D. 2d 734, 132 Misc. 2d 338, 501 N.Y.S.2d 604 (1986); Dave Gustafson & Co. v. State, 83 S.D. 160, 156 N.W.2d 185, 188–89 (1968), as well as federal court decisions in United States v. Bethlehem Steel Co., 205 U.S. 105, 119, 27 S. Ct. 450, 455, 51 L. Ed. 731, 737 (1907); Bethlehem Steel Corp., 234 F. Supp. at 729–32; and Sw. Eng’g Co. v. United States, 341 F.2d 998, 1001–02 (8th Cir. 1965)). As another source observes, some courts have held that in cases involving a public construction contract, “no actual damages, at all, need have been sustained in order to collect liquidated damages.”176 Finally, as also advised by the FTA, a liquidated- damages clause may be used when a recipient “rea- sonably expects to suffer damages through delayed contract completion” and it “would be difficult or im- possible to determine” the amount of damages.177 2. Guidelines for Determining the Amount of Liquidated Damages As stated, the federal government and the states have statutes and regulations regarding the use of liquidated-damages clauses in public construction con- tracts.178 (Footnote omitted.) Moreover, “[s]ome gov- ernment agencies have their own internal guidelines for establishing liquidated damages rates.”179 (Empha- sis supplied.) Some of the statutes and regulations require that government projects include a liquidated- damages clause.180 The statutes or regulations may include or require standards for determining the amount of liquidated damages to be assessed. It should be remembered that “[l]iquidated damages rates consis- tent with such guidelines are presumed to be reason- 176 Matthew J. Christian, Public Entities in Nevada Be- ware: The Liquidated Damages Clause in Your Construction Contract May Be Unenforceable, 12 NEV. LAWYER 16 at *19 and n.1 (Oct. 2004) (citing, e.g., Thompson v. St. Charles County, 126 S.W. 1044, 1050 (Mo. 1910) and Solomon v. Dep’t of State Highways & Transp., 345 N.W.2d 717, 720 (Mich. Ct. App. 1984)). 177 FTA Circular 4220.1F, supra note 21, at IV-12. 178 Tyler, 44 DUKE L.J. 357, 374. 179 SMITH, CURRIE & HANCOCK, supra note 21, at 432. 180 In Tyler, 4 4 D U K E L . J . 375, n.85, the author cites to and quotes from a number of illustrative statutes and regulations on this point, including: ALASKA STAT. § 36.30.430(b)(1) (1992) (“[In state contracts, t]he commissioner shall adopt regulations permitting or requiring the inclu- sion…of clauses providing for…liquidated damages.”); LA. REV. STAT. ANN. § 39:1661(B)(1) (West 1989) (“Regulations may permit or require the inclusion in state contracts of clauses providing for…liquidated damages as appropriate.”); MD. CODE ANN. STATE FIN. & PROC. § 13-218(a)(4) (Supp. 1993) (“[State procurement contracts] shall include clauses cover- ing…liquidated damages, as appropriate”); OHIO REV. CODE ANN. § 731.15 (Baldwin 1992) (“When a bonus is offered for completion of a contract prior to a specified date, [a village] may exact a prorated penalty in like sum for each day of delay beyond the specified date.”); OKLA. STAT. ANN. tit. 15, §§ 214– 215 (West 1993) (“A stipulation…providing for the payment of an amount which shall be presumed to be an amount of dam- age sustained by a breach of such contract, shall be held valid, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage.”); 48 C.F.R. § 12.202 (1993) (Acquisition regulation permitting liquidated damages only “when…the Government may reasonably expect to suffer damage if…performance is delinquent, and…the ex- tent…of such damage would be difficult or impossible to ascer- tain or prove”).

