Liquidated damages are generally established in the contract based on what criteria?

Liquidated damages are predetermined amounts that a contract specifies will be owed by the contractor in the event of a failure to meet certain obligations, often related to project completion timelines. The correct answer, which focuses on projected losses due to delay, highlights that these damages are typically based on the anticipated financial impact that a delay in project delivery will cause to the other party (usually the government or the project owner).

When establishing liquidated damages, it is critical to consider the specific losses that could arise from a delay, such as lost revenue, increased operational costs, or other impacts on the project timeline that could affect subsequent phases. This approach ensures that the liquidated damages are reasonable and reflective of actual expected harm, which is essential for enforceability in a legal context.

In contrast, while administrative costs, performance history, and audit findings might inform decisions about contractor management or contract terms, they do not directly relate to the calculation of damages linked to delays in a project’s completion. Each of these factors may play a role in assessing the overall risk associated with the contract, but they do not represent the primary criterion for establishing liquidated damages.