Termination for Convenience
Most government contracts include a clause giving the government the right to terminate the contract, or any part thereof, for its sole convenience “when it is in the best interests of the government.” FAR Parts 49, 12, 13, and 31 establish the regulatory requirements for termination and settlement of government contracts. The mechanics are specific. Upon receipt of the notice of termination, the prime contractor should immediately stop all work and terminate all subcontracts related to the terminated portion of the prime contract. Inventory disposal schedules must be submitted within 120 days. A prime contractor must submit its “final” termination settlement proposal to the government within one year of the effective date of the termination. If only part of the contract is terminated, any request for an equitable adjustment is due within 90 days of termination, if the contractor believes it is entitled to an equitable adjustment of the price of the continued portion of the contract to reflect the fact that there is less work over which to spread fixed costs. These timelines are precise, and failure to meet them can result in forfeiture of your right to recover anything. The conditions of arriving at a settlement are less precise.
Termination Contracting Officers (either the PCO or as assigned by the ACO) have considerable latitude to reach a negotiated settlement. FAR Part 49.201(a) states that “the overall purpose of a termination for convenience settlement is to fairly compensate the contractor and to make the contractor whole for the costs incurred in connection with the terminated work.” Notice that it does not state that the intent is to make the contractor “profitable.” FAR 49.203(a) goes on to state that the TCO shall not allow profit if it appears that the contractor would have incurred a loss had the entire contract been completed, ensuring that the government does not pay more for the completed work than they would have had the contract not been terminated. A contractor is not entitled to lost profits on uncompleted portions of the contract. Note that FAR Part 12 addresses termination for convenience differently from FAR Part 49. FAR 12.403 stipulates that the Contracting Officers shall follow the procedures in FAR Part 12 when terminating a commercial contract. It goes on to say, “the requirements of Part 49 do not apply when terminating contracts for commercial items…Contracting Officers may use Part 49 as guidance to the extent that Part 49 does not conflict with FAR Part 12 and the language of the termination paragraphs in FAR 52.212-4.”
In any case, the Contracting Officer may settle a termination for convenience claim by negotiation or through a final determination. A termination for convenience under FAR Part 49 requires the submission of cost data to support all costs proposed. FAR 52.249-2, Termination of Fixed-Price Contracts, states that “the cost principles and procedures of Part 31 of the Federal Acquisition Regulation, shall govern all costs claimed, agreed to, or determined under this clause.” The TCO may also request an advisory audit to assist with a determination or settlement. However, FAR 49.2 states in part, (1) “the primary objective is to negotiate a settlement by agreement. The parties may agree upon a total amount to be paid the contractor without agreeing on or segregating the particular elements of costs or profit comprising this amount,” and (2) cost and accounting data may provide guides, but are not rigid measures, for ascertaining fair compensation. In appropriate cases, costs may be estimated, differences compromised, and doubtful questions settled by agreement…”.
When submitting a termination proposal, a few things can boost your likelihood of recouping all costs to which you are entitled.
- Ensure that the costs are clearly and appropriately substantiated.
- Ensure all subcontracts contain an appropriate termination for convenience clause that limits the prime’s liability to that which the government is obligated to pay the prime in the event of a termination for convenience and modify the clause to account for the timeframes required for settlement with the government.
- Ensure that you immediately begin segregating any potential “termination settlement” costs or charges and retain all related documentation (invoices, timesheets, memos for record documenting efforts taken to minimize these costs, etc.).
- Discuss in advance with the TCO the types of records and substantiating data that will suffice, particularly if you do not have an approved accounting system.
- Ask for copies of the results of any advisory audits the TCO may request.
- Consider an application for Partial Payment (SF 1440) to assist with closing out and final payments to subcontractors.
- Preserve your rights under the Contract Disputes clause by ensuring you meet all timelines or timely request extensions as specified in the termination clause of your contract; failure to do so forfeits your rights to dispute a contracting officer’s determination.
Please reach out to a member of Maynard Cooper’s Government Solutions Group if you have any questions or need assistance.