Liquidated damages in government contracts: rate and cap

Liquidated damages (LD) are the money a government buyer deducts when you deliver late. On GeM the rule is 0.5% of the value of the delayed quantity for each week or part of a week, capped at 5% of the total contract value. If the delay is inordinate, the cap rises to 10%.

LD usually shows up as a payment smaller than your invoice, because the buyer deducts it from the bill. By then the arguments are harder. This post covers the whole mechanism: where the rate comes from, how the maths works in rupees, how extensions and force majeure change it, and how to push back when you think the buyer got it wrong.

What are liquidated damages?

LD is compensation for late delivery that both parties agree on in advance, inside the contract. The buyer doesn’t have to prove what the delay actually cost. The Manual for Procurement of Goods, 2024 (para 9.3.8) defines it as compensation for loss from late delivery, “actually incurred as well as notional”, where the loss is pre-estimated and mutually agreed.

The GeM General Terms and Conditions (GTC, Version 1.29 of 25 March 2026) make the same point in clause 15. LD is recovered “as pre-estimated damages”. Clause 14 adds that the delivery period is “deemed to be essence of the Contract”, so the date itself is a term you can breach.

Where the rule comes from

Three layers decide your LD:

Layer	What it says about LD
General Financial Rules, Rule 225(xvi)	All contracts must contain a provision for recovering LD for the contractor’s defaults; exemptions only in exceptional cases, justified in writing
DoE Manual for Procurement of Goods, 2024 (paras 9.3.3 to 9.3.10)	The 0.5% weekly rate, the 5% and 10% caps, extensions, force majeure and waiver
GeM GTC, clause 15	The rate and caps as they apply to GeM contracts

The bid’s own Additional Terms and Conditions (ATC) can change the default. The GTC itself says it applies unless superseded by product-specific or bid-specific terms. Some PSU bids on GeM do set a different cap, so the ATC is the first thing to check.

How much is LD on GeM? The rate and the cap

Here is the operative part of GTC clause 15(iii). If you fail to deliver within the original or re-fixed delivery period, the buyer can deduct or recover LD ”@ 0.5% of the contract value of delayed quantity per week or part of the week of delayed period, until actual delivery or performance”. The total can’t exceed 5% of the total contract value. “In case of inordinate delay maximum deduction shall be 10% of the total contract value.”

Three details in that sentence matter most:

• Delayed quantity, not the whole order. If you delivered 60% on time, LD runs only on the 40% that was late.
• Part of a week counts as a week. Eight days late is two weeks of LD.
• The cap is on the total contract value. So a small late lot can’t attract LD beyond 5% (or 10%) of the full order.

What counts as inordinate delay

The GTC note defines it: “Inexcusable delays of more than one-fourth (25%) of the completion period specified in the contract shall be treated as inordinate delay(s).” The Goods Manual (para 9.3.3-2) uses the same test and adds that inordinate delays may be treated as a breach of contract and noted as deficient performance. That record can be held against you in future tenders, after a show-cause notice.

Delivery period in the contract	Delay that becomes inordinate	LD cap
30 days	More than 7.5 days	10%
60 days	More than 15 days	10%
90 days	More than 22.5 days	10%
Any period, delay within 25%	Not inordinate	5%

Short orders carry the most risk. On a 30-day delivery period, a delay of just over a week already lifts the ceiling to 10%.

Worked examples in rupees

Picture a supplier with a ₹10,00,000 GeM contract and a 60-day delivery period. These are illustrations of the clause 15 arithmetic, not real cases.

Example 1: part of the order is late

The supplier delivers ₹6,00,000 worth on time. The remaining ₹4,00,000 arrives 17 days late.

• Weeks of delay: 17 days is 2 weeks and 3 days, so 3 weeks.
• LD: 0.5% × 3 × ₹4,00,000 = ₹6,000.
• Cap check: 5% of ₹10,00,000 is ₹50,000, so the cap doesn’t bite.

17 days is more than 15, a quarter of the 60-day period. If the delay was inexcusable, the cap is now 10%, but the LD here stays ₹6,000 because it’s well under either ceiling.