21 able measures of the forseeable actual damages that the government will sustain due to late completion of the project.”181 A Florida statute provides: Every contract let by the department for the performance of work shall contain a provision for payment to the de- partment by the contractor of liquidated damages due to failure of the contractor to complete the contract work within the time stipulated in the contract or within such additional time as may have been granted by the de- partment. The contractual provision shall include a rea- sonable estimate of the damages that would be in- curred by the department as a result of such failure. The department shall establish a schedule of daily liqui- dated damage charges, based on original contract amounts, for construction contracts entered into by the department, which schedule shall be incorporated by reference into the contract.182 (Emphasis supplied.) The same Florida statute also provides: The department shall update the schedule of liqui- dated damages at least once every 2 years, but no more often than once a year. The schedule shall, at a mini- mum, be based on the average construction, engineer- ing, and inspection costs experienced by the depart- ment on contracts over the 2 preceding fiscal years. The schedule shall also include anticipated costs of pro- ject-related delays and inconveniences to the department and traveling public. Anticipated costs may include, but are not limited to, road user costs, a portion of the pro- jected revenues that will be lost due to failure to timely open a project to revenue-producing traffic, costs resulting from retaining detours for an extended time, and other similar costs. Any such liquidated damages paid to the department shall be deposited to the credit of the fund from which payment for the work contracted was au- thorized.183 (Emphasis added.) In an Illinois case, the court explained that the de- fendant arrived at its $200 per-diem amount for liqui- dated damages based in part on the Illinois DOT’s Standard Specifications, which suggested that liqui- dated damages be set at $200 per day on a $1 million to $2 million project.184 Using the FAR as a guide and depending on the contract, “liquidated damages may be assessed for de- lays in completing phases of the contract and for delays 181 SMITH, CURRIE & HANCOCK, supra note 21, at 432. 182 FLA. STAT. § 337.18(2). Although the section does not mention transit specifically, the Public Transportation chapter defines a “transportation facility” to be “any means for the transportation of people or property from place to place which is constructed, operated, or maintained in whole or in part from public funds.” Id. § 340.03(30). 183 Id. § 337.18(2). 184 Stone v. Arcola, 181 Ill. App. 3d 513, 522, 536 N.E.2d 1329, 1335 (1989). Although the liquidated-damages clause was held to be “appropriate and enforceable,” the court ruled in favor of the contractor on other grounds. Id., 181 Ill. App. 3d at 525, 536 N.E.2d at 1337. in substantial completion of the entire project.”185 FAR Section 11.501 sets forth the basic factors and guide- lines that should be considered when determining whether to use a liquidated-damages clause, as well as in establishing the rate for the damages.186 The FTA Circular advises that the rate and meas- urement standards must be specified in the solicita- tion and contract, must be “calculated to reasona- bly reflect the recipient’s costs should the standards not be met,” and must be “established at a specific rate per day for each day beyond the contract’s delivery date or performance period.”187 The file should record “the calculation and rationale” for the damages as- sessed.188 If the government is the cause of the delay, “liquidated damages are either waived or apportioned between the government and the contractor.”189 Any such damages that are recovered must be credited to the grant, thus becoming available to the agency for activities that are within the scope of the grant.190 3. Guidelines for Drafting a Liquidated-Damages Clause There are some suggested guidelines to follow or language to include when drafting a liquidated- damages clause, such as: • The parties should express their intent in the agreement that the liquidated-damages clause is in fact meant to be a liquidated-damages clause and not a penalty. • The liquidated-damages clause is a reasonable forecast of the damages in the event of a breach of the contract. • At the time of entering into the contract, the parties stipulate that the damages in the event of a breach of contract are incapable of being estimated or are very difficult to estimate. • The contract should identify the type or types of breach of contract to which the liquidated- damages clause applies to assist in avoiding a ruling later that the clause is overbroad or punitive. • The parties also may specify the types of damages that are difficult to estimate, such as when damages are incurred because of a delay in the completion of the contract. • It has been recommended that the contract include a formula for calculating the liquidated damages that are applicable to a specific breach, such as a per-diem sum for each day of delay that is attributable to the fault of the contractor.191 It may be noted that an 185 SMITH, CURRIE & HANCOCK, supra note 21, at 432. 186 Id. 187 FTA Circular 4220.1F, supra note 24, at IV-12. 188 Id. 189 CONSTRUCTION LAW HANDBOOK, supra note 99, at 355 (citing George Sollitt Constr. Co. v. United States, 64 Fed. Cl. 229, 243 (2005)). 190 Id. See also FTA, Incentive Contracts, supra note 45. 191 Public Health Trust of Dade County v. Romart Constr., Inc., 577 So. 2d 636, 638 (Fla. Ct. App. 1991) (upholding liq-

22 American Law Reports annotation collects cases that have upheld liquidated-damages clauses, including those providing for liquidated damages on a per-diem basis.192 • The parties may include a stipulation that the liquidated-damages clause is to be applied and en- forced against the breaching party without any show- ing being required that there are any actual damages incurred or suffered at all by the public entity because of the breach and/or without any showing that there is any relationship between the stipulated amount of liq- uidated damages and the amount of actual damages caused by the breach.193 E. Liquidated Damages Collected by Transit Agencies Transit agencies that are using performance-based contracting were asked to state for the most recent 3- year period how much each agency had collected or had been credited in liquidated damages for delay in con- tract completion (Table 6). Of 27 agencies using per- formance-based contracting, 17 reported that no liqui- dated damages had been collected or credited for the most recent 3-year period. Four agencies reported that they had collected or been credited liquidated damages in the amounts of $6,800;194 $29,950;195 $429,000;196 and $471,300.197 One agency, however, reported $6,000,000 in liquidated damages on one project.198 Five agencies either stated that the information was not available or did not respond to the inquiry. uidated damages of $2,500 per day even though the county may have suffered no actual monetary loss). 192 See Annotation, Contractual Provision for Per Diem Payments for Delay in Performance as O n e for Liquidated Damages or Penalty, 12 A.L.R. 4th 891 (2012 Supp.). 193 See discussion of the foregoing suggestions in Henry F. Luepke III’s How to Draft and Enforce a Liquidated Damages Clause, 61 J. OF MO. BAR 324, 326–28 (2005). 194 Survey response of Orange County Transp. Auth. (stat- ing that the amount was collected on one contract). 195 Survey response of Omnitrans (reporting that for 1 year (July 1, 2010, to June 30, 2011) it had collected or been credited $16,000 and that for a partial year (July 1, 2011, to Feb. 29, 2012) it had collected or been credited $13,550). 196 Survey response of Capital MTA (reporting an average of $143,000 per year). 197 Survey response of CTDOT (reporting $258,000 for 2009, $63,200 for 2010, and $150,100 for 2011). 198 Survey response of Port Authority/Trans Hudson (PATH).

