Accounting for Liquidated Damages: 10 Things You Need to Know

What are Liquidated Damages?

1. Liquidated damages are damages agreed upon by the parties to a contract, to be paid in case of breach thereof.

(Article 2226, Civil Code of the Philippines)

When to impose Liquidated Damages?

2. In the procurement of goods, supplies and materials, when the supplier fails to satisfactorily deliver goods under the contract within the specified delivery schedule, inclusive of duly granted time extensions, if any, the supplier shall be liable for damages for the delay and shall pay the procuring entity liquidated damages, not by way of penalty, an amount equal to one-tenth (1/10) of one percent (1%) of the cost of the delayed goods scheduled for delivery for every day of delay until such goods are finally delivered and accepted by the procuring entity concerned.

(Item 3.1, Annex D, Revised Implementing Rules and Regulations, RA No. 9184)

Does the Procuring Entity need to prove that it incurred actual damages to be entitled to Liquidated Damages?

3. The procuring entity need not prove that it has incurred actual damages to be entitled to liquidated damages. Such amount shall be deducted from any money due or which may become due to the supplier, or collected from any securities or warranties posted by the supplier, whichever is convenient to the procuring entity concerned.

(Item 3.2, Annex D, Revised Implementing Rules and Regulations, RA No. 9184)

What to do when Liquidated Damages exceeds 10% of Total Contract Price?

4. In case the total sum of liquidated damages reaches ten percent (10%) of the total contract price, the Procuring Entity concerned may rescind the contract and impose appropriate sanctions over and above the liquidated damages to be paid.

(GPPB Resolution No. 02-2020 dated February 27, 2020)

Amount of Liquidated Damages on Infrastructure Projects

5. For the procurement of infrastructure projects, liquidated damages is an amount equal to at least one tenth (1/10) of one (1) percent of the cost of the unperformed portion of the works for every day of delay.

(GPPB Resolution No. 02-2020 dated February 27, 2020)

6. Once the contract duration expires, including any time extension duly granted, and the contractor (in an infra project) refuses or fails to satisfactorily complete the work, the Procuring Entity shall impose upon the contractor in default liquidated damages.

(GPPB Resolution No. 02-2020 dated February 27, 2020)

Accounting Treatment for Liquidated Damages

7. Liquidated damages is deducted from any money due or which may become due the contractor under the contract or collect such liquidated damages from the retention money or other securities posted by the contractor, or a combination thereof, whichever is convenient to the Procuring Entity.

(GPPB Resolution No. 02-2020 dated February 27, 2020)

8. In case the total sum of liquidated damages reaches ten percent (10%) of the total contract price, the Procuring Entity may either terminate the contract or allow the contractor to continue the works without prejudice to the continued imposition of liquidated damages until the works have been completed.

(GPPB Resolution No. 02-2020 dated February 27, 2020)

9. The appropriate account title where the liquidated damages is recognized in the books of account is miscellaneous income.

10. The Miscellaneous Income account is credited to recognize the revenues and other receipts not elsewhere classified under any specific income account. This includes receipt of payment from liquidated damages, receipt of payment from penalty for late deposits or reporting of collections by AABs, receipt of payment from restitution for lost assets, cash overages, condoned loans, proceeds from sale of unserviceable semi-expendable property, among others. This account is debited, at year end, to close to the Revenue and Expense Summary account, and/or adjustments.

(Revised Chart of Accounts (RCA) (Updated 2019)