Example 2: the whole order is very late

Nothing arrives until 12 weeks after the due date.

• LD by the rate: 0.5% × 12 × ₹10,00,000 = ₹60,000.
• Under a 5% cap, this would stop at ₹50,000.
• But 84 days is far beyond a quarter of 60 days, so the cap is 10% (₹1,00,000) and the full ₹60,000 is recoverable.

Example 3: the cap runs out

Same order, 26 weeks late. The rate gives ₹1,30,000, but the 10% cap holds LD at ₹1,00,000. By this point the buyer is far more likely to cancel than wait, which brings in the remedies covered below.

Scenario	Delayed value	Weeks counted	LD by rate	Cap	LD recovered
1. Part late, 17 days	₹4,00,000	3	₹6,000	₹50,000 / ₹1,00,000	₹6,000
2. All late, 12 weeks	₹10,00,000	12	₹60,000	₹1,00,000	₹60,000
3. All late, 26 weeks	₹10,00,000	26	₹1,30,000	₹1,00,000	₹1,00,000

One more detail on the base. The Goods Manual (para 9.3.9-1) applies the rate to the “delivered price”, including GST, freight and price variations, of the delayed goods. So the LD figure on a GST-inclusive order is larger than the same percentage of your basic price.

LD vs penalty vs risk purchase

These three are easy to confuse, and each one works differently.

	Liquidated damages	Penalty	Risk purchase
What it is	Pre-agreed compensation for delay	A sum fixed to force performance	Buyer buys elsewhere and charges you the extra cost
When it applies	Goods delivered late, within an extended period	Treated like LD under Indian law	Supplies not made, contract cancelled
Amount	Rate × delay, up to the cap	Only reasonable compensation, up to the named sum	The actual loss from buying elsewhere

What Indian law says about the named sum

Section 74 of the Indian Contract Act, 1872 covers both LD and penalty clauses. When a contract is broken and it names a sum payable for the breach, the injured party gets “reasonable compensation not exceeding the amount so named”, “whether or not actual damage or loss is proved to have been caused thereby”. Section 73 is the general rule: compensation for loss that naturally arose in the usual course of things.

The Supreme Court has read section 74 twice in ways that matter here. In ONGC v. Saw Pipes Ltd. (2003) 5 SCC 705, a delayed-supply case, it upheld LD as a genuine pre-estimate without proof of the exact loss. In Kailash Nath Associates v. DDA (2015) 4 SCC 136, it held that loss is still a necessary ingredient, and that the named sum is awarded without proof only where loss is difficult or impossible to prove. The named sum is always the upper limit.

Where risk purchase comes in

The Goods Manual (para 9.3.9-2) says LD accrues only on delayed supplies. Where nothing was supplied and the contract is cancelled, only “the loss occasioned thereby” can be recovered. That’s risk purchase territory: the Manual’s model formats warn that the contract can be cancelled “at your risk and cost”. The Works Manual 2025 has the same remedy for works contracts.

On GeM, GTC clause 19 lets the buyer cancel the unsupplied portion after the delivery date and forfeit your performance security. The buyer can also downgrade your rating, or GeM can debar you.

How delivery-period extension works

GTC clause 15 lets the buyer extend the delivery date “on the request of the Seller or otherwise”. There are two kinds of extension:

Type	When	Cost to you
Re-fixed delivery period, without LD	Force majeure, or delay attributable to the buyer or consignee	None
Extension with LD	Any other reason, and only if the price trend is not lower	LD for the extended period, no price increase, and the buyer keeps any GST cut

Delays the buyer should not charge you for

The Goods Manual (para 9.3.3-3) lists situations where the supplier normally isn’t responsible. In these cases the period is re-fixed without LD and without a denial clause:

• The buyer was slow to approve a pre-production sample you submitted on time.
• An omission by the buyer affected your performance.
• The buyer controls your entire production schedule.
• Force majeure, a statutory change or specific government instructions affected production or delivery.

