Refocusing on Liquidated Damages in Incentive/Disincentive Contracts

Abstract

Incentive/disincentive (I/D) clauses are designed to award payments to contractors if they complete work ahead of schedule and to deduct payments if they overrun the completion time. The use of incentive/disincentive clauses in transportation is heavily influenced by the code of federal regulations. The intended effect of this regulation is to facilitate the inclusion of road user costs (RUC) to accelerate projects. However, the unintended consequence is for disincentives to be construed as unenforceable penalties as illustrated in previous cases. This paper argues for an alternate approach to disincentives in which liquidated damages include all reasonable foreseeable damages, including RUC. The reasons for this approach are to prevent RUC from being construed as impermissible security for performance, to avoid double counting RUC, and to reflect the asymmetry in the legal principles justifying disincentives as opposed to incentives. In addition to the aforementioned legal issues, state transportation departments (STD) often need to consider other issues such as public perception of incentives. This article also discusses some other relevant legal issues, such as constructive acceleration/suspension and sovereign immunity. This article is intended for both agency attorneys and contract engineers who work in the area of contract acceleration.