The word “termination” in nearly every context elicits concern. And in federal contracting, such concern may often be warranted. Some terminations are no big deal, resulting in a federal contract–or even just part of one–being ended a bit early for convenience of the government. But other terminations, based on alleged default or deemed “for cause,” can have significant negative impacts (especially on small and disadvantaged businesses). So, one thing remains consistent across the board for federal contract terminations: it is crucial to understand the type of termination you are issued, its legal implications, and your rights and options for resolution. This article provides a general overview of terminations. Future posts will dive in deeper to contractor termination rights and options and settlement proposals.
FAR part 49 covers “Termination of Contracts” in the federal government contracting realm. Its scope includes a contracting officer’s authority and responsibility to terminate contracts, an agency’s procedural and notification duties for terminations, settlement agreements, and various other principles applicable to the two main types of federal government contract terminations: (1) terminations for convenience, and (2) terminations for default (also called “terminations for cause” for certain contract types).
Terminations for Convenience
This refers to the government’s right to end a contract (really) whenever and for whatever reason it wants. It is typically triggered by the applicable contracting officer’s decision that such a termination would be most beneficial to the government and/or taxpayers. And such a decision is generally given strong deference. FAR 52.212-4(i), and related clauses similarly, state:
Termination for the Government’s convenience. The Government reserves the right to terminate this contract, or any part hereof, for its sole convenience. In the event of such termination, the Contractor shall immediately stop all work hereunder and shall immediately cause any and all of its suppliers and subcontractors to cease work. Subject to the terms of this contract, the Contractor shall be paid a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system, have resulted from the termination. The Contractor shall not be required to comply with the cost accounting standards or contract cost principles for this purpose. This paragraph does not give the Government any right to audit the Contractor’s records. The Contractor shall not be paid for any work performed or costs incurred which reasonably could have been avoided.
Indeed, there’s not much a contractor can do to change or prevent an agency’s termination for convenience. It really is entirely up to the contracting officer to decide if finishing out the work is necessary or beneficial–or, for whatever reason, is not. But this is also why the FAR’s termination for convenience cost settlement rules generally allow recovery of a wider range of costs than the other FAR clauses. Nearly every federal government contract incorporates the FAR clause giving the government termination for convenience rights. And there are different termination for convenience clauses for different kinds of contracts. But they work generally the same way.
FAR 49.201(a) states the general principles behind compensating a contractor terminated for convenience. But the main takeaway is that there is no hard-and-fast calculation to be done to figure out what is owed. The government is required to work with the contractor to negotiate and settle on fair amount of compensation. FAR 52.249-2(e), the termination for convenience clause for fixed price contracts, (and other, similar FAR clauses) require the contractor to submit a settlement proposal to the contracting officer as soon as possible upon such termination–and no later than a year after such termination’s effective date. As you will see below, ensuring your settlement proposal is considered timely submitted is crucial. Now, what is “on time” or “timely” for each proposal–in my own experience–is not always easy to deduce.
Even though the FAR sets a broad timeframe (from ASAP to one year out)–and potentially, any shorter deadline set by the agency could be argued and found contrary to the FAR–many agency’s still set their own “deadlines” for the settlement proposal. In such cases, unless you are ready and willing to litigate, it is often best to just meet such deadlines. And if you simply cannot do so, asking the contracting officer for an extension of the deadline–in writing–is often your best bet. So, now we know contractors must submit settlement proposals on time; the next logical question is “what costs can/should I include?”
All these termination for convenience FAR clauses similarly insist that the terminated contractors’ settlements should fairly compensate them for work already done–and for any preparations made for the terminated work, with a “reasonable allowance for profit” factored in. See FAR 49.201(a) for an example of this language. But there are some limitations and boundaries on such compensation too. Indeed, the amount the contractor receives cannot be more than the contract price, minus whatever they’ve already been paid and the price of any work not terminated.
But as you may already be thinking, this still leaves a lot of room to negotiate a fairly wide range of costs on many contracts. As such, it can be a generally wise idea to list every such allowable cost the terminated contractor can demonstrate–even with the understanding that the contracting officer will not approve all such costs (and is really most likely to meet in the middle somewhere). And fortunately, the FAR requires the contracting officer to “show its work” in detail when coming to such determinations–ensuring the contractor knows exactly how the decision was made and the compensation was calculated–so it can make an informed decision on whether or not to appeal any such determination. If the contracting officer fails to do this, that alone can be a strong push toward the appeal avenue, given the basic legal duty was not met.
Indeed, by law, contractors have the right to appeal such contracting officer determinations if they do not feel they were fairly compensated in accordance with their governing FAR clause–provided they submitted their settlement proposal on time–as you can see from FAR 52.249-2(j) and similar clauses. To bring it full circle here, this is yet another reason it is crucial to timely submit the original settlement proposal to the contracting officer. Indeed, along with losing your right to appeal, failure to submit a settlement proposal on time actually gives the contracting officer the right to unilaterally determine a fair amount to pay you, instead. And it’s probably safe to assume you’ll be walking away with less than what you would have bargained for–sometimes, simply because the contracting officer is not even aware of all allowable costs incurred.