23 Table 6. Liquidated Damages Collected by or Credited to Transit Agencies for the Most Recent 3-Year Period. Amount of Liquidated Damages No. of Agencies $0 17 (63%) $6,500 1 (4%) $29,950 1 (4%) $429,000 to $471,300 2 (7%) $6,000,000 1 (4%) Information not available or agency not responding 5 (18%) F. Examples of Liquidated-Damages Clauses Used by Transit Agencies The policy of the Central Florida Regional Transpor- tation Authority (LYNX) on liquidated damages in- cludes a definition of liquidated damages, a require- ment that estimated damages must be computed on a case-by-case basis, a liquidated-damages checklist to complete, a statement that liquidated damages may be required in any type of contract, and other guidance on the assessment of liquidated damages: Liquidated damages are a specific sum (or a sum readily determinable) of money stipulated in the contract as the amount to be recovered for each day (or other pe- riod as appropriate) of delay in delivery of the product or completion of the contract. They do not represent actual damages but are established in the initial contract as a substitute for actual damages. They should represent, however, the most realistic forecast possible of what the actual damages are likely to be. In order to be enforce- able, liquidated damages must be compensatory in na- ture (a reasonable estimate of actual damages), and not in the nature of a penalty. If the liquidated damages, in effect, provide for a penalty or punishment for breach of contract, rather than compensation for loss sustained by the Agency, the provision will be unenforceable by a court on grounds of public policy. A Liquidated Damages Checklist must be completed by the Project Manager prior to issuing the solicitation in order to document the Agency’s estimate of what actual damages are likely to be for delays in contract comple- tion. The estimated damages must be computed on a case- by-case basis and documented in the contract file. Liquidated damages may be used in any type of contract: supplies, services and construction when the time of de- livery is important and LYNX may reasonably expect to suffer damage if performance is delinquent. When consid- ering whether to use a liquidated damages clause, factors to be considered include the probable effect upon bidders’ pricing, potential for discouraging competition, and the costs and difficulties of contract administration. When it is determined that a liquidated damages clause will be included in the contract, the applicable clause and appro- priate rate(s) must be contained in the solicitation. Capping the Liquidated Damages: Open-ended, uncapped liquidated damages may be a serious detriment to compe- tition and may increase the bid prices. Many companies are unable to accept open-ended risks or will simply add contingencies to cover the potential financial impact the damages may cause. If a surety bond is being required for the contract, uncapped liquidated damages may be- come a detriment to obtaining a bond. The contract, therefore, should include an overall maximum dollar amount or period of time, or both, during which liqui- dated damages may be assessed. Substantial Completion: Liquidated damages are not assessed after the date on which the work is substan- tially completed. Substantial completion is defined as “the time when the construction site or the supplies deliv- ered are capable of being used for their intended pur- poses.” There is no predetermined percentage that will establish substantial completion—the criterion to be used is the availability of the work for its intended use, not a formula as to the percentage of completion.199 Liquidated-damages clauses used by the San Mateo County Transit District provide for both hourly and daily rates of liquidated damages ranging from $2,000 per hour for certain delays to $7,500 per day for delays in obtaining substantial completion of the work. GP8.4 Liquidated Damages In case all or any designated portion of the Work called for under the Contract does not achieve Substan- tial Completion within the time set forth in the Special Provisions, damage will be sustained by the Owner, and the Contractor will pay to the Owner the sum set forth in the Special Provisions for each and every day’s delay in achieving Substantial Completion of the Work in excess of the time specified in the Special Provisions. The Owner may deduct the amount of liquidated damages from any monies due or that may become due the Contractor under the Contract. SECTION 01002 LIQUIDATED DAMAGES PART 1— GENERAL 1.01 DESCRIPTION 199 LYNX, App. 3, at A3-13–A3-14.

