8.2.1 Liquidated damages for delayed Service Commencement are an ascertained payment representing a genuine pre-estimate of the losses or damages the Authority will suffer if the Contractor fails to fulfil its obligation to commence Service delivery on time. If the Authority will not suffer any losses in excess of the payment of the Unitary Charge (taking into account the cost of procuring the Service itself), liquidated damages are not appropriate or recoverable. If the Authority will suffer such losses (including any costs payable under any contracts for soft services), liquidated damages may be appropriate but only where they offer the Authority value for money, taking into account the effect of any other protections being required by the Authority, the Contractor or its financiers.
8.2.2 To protect against late Service Commencement, Senior Lenders will usually require the Sub-Contractors to cover debt service for any period of delay through liquidated damages paid to the Contractor (secured to the Senior Lenders) as the finance plan will assume Service Commencement and so finance costs being recovered in accordance with a particular timetable. The Construction Sub-Contractor will price this requirement into the price it charges the Contractor (for example, by increasing its construction costs to ensure completion will be achieved on time) and may also require a longer build period to allow itself more contingency time. This cost is then likely to be passed on to the Authority through the Unitary Charge and the Project timetable is likely to be longer. If the Authority requires liquidated damages to be paid by the Contractor to itself in addition to those already required by the Senior Lenders, this is likely to further increase the Unitary Charge and the build period. Liquidated damages payable to the Authority may therefore prove bad value for money unless circumstances such as those outlined in Section 8.2.3 exist.
8.2.3 Liquidated damages may prove value for money in situations where the costs the Authority incurs as a result of the delay are so great as to justify the increased expense (e.g. a higher Unitary Charge) to which such liquidated damages give rise. This could be the case where there are critical dates (see Section 7.3.1 (Critical Dates)) and the Authority's contingency plan to cope with such dates has a significant quantifiable expense associated with it.1 Liquidated damages may also be justified where:
• the Authority has contributed a valuable asset to the Project which could otherwise have been used by the Authority during the period prior to Service Commencement, so an "opportunity cost" is incurred;
• there are no prior claims on liquidated damages paid by a Sub-Contractor (for example, from Senior Lenders) and liquidated damages give value for money; or
• the Authority has to pay for soft services which it is committed to pay for.
8.2.4 If liquidated damages are considered worthwhile and value for money, the Authority should specify the level of liquidated damages, and any cap,2 early on in the bidding process (i.e. in the ITPD) to enable the bidders to price the risk of incurring liquidated damages.3 Bidders could also be invited to submit alternative bids without liquidated damages and/or using higher or lower caps. The Authority's technical or financial adviser should advise on an appropriate level.
8.2.5 The Authority should note that any assessment of the appropriate rate of liquidated damages must be a genuine pre-estimate of the losses the Authority is likely to incur as a result of the delay in Service Commencement. If this is not the case, the rate may be judged to be a penalty and the liquidated damages provision will not be legally enforceable against the Contractor.
8.2.6 If the Contractor is not going to be able to deliver the Service on time, but is able to find some form of alternative which is acceptable to the Authority and which can commence on the Planned Service Commencement Date (or will reduce the delay in Service Commencement), the Authority may agree that this alternative service may be provided for a certain period for a reduced Unitary Charge. Any liquidated damages liability will be deferred for the period in question and the Contractor's revenue stream will commence. The Unitary Charge will be reduced appropriately to reflect the fact that the Service is not being provided as contracted. This is not an issue which needs to (or necessarily can) be agreed prior to signature of the Contract, so it may need to be negotiated at the time.
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1 For example, in school projects the Authority may have to purchase temporary classrooms to replace school accommodation that is not available; in prison projects, the Authority may have to pay to house prisoners in police cells because a prison is not ready on time; and in training projects involving flight simulators, the Authority may incur costs in providing training by alternative means if the simulator-based training is not available on time.
2 A cap will be a key issue for financiers.
3 It will assist the evaluation of any bids submitted if the cost of providing liquidated damages could be identified separately within such bids.