Finally, it is not uncommon for contracting officers to also ask contractors what steps they took to mitigate their costs incurred upon being notified they were terminated for convenience. This comes from language in FAR 52.212-4(l), and related clauses, which you read above, to the extent of: “[t]he Contractor shall not be paid for any work performed or costs incurred which reasonably could have been avoided.” This is an important piece of the puzzle to keep in mind, as being able to demonstrate with documentation that you indeed took action to mitigate such costs (i.e., tried to rent/sell things that were no longer needed, get out of a lease, etc.) can help support full compensation of the the costs you did incur.
So, if you find yourself terminated for convenience, make sure to get those settlement proposals in on time to give your company the best chance to maximize recovery of allowable costs. As long as you do so: your contracting officer must examine your settlement proposal and work with you to negotiate terms; and you retain the right to appeal the contracting officer’s decision if you don’t like it. Notably, there are even some much-less-well-known alternate dispute resolution provisions of the FAR that can be invoked (instead of initiating a full-blown appeal) if you cannot come to an agreement with your contracting officer on things like costs and compensation. Nonetheless, the FAR does say, “[w]hen possible, the TCO should negotiate a fair and prompt settlement with the contractor[,] and “[t]he TCO shall settle a settlement proposal by determination only when it cannot be settled by agreement.” And many times, agreement is reached without issue.
Terminations for Default or for Cause
Ok, yes, this is the scarier one. Does it mean you lost your contract, your right to certain payments, and maybe even your ability to get future government work? Well, possibly. But on a positive note, the FAR and applicable legal precedent do set the bar pretty darn high for a termination for default or termination for cause (they are essentially the same thing for different types of contracts). Indeed, the Civilian Board of Contract Appeals has repeatedly called it “a drastic sanction which should be imposed (or sustained) only for goof grounds on solid evidence.” And FAR 52.212-4(m), and related clauses similarly, state:
Termination for cause. The Government may terminate this contract, or any part hereof, for cause in the event of any default by the Contractor, or if the Contractor fails to comply with any contract terms and conditions, or fails to provide the Government, upon request, with adequate assurances of future performance. In the event of termination for cause, the Government shall not be liable to the Contractor for any amount for supplies or services not accepted, and the Contractor shall be liable to the Government for any and all rights and remedies provided by law. If it is determined that the Government improperly terminated this contract for default, such termination shall be deemed a termination for convenience.
So, basically, if you don’t hold up your end of the deal, the government will terminate your contract, negating your right to certain payment, and you will likely have a hard time getting future federal government work too. Again using the FAR clause for termination for default of a fixed price supply and service contract at FAR 52.249-8(f) (and again, there are other, similar clauses for other contract types), the government will still pay the contract price for completed supplies delivered and accepted. But unlike a termination for convenience, there’s no negotiation for future profits or work planned. And importantly, these FAR clauses do include procedures that the agency must follow in order to termination for cause or default, such as the requirement to issue a cure notice or notice of default to the contractor first and allow time to fix the issue. But even then, you only have ten days from the time you receive notice of default to fix the problem or you’re pretty much out of luck, in accordance with FAR 52.249-8(a)(2) and similar related clauses.
That said–based on the high bar set by the FAR, the Boards of Contract Appeals, and the courts–there is still recourse available if you can show that the default wasn’t your fault or the high bar was simply not met. Indeed, if any failure to perform is caused by circumstances beyond the contractor’s control (think floods, pandemics, or a Red Dawn situation), such contractor is not liable for excess costs the government incurs in trying to complete the contract and for tracking down all of the supplies and materials that entails. And if you can prove you actually weren’t in default after the contract is terminated, the default was excusable, or the agency’s default termination simply doesn’t meet the required standards of the law, then (as it says in the FAR) your rights and obligations will be the same as if it had been terminated for convenience. And luckily, this means you’ll probably get more money and your reputation will remain intact.
Additionally, under the FAR, a notice of a termination for default–alone–gives the terminated contractor the right to immediately appeal to the Board of Contract Appeals or the Court of Federal Claims, as it is considered the final decision of the contracting officer. And in most cases, such appeal is highly recommended if there are any appeal grounds present–as again, a default termination can be a really big deal and major hurdle for contractors seeking future government contracts.
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In summary, knowing your rights is key if your company faces either type of termination. You’ll want to know what kind of termination clause your contract has, what steps the contracting officer has taken to that point, and what kind of termination you’ve been served with in order to mitigate risk and loss and to protect your company. Termination (of any kind) isn’t fun when you’re in the middle of working on a contract. But if you understand what’s happening, what is required, what your rights are, and how to respond to it, you can maximize how much you walk away with and make sure you’re still standing when the next opportunity comes around.
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