24 A. Section includes liquidated damages for Substantial Completion and interim milestones. 1.02 LIQUIDATED DAMAGES A. Attention is directed to General Provisions GP8.4, Liq- uidated Damages. B. Liquidated damages in the amount shown per hour shall be assessed for each and every hour delay in finish- ing the Work of each interim milestone in excess of the specified completion time or date as follows: 1. $2,000 per hour shall be assessed for each and every hour’s delay in completing work performed under a street closure…. C. Liquidated damages in the amount shown per day or as otherwise indicated shall be assessed for each and every day’s delay in finishing the Work of each in- terim milestone in excess of the specified completion time or date as follows: 1. $5,000 per day shall be assessed for each and every day’s delay in completing CP Scott and the temporary station as described in Section 01001. D. In the event that the Owner directs Contractor to proceed with the work of Option 1, then: 1. Liquidated damages in the amount of $7,500 per day shall be assessed for each and every day’s delay in com- pleting the Work of the Main Contract as described in Section 01001. E. Liquidated damages in the amount of $7,500 per day shall be assessed for each and every day’s delay in ob- taining Substantial Completion of the Work as described in Section 01001. F. Liquidated damages shall accrue separately for each occurrence listed in Paragraphs 8, C D and E (above).200 Other transit agencies provided copies of their con- tractual documents and policies regarding the assess- ment of liquidated damages, including: • Liquidated-damages clauses and checklists for liq- uidated damages.201 • A contract close-out performance evaluation.202 • Provisions regarding the preparation/bid tender with daily liquidated damages for each day the project is delayed beyond the mandatory completion date.203 • A solicitation packet for an invitation to bid for services,204 a best-value bid for services for asbestos 200 San Mateo County Transit Dist., App. 3, at A3-114–A3- 121. 201 See LYNX, App. 3, at A3-13–A3-14 and A3-15 (liquidated damages checklist), and LYNX, App. 3, at A3-13–A3-14 (liqui- dated damages definition, policy, and guidelines). See also Or- ange County Transp. Auth., App. 3, at A3-82–A3-87 (deduc- tions for liquidated damages). 202 LYNX, App. 3, at A3-15. 203 MBTA, App. 3, at A3-73–A3-76. 204 COTPA, App. 3, at A3-51–A3-55. clean-up and removal,205 and the agency’s vendor evaluation form.206 • A schedule of deductions based on the value of the contract and the charges per calendar day for failure to complete the work on time.207 • The assessment of liquidated damages in a medi- cal services contract for drug testing.208 • Various other clauses providing for the assessment of liquidated damages.209 G. The Use of Dispute Resolution Boards According to a TRB Synthesis, some agencies have adopted the use of “a Dispute Review Board (DRB) to hear disputes relatively contemporaneously with construction and to submit nonbinding findings” to settle disputes.210 According to the Synthesis, [t]he DRB was originally conceived to evaluate claims in differing site conditions, particularly in tunnel construc- tion. The process, however, has been so successful that it has rapidly spread to other parts of the transit construc- tion industry and is now being extensively used by sev- eral highway departments and is gaining acceptance in commercial applications.211 Moreover, [t]he DRB is created as a part of a contracting process and is established by the contract between the owner and the contractor and comes into being at the beginning of the contract. Initially, both the owner and the contrac- tor select their appointed representative to the DRB, who must be acceptable to the other party, and these two nominees then select the third member who acts as chairman. …. The DRB members then become familiar with the con- tract through the review of the contract documents and a tour of the contract site.212 Although some transit agencies may be using DRBs, the agencies responding to the survey did not state or otherwise indicate that they are using DRBs in connection with their performance-based contracts. 205 Id. at A3-56–A3-57. 206 Id. at A3-58–A3-59. 207 MBTA, App. 3, at A3-73–A3-76 (General Conditions § 6.9). 208 Capital MTA, App. 3, at A3-7. 209 See MTA Metro-North, App. 3, at A3-77 (Metro-North’s damages in case of delay); San Joaquin RTD, App. 3, at A3-99, § 2.35 (liquidated damages); San Mateo County Transit Dist., App. 3, at A3-114–A3-121, § 01002 (liquidated damages from $2,000 per hour to $7,500 per day), and § 26 (liquidated dam- ages); TriMet, App. 3, at A3-122, § 5.2.3 (liquidated dam- ages of $100,000 after a date certain plus $10,000 for each calendar day until 10 cars have been conditionally accepted). 210 CALLAHAN, supra note 19. 211 Id. at 23. 212 Id.