Liquidated Damages

Liquidated damages are a specific sum of money stated in a contract as the damages one party can recover if the other breaches the agreement. The Government of Canada's Supply Manual glossary defines them this way, and adds that the amount must be a genuine pre-estimate of the loss caused by the breach.

Because the sum is fixed in advance, the buyer can recover it without proving the actual loss. The remedy applies when a named breach occurs, for example late delivery, failure to meet a contractual obligation, or non-compliance with a procurement-program requirement. In Canadian federal procurement, liquidated damages appear in supply arrangements, sample request for proposal documents and defence industrial benefits terms.

Liquidated damages versus a penalty

A liquidated damages clause is not a penalty. The stipulated amount is meant to estimate the loss the buyer is likely to suffer, not to punish the contractor. The Practitioner's Guide for Procurement Pricing and the Supply Manual both treat the concept on this basis.

This distinction matters because the amount must be tied to the likely loss. A figure that is a genuine pre-estimate is recoverable as agreed. That is why the clauses described below set out how the amount is calculated rather than leaving it open.

Set-aside compliance clauses in PSPC supply arrangements

Public Services and Procurement Canada requires liquidated damages in several professional-services supply arrangements when a contractor is found non-compliant with an applicable set-aside program requirement. The clauses appear in the ProServices supply arrangement, the task-based professional services arrangement, the informatics arrangement, the temporary help arrangement and the professional audit support services arrangement.

• Damages are calculated using an assumed 16% profit margin, as set out in the ProServices clause.
• Non-compliance is deemed to begin at contract award. The calculation can include invoices already paid and the value of accepted work not yet paid.
• After receiving written notice, the contractor has 15 calendar days to provide evidence of its actual profit margin and the actual period of non-compliance. Canada may reduce the amount if the evidence supports a lower margin or a shorter period, as the audit support clause also states.
• Payment is due within 30 calendar days after the contractor receives written notice of non-compliance, per the temporary help clause.

Delivery performance clauses

Liquidated damages also attach to delivery performance. A CanadaBuys sample RFP provides for them where at least 10% of deliveries or partial deliveries in a calendar month fail to meet the stated delivery timeframes. The stipulated amount is 15% of the total value of the affected task authorization.

The trigger is measured monthly and tied to a threshold, so a single late delivery does not by itself activate the clause. The amount is a percentage of the affected task authorization, not of the whole contract.

Industrial and Technological Benefits obligations

In defence and marine procurement, Innovation, Science and Economic Development Canada uses liquidated damages in its Industrial and Technological Benefits (ITB) terms. The ITB model terms and conditions apply them where required obligations have not been achieved by the end of the achievement period.

The model provides project-specific formulas based on deficiencies in areas such as overall obligations, regions, small and medium-sized businesses, and value propositions. The published ITB Terms and Conditions v6 sets out the model wording.

What it means for a supplier bidding on Canadian public contracts

Read the liquidated damages clause before you bid, because it states the trigger, the formula and the payment deadline. Under the set-aside clauses, keep records that show your actual profit margin and the period of any non-compliance, since you have 15 calendar days after written notice to submit that evidence. For delivery-based clauses, track monthly delivery performance against the stated timeframes. On defence work, confirm how the project-specific ITB formula applies to your obligations.