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Government Contractors

Terminations for Convenience

While the spending cuts mandated under Budget Control Act of 2011 were delayed by two months under the recently signed American Taxpayer Relief Act of 2012, near term federal budgetary cuts remain very likely.  As a result, Government contractors should be prepared for prospects of increased contract terminations in 2013 and beyond.  This blog presents a brief background on terminations, best practices pertaining to terminations for convenience, and steps contractors can take to ensure maximum cost recovery should their contract(s) be terminated.

Under the Federal Acquisition Regulation (“FAR”) Part 49, there are two broad categories of terminations: terminations for default and termination for convenience.  Terminations for default are the result of either actual or anticipated failure of a contractor to perform their contractual obligations.  Under terminations for default, contractors are generally not remunerated for unfinished contract work and may be legally liable to the federal government in certain situations.  Terminations for convenience are the result of the government exercising its right to unilaterally terminate a contract at any time for any reason.  Terminations for convenience usually result in negotiated settlements between the contractor and federal government whereby the contractor is made whole for unfinished contract efforts.

The federal government is afforded the right to terminate government contracts at its convenience, so what can contractors do to ensure they are prepared in the case of a termination?  Cherry Bekaert recommends the following:

  • Maintain an open relationship with your customer and contracting officer.  This will better help a contractor gauge their risk of contract termination.  Contractors who know of a pending termination should be better prepared for the termination and implementation of a contract wind down plan.
  • Maintain adequate cost accounting data.  Termination claims will involve an analysis of contract costs incurred up to the termination date, costs incurred due to contract wind down, and costs incurred because of the termination itself.  Maintenance of adequate cost accounting data help contractors support costs which fall into these elements.  Contractors often set up a separate termination project number to record all costs incurred due to termination, which prevents contractors from having to segregate commingled costs to support a termination claim.
  • Monitor subcontractors.  The reasonableness of subcontract costs is often times a point of contention in termination claims.  It is the prime contractor’s responsibility to ensure the reasonableness of subcontractor costs, that termination clauses are flowed down to subcontractors, and that the clauses are complied with.  The stronger a prime contractor’s subcontractor surveillance processes are, the easier it is to assess whether subcontract costs are indeed reasonable. 
  • Know the clauses applicable to your contract.  FAR Part 49 contains different provisions for different types of contracts (fixed price, cost type, commercial, etc.).  The termination procedures for different contracts are slightly dissimilar, as are the government’s rights (for example, the government’s rights to audit termination claims for commercial and cost type contracts are different).  Knowing the clauses applicable to your contract can help ensure your termination plan is adequate under the circumstances.

With federal budgetary pressures remaining after the passage of the American Taxpayer Relief Act of 2012, contractors should be cognizant of the rules, processes, and best practices relating to terminations for convenience.  Please contact Mike LaCorte (mlacorte@cbh.com) for additional information related to terminations for convenience.