Para 9.4.7 - Liquidated Damages | KartavyaDesk
Original Rule Text
9.4.7. Quantum of LD 1. While granting extension of the delivery period for delays attributable entirely to the contractor , where the delivery of services or any activity thereof is accepted after expiry of the original delivery period, the Procuring Entity may recover from the contractor, as liquidated damages for each week of delay or part thereof until actual delivery or performance, but not as a penalty, a sum equivalent to the 0.5% (half per cent, or any other percentage if prescribed) of the value of delayed portion (that includes variations, taxes and duties) of the Services, subject to a maximum of 5% (Five per cent) of the total contract value. Besides liquidated damages during such a delay, the denial clause shall also apply. The Procuring Entity may deduct liquidated damages from payments due to the contractor. Payment of liquidated damages shall not affect the contractor’s liabilities. For purpose of GST, LD should be shown as deduction on the invoice value by the contractor. 2. In contracts governed by any type of variation (PVC, ERV or statutory variations), LDs (if a percentage of the price) will be applicable on the price as varied by the operation of the PVC. 3. In case of delays for which both procuring entity and contractor may be responsible to a different extent, procuring entity with the approval of CA and concurrence of finance decide a lower quantum of LD, and consider waiver of denial clause on the merit of the case. 4. LDs accrue only in case of delayed services. Where or as far as no services have been delivered under a contract, upon cancellation, recovery of only the loss occasioned by breach of contract can be made, notwithstanding the fact that prior to the cancellation one or more extensions of the delivery period with reservation of the right to LD are granted.
What This Means
Para 9.4.7 of the Manual for Procurement of Non-Consultancy Services deals with Liquidated Damages (LD), which are essentially penalties for delays in service delivery caused by the contractor. If a contractor fails to deliver services on time, and the government agency grants an extension, the agency can deduct a certain percentage of the contract value as LD for each week of delay. This isn't considered a penalty but rather compensation for the inconvenience caused by the delay. The maximum LD that can be levied is capped at 5% of the total contract value. Importantly, even with LD, the contractor remains responsible for fulfilling their obligations under the contract. The rule also addresses situations where delays are caused by both the contractor and the procuring entity, allowing for a reduced LD amount after proper approvals. Finally, if the contract is cancelled and no services were delivered, the agency can only recover the actual loss caused by the breach, even if extensions with LD reservations were previously granted.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- •Liquidated Damages (LD) are applied for delays in service delivery attributable to the contractor.
- •LD is calculated as a percentage (typically 0.5%) of the delayed portion's value per week of delay, up to a maximum of 5% of the total contract value.
- •LD can be deducted from payments due to the contractor, but it doesn't absolve them of their contractual liabilities.
- •If delays are due to both the contractor and the procuring entity, a reduced LD amount can be decided with proper approvals.
- •If a contract is cancelled before any services are delivered, only the actual loss due to the breach can be recovered, regardless of prior extensions with LD reservations.
Practical Example
The Ministry of Textiles contracted 'WeaveWell Services' for providing weaving training to artisans for ₹10,00,000. The original delivery date was December 31, 2023, but WeaveWell Services completed the training on January 31, 2024, due to logistical issues on their end. The Ministry granted an extension. As per Para 9.4.7, the Ministry can levy LD at 0.5% per week of delay. The delay is 4 weeks (January 1-31). Therefore, the LD would be 4 weeks * 0.5% * ₹10,00,000 = ₹20,000. This amount will be deducted from WeaveWell Services' final payment. However, if the contract was cancelled on January 15, 2024, due to WeaveWell's inability to provide trainers, and no training had commenced, the Ministry could only recover the actual losses incurred due to the breach of contract, such as costs associated with finding a new vendor.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
What happens if the delay is due to unforeseen circumstances like a natural disaster?▼
Can the Procuring Entity charge more than 5% as Liquidated Damages?▼
What is the 'denial clause' mentioned in the rule?▼
How does GST apply to Liquidated Damages?▼
If the contract includes Price Variation Clauses (PVC), how are LD calculated?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Test Your Knowledge
Question 1 of 3
According to Para 9.4.7 of the Manual for Procurement of Non-Consultancy Services, what is the maximum Liquidated Damages (LD) that can be levied on a contractor for delays in service delivery?
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