Where both sides share the blame, the Manual says LD is decided on merits. There’s also a GeM-specific exemption. Under the DoE OM of 29 December 2020 on fund blocking, if the buyer fails to make funds available within 10 days of the GeM alert, the seller can decline supply, and any delay in delivery becomes exempt from LD.

How to ask for one

The Manual (para 9.3.4) tells the supplier to inform the buyer promptly, in writing, with the likely duration of the hindrance and a request to extend. An extension is a contract amendment, so it needs both parties’ consent, and the buyer must say in writing if LD will be recovered.

Ask before the delivery date passes. The Manual tells officers that accepting late goods without a formal extension gives up their LD rights, so buyers are trained to insist on a written extension. A request made in time, with reasons, is the best evidence you’ll have later for a no-LD extension.

Ask for the extension before the delivery date, in writing, with the reason. A late request with no paper trail is how a no-LD delay turns into a 10% deduction.

Force majeure: the 10-day notice

GTC clause 15(iv) defines force majeure: war, hostility, epidemics, civil commotion, sabotage, fires, floods, explosion, quarantine restrictions, strikes, lockouts or act of God. It excludes “negligence or wrongdoing” and “predictable/seasonal rain”.

The notice is the condition to watch. It must be “duly evidenced with documents” and given to the other party “within 10 days from the date of occurrence”. With that notice in place, neither side can claim damages for the delay. If the event runs past 90 days, either party may terminate. The Goods Manual (para 9.3.6) adds that force majeure only suspends performance while the event lasts, and that it can’t be claimed after the fact.

A supplier whose truck is held up by a flood has a force majeure case, if the notice goes out in time. A supplier whose vendor shipped late, or who planned around the monsoon and got it wrong, does not.

How LD gets deducted from your bill

On GeM, LD comes out of your payment. The DoE payment procedure for GeM, reproduced in the Goods Manual, says payment for goods is made after the CRAC “subject to recoveries, if any, either on account of short supply or Liquidated Damages etc. for delay in supply”. For installation contracts, the recovery comes out of the second milestone payment.

Two things follow from that:

• Your delivery dates are on record. The CRAC and your shipment entries fix when you delivered, so get them right. That’s the same CRAC that starts the MSME 45-day payment clock.
• The invoice should show it. The Manual (para 9.5.2) says the contractor should show LD as a deduction on the invoice value for GST purposes.

Under GTC clause 7, if an extension runs past the performance security’s validity, you have to extend the ePBG as well. And keep LD separate from your bid security: getting your EMD back is a different process.

How to contest liquidated damages

Start by checking the buyer’s arithmetic against the clause.

Check the deduction

1. The base. Was LD charged on the delayed quantity, or wrongly on the whole order?
2. The weeks. Count from the original or re-fixed delivery date to actual delivery, rounding part weeks up, not from the order date.
3. The cap. Did the buyer apply 10% without the delay being inordinate under the 25% test?
4. The ATC. Did the bid’s own terms change the rate or cap?
5. The cause. Was any part of the delay the buyer’s, such as a late sample approval, missing site readiness or unblocked funds?

Write to the buyer, then escalate

Send a written representation with the dates, your extension request, any force majeure notice and the buyer’s own correspondence. Ask for the period to be re-fixed without LD where the delay was theirs, or for the amount to be recalculated.

If that fails, GTC clause 16 sets the route. For direct purchase and L1 orders, it’s 30 days of amicable settlement after written notice, then a Dispute Resolution Committee chaired by the buyer’s Primary User. Then come the DoE guidelines on arbitration and mediation (OM of 3 June 2024). For bid and RA contracts, the method is whatever the buyer chose when creating the bid. GeM itself can’t be made a party to the dispute.

Don’t stop delivering while you argue. Non-delivery leads to an incident and suspension, which I covered in the GeM incident management post. A suspension shuts you out of new bids, which costs more than LD on one order.

Quote delivery periods you can beat, ask for extensions before the date passes, and send any force majeure notice inside 10 days. When a deduction does land, check it against the weeks, the base and the cap before you accept it.