“Hope for the best, prepare for the worst” is an adage that many of us repeat in our conversations, but we never expect the worst to actually happen. For federal contractors, one of the worst things that could happen is having a contract terminated–even if the termination is for convenience. Even if you prepare for the worst, the question inevitably becomes, what do I do now? In this GovCon FAQ, we will discuss terminations for convenience and what steps to take after receiving the dreaded termination notice.
First, it is good to remember that terminations for convenience are different than terminations for default. A termination for default means the government felt something with the contractor’s performance was so concerning, it required contract termination. This is often a punishment or consequence levied on a contractor after facing multiple contract performance issues. In contrast, a termination for convenience is simply the government electing to use its right to end the contract for any reason. It is most often encountered due to funding cuts, agency changes, changes in circumstances since the initial contract issuance, or even policy changes in the executive branch. A termination for convenience is generally something completely out of the contractor’s control, and as such, can catch many off guard.
A termination for convenience typically starts with the CO reaching out to let you know that one is planned, or you will simply get the notice via email or other form. You will likely see one of three FAR Clauses noted, depending on your contract type:
- FAR 52.212-4(l): Commercial Products and Commercial Services
- FAR 52.249-6: Cost-Reimbursement
- FAR 52.249-2: Fixed Price
FAR 52.249 does have other termination clauses, specifically some “Short Form” versions of those discussed above, and then terminations of specific contracts such as Architect-Engineer contracts. But the above three, in our experience, are the most commonly cited in terminations for convenience.
Looking at those FAR clauses and termination settlements we have experienced in the past, there are many commonalities across terminations which contractors can look to as general guidance on next steps when they receive a termination notice.
First, after gathering yourself from the shock of the termination, you will need to immediately stop work, and notify any/all subcontractors of the prime contract termination necessitating them to stop their work. You also should check any subcontracts and vendor agreements you have for language regarding terminations of the prime contract and those specific lower-tier agreements. After you get through this initial step of stopping everything, you can shift to analyzing the damage.
Generally, terminations for convenience allow for settlements with the government for amounts that will cover costs felt due to the termination. A good rule of thumb for determining these costs is “if not for the termination, would this cost be felt or exist?” What is allowed in a termination settlement is often dependent on the contract; but you typically cannot get lost future expected profits or things similar to that. Also, the agency will expect that contractors take actions to try and mitigate costs felt due to the settlement (i.e., try to sell or rent contract equipment or facilities to another party/for another use, etc.). Contractors cannot sit idly by and let costs rack up that they could help lower.
The settlement ordinarily is focused on the termination action itself and its immediate consequences, not what “could have been.” The settlement costs would also include fees you incur for legal representation and accountants you may need to help with the settlement. Also, you will need to work with your subcontractor on their own termination costs as those can generally be incorporated into the prime contract termination settlement and “passed through” to the government in that way. Therefore, after stopping performance, you should start compiling documentation, spreadsheets, receipts etc. for all the costs felt. Documentation is key for justifying costs, will help any attorneys or accountants understand what is requested under the settlement, and will be critical for any future disputes or questions on the termination costs. If you have specific fact scenarios or justifications of costs you feel may be important, you should draft and compile those for review by those helping you with your settlement preparations.
Also, just because the contract is terminated, it does not mean lines of communication with the CO are terminated. If you have questions on any items related to the termination (for example, what to do with government furnished property), do not hesitate to reach out to your CO. As discussed earlier, terminations for convenience are not issued because there was a problem between the contractor and agency but rather circumstances simply changed. So, the CO should be fairly receptive to communication. It is also typically the CO who will receive and facilitate the termination settlement process. So, after you have stopped work and started to gather your costs/information, make sure to determine what questions you have for your CO. And don’t hesitate to send them to the CO or termination contact you were provided with the termination notice as soon as possible.
Finally, you will want to calendar when the termination settlement is due. Often agencies will try and impose their own deadline. But the FAR sets forth the following general deadlines for settling a termination for convenience: A partial termination for convenience should have its settlement proposal submitted within 90 days of the termination (note you have to keep performing the items that were not terminated); and a full contract termination for convenience requires submission of a settlement proposal within one year of the termination.
After that is all completed, you can get to work on drafting your settlement proposal. We would also recommend you take some deep breaths and remember that there will likely be more contracting opportunities in the future. Also, this termination does not leave a negative mark on your record like the infamous default termination does. So, just keep a level head and try to stay optimistic throughout this tough process.
Even if you have not received a termination for convenience, you should still incorporate practices that will prepare your business in case one occurs. As stated earlier, documentation is key. So implement processes now that track receipts, costs, and communications with vendors as well as the agency. If you can get directives from the agency in writing rather than in person or over the phone, that will help as well. You will also want to utilize and be aware of any contract terms related to terminations in a prime contract, but also any subcontracts or lower tier contracting agreements. Lastly, be ready to engage legal counsel and accountants if a termination for convenience occurs. While many terminations for convenience occur with clear cut or minimal costs, there can be some which have nuances which require legal and financial professionals to assess.
Questions about this post or other federal contracting matters? Email us. Need legal assistance? Call us at 785-200-8919.
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