How to Navigate the Current Stop-Work Orders and Contract Termination

ERIC: Hello. Welcome to Cherry Bekaert's Government Contractors Podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward.

ERIC: My name is Eric Poppe. I'm a Managing Director and help lead the government contract consulting team here at Cherry Bekaert.

ERIC: With me today is Jeff, a senior manager on our team. We wanted to jump on and get this podcast out quickly given the new administration taking over. It is Tuesday, January 28, and there has been significant activity around executive orders and reprioritization of programs from the previous administration to the new administration.

ERIC: There have been executive orders affecting DEI programs related to diversity, equity, and inclusion. Those programs within the federal government—whether grant-related, contract-related, or federal employee programs—have been communicated as needing to be terminated and ended as of yesterday.

ERIC: Over the weekend there was an order halting grants and funding for foreign aid to certain non-governmental organizations, DEI initiatives, gender ideology initiatives, Green New Deal initiatives, and some funding under the IRA and IIJA programs. There is a stop-work for at least a 90-day review period, and some of this work may be terminated.

ERIC: Jeff, many companies we work with face stop-work orders, terminations of grants or contracts, or terminations for convenience or default. People are seeking answers about their programs and contracts. To slow this down for listeners, if an organization receives a stop-work notification, what does that mean?

JEFF: A stop-work order is typically a first step prior to a contract being terminated. It means to stop all work as specified—whether for the entire contract, a portion of it, or a specific scope of work within the contract or program. Read the stop-work order explicitly because it should provide instructions and standard language.

JEFF: One of the main things you will typically see is a direction to take all reasonable steps to minimize or mitigate costs. My recommendation is to reach out to your Contracting Officer or program manager who issued the stop-work order to get a clear determination of what it means.

JEFF: A stop-work order can be partial or full, and that distinction will impact the steps a company takes to mitigate and minimize costs. If you are a prime contractor with multiple subcontractors, you must relay that information promptly to your subcontractors. Timely notification is critical because delays could make the prime contractor liable for continued subcontractor costs without government reimbursement.

JEFF: Forward the stop-work order you received on the prime contract to your subcontractors, meet with them, and ensure they understand what is expected. Stop-work orders are typically issued for a 90-day period. After that, the stop-work order could be canceled and lifted, extended for another 90 days, or converted into a contract termination for convenience.

ERIC: Stay in constant communication with your CEO and the Contracting Officer. One of the primary actions is to understand your contract and read the terms and conditions, including relevant clauses that prescribe steps for cost recovery.

ERIC: For example, look for FAR clauses such as FAR 52.249-2 and other clauses that may be incorporated into the contract. Identify agency-specific supplements or grant manual references, such as 2 CFR or agency grant manuals, that explain the road to potential cost recovery.

ERIC: It can get confusing quickly, so leverage advisors—accountants who understand government contracting, legal counsel who understand government contracting, and your consultants—because this could move quickly.

ERIC: Jeff, you mentioned prime and subcontractor flow-down responsibilities. Can you discuss how a termination for convenience can roll downhill to subcontractors?

JEFF: Responsibilities can move quickly. FAR 52.249-2 is the general guidance for fixed-price contracts that are terminated. That clause or others from FAR 52.249 will likely be listed in your prime contract termination notification. It tells the prime contractor to look up the clause and understand responsibilities when the contract has been terminated.

JEFF: Key steps include flowing down the termination notice to subcontractors promptly and ensuring subcontractors receive and follow the guidance. Contractors should stop placing orders or entering new subcontracts unless there is a partial termination where some scope continues.

JEFF: It's important to rely only on formal written direction from the Contracting Officer. Do not continue work based on verbal approval from a field contact. If you receive a formal stop-work or termination notice, you must stop work and set up new codes to mitigate costs.

JEFF: After termination, you also need to terminate subcontracts. If you did any manufacturing or hold inventory, try to return material to subcontractors even if they refuse. Maintain documentation of those efforts—follow up phone calls with email—to create a paper trail.

JEFF: Contractors must submit an inventory schedule within 120 days of the effective date of termination. That requires listing every material or inventory item, a price, condition, and purpose.

JEFF: Contractors have one year to submit a termination settlement proposal to the government from the date of termination. You can request extensions in some circumstances, but prime contractors must also receive termination settlement proposals from subcontractors. As the prime, you are responsible for reviewing, evaluating, and determining the reasonableness of subcontractor proposals and obtaining supporting documentation.

JEFF: The government will look at whether inventory items are common-use or used on other contracts. Expect detailed review.

ERIC: Documentation is essential. If you get a stop-work and then later resume, track costs carefully. Set up new project codes to collect underlying cost and accounting data to support a cost proposal, claim, or audit.

ERIC: Settlement proposals can take time, and auditors will request underlying support. You should collect labor records, time sheets, expense reports, invoices, and any other documentation to support your costs. That allows you to negotiate and potentially obtain partial payment earlier.

JEFF: Documentation should demonstrate your efforts to control and mitigate costs, including communications with subcontractors and the government, attempts to return government property, and efforts to close out deliverables. Maintain records for all mitigation steps.

JEFF: Understand the type of contract—fixed-price or cost-type—because it affects settlement calculations. The government uses standard forms for termination settlement proposals. For fixed-price contracts, forms include SF 30, SF 35, and SF 36 in certain contexts, and SF 137 for cost-type contract settlement (note: use the forms specified in your termination instructions).

JEFF: On cost-type contracts, you roll up contract costs incurred in performance plus any additional costs incurred to support termination, such as standby costs, severance, equipment relocation, and settlement expenses like legal and administrative costs. You back out what you have been paid to date and present the amount due.

JEFF: On firm-fixed-price contracts, delivered and accepted finished products or completed services are typically not at risk. But scope partially performed will be rolled up on either an inventory or cost basis. The government’s intent is to make contractors whole, not to guarantee prior profit margins on undelivered work.

JEFF: Agencies handle terminations differently. DOD contracts often involve DCMA and audits by DCAA. Other agencies may assign the Procuring Contracting Officer (PCO) or the main Contracting Officer.

ERIC: When considering requests for equitable adjustment, claims, or termination settlement proposals, involve your internal contracts and accounting team along with outside legal counsel and accountants. Decide whether to submit an equitable adjustment under the Changes Clause or pursue a claim, and evaluate whether a termination settlement proposal is appropriate.

ERIC: If you have received a stop-work order and set up new codes, what steps can help minimize the settlement timeline and maximize recovery?

JEFF: Documentation and due diligence. Terminations are lengthy, and many agencies may be flooded with requests right now. Specifically within DOD, any termination settlement proposal over $2 million generally requires audit by DCAA. DCAA audit review can take six to eight months after submission, and preparing the proposal can take months as well.

JEFF: Speed the review by packaging a supportable proposal: reference source documents, provide time sheets, expense reports, invoices, and third-party documentation. Agencies often request a draft walk-through to ensure costs are supported by your systems and documentation.

JEFF: Include subcontractor packages. Ensure subcontractors have time to prepare and provide the correct documents. Expect a high volume of settlement proposals, so be organized.

JEFF: It is not just direct costs. Ensure your indirect costs are appropriately allocated and absorbed to the correct cost objectives, and that you have the correct indirect rate structure applied. Recover everything allowed under your contract and cost principles.

JEFF: Prepare comprehensively to move faster through the process. Make it easy for the government to review and approve your proposal.

ERIC: This process depends on the underlying terms and conditions of your contract or grant, including agency supplements. Pull your documentation together and lean on your advisors.

ERIC: That is all the time we have today. Jeff, any closing comments?

JEFF: We are here to help anyone navigate these stop-work orders and terminations. We touched on key points both prime and subcontractors should focus on during this process.

ERIC: If you have questions, please reach out to us. Thank you for listening, and please follow us wherever you get your podcasts. Thank you.