INTRODUCTION

Almost all Government contracts are subject to the Termination for Convenience clause (FAR 49.502). This clause allows the Government to terminate a contract whenever “…it is in the Government’s interest.” (FAR 52.249-1) What this means is that the Government has an exit strategy; whether in the event that it needs to discontinue a contract because of technological developments that make continued work on the contract outmoded, a lack of funding due to budgetary restrictions, or in some instances, because the work is simply no longer needed (i.e., work during war-time that is no longer necessary). This clause effectively avoids liability for a Breach of Contract action against the Government.

WHAT THIS MEANS FOR THE CONTRACTOR

Contractors should be aware that a Termination for Convenience is not the same as a Breach of Contract. As such, recoverable costs are not the same under a Termination for Convenience (FAR 52.249-2(1-3)). When the government terminates a contract for its convenience, a contractor is entitled to recover the following costs associated with the Termination:

• Costs incurred for work completed and accepted at the time of the Termination;
• Costs that are considered allowable, allocable, and reasonable;
• Profit on the above costs incurred; and
• Close-out, demobilization, and settlement proposal costs associated with preparing a final cost proposal for submission to the government are allowable, less profit.

Alternatively, under a Breach of Contract by the government, recoverable costs (also commonly referred to as damages) may include monetary costs such as forecasted profits, overhead, and damages for time lost or otherwise needed to perform the work as required by the contract (Recovery). These types of costs (damages) are not recoverable under a Termination for Convenience.

EXAMPLE PROJECT DETAILS: $1.5 million Partial Termination Proposal

A USACE Firm Fixed-Price Contract in the Middle East was partially terminated for the convenience of the Government.

COST ALLOCATION

Excell was able to allocate the costs expended by the Prime due to early-on delays, differing site conditions, change orders, and owner changes.

Excell was hired to evaluate the costs recoverable under the partial termination, which removed approximately 40% of the project nearly 1 year into construction.

INTRODUCTION

The Federal Government also inserts clauses, in efforts to protect itself, into Government contracts to ensure that a contractor that is hired to perform work or provide services does so in a timely manner, with the correct materials, and does not otherwise refuse or fail to prosecute the work as required. One such clause is a Termination for Default, which is outlined under FAR 52.249-10 “Default (Fixed-Price Construction).”

A Termination for Default provides protection to the Government by allowing the Government to effectively terminate a contractor’s contract and the contractor is then liable to the Government for any “damages” that are a direct result of a contractor’s refusal or lack of success in completion of the project.

WHAT THIS MEANS FOR THE CONTRACTOR

In order to terminate a contractor for default, the Government must first deliberate and decide the most appropriate action to take. The Government must review and ultimately prepare a Memorandum for Record (MFR) addressing the following considerations under FAR 49.402-3 (Procedure for Default) before deciding to terminate a contract for default:

1. The terms of the contract and applicable laws and regulations;
2. The specific failure of the contractor and the excuses for the failure;
3. The availability of the supplies or services from other sources;
4. The urgency of the need for the supplies or services and the period of time required to obtain them from other sources as compared with the time in which deliver could be obtained from the delinquent contractor;
5. The degree of essentiality of the contractor in the Government acquisition program and the effect of a termination for default upon the contractor’s capability as a supplier under other contracts;
6. The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments; and/or
7. Any other pertinent facts and circumstances.

FAR 49.607 (Delinquency Notices) requires that the Government notify the contractor that the contractor is responsible for a condition that is endangering performance of the contract. This is typically done through a “Cure Notice” and unless the condition is cured within 10 days after receipt of the notice, the Government may Terminate for Default. This is provided that the time remaining in the contract performance period is sufficient to allow for “…an amount of time equal to or greater than the period of “cure” remains in the contract delivery schedule or any extension to it.” (See FAR 49.607(a))

If the time remaining in the contract delivery schedule is not sufficient to permit a realistic cure period of 10 days or more, the Government may issue a Show Cause Notice advising the contractor that the Government is considering terminating the contract for default and, “…pending a final decision as to this matter, it will be necessary to determine whether the contractor’s failure to perform arose from causes beyond its control and without fault or negligence on the contractor’s part.”

Thus, the contractor is given the opportunity to present, in writing, any facts bearing on the questions to the contracting officer within 10 days after receipt of the notice. Failure to present any excuses within the 10 day period may be considered an admission that none exist.

The contractor should present the following information in response to a Cure Notice:

• Discussion of issue alleged to be a condition endangering contract performance
• Corrective plan to cure the alleged condition
• Who will bear the cost of the corrective work
• Schedule for performance of corrective work
• Impact of corrective work on  completion of contract
• Actions contractor has taken and will take to mitigate the effect of the condition upon completion
• Government’s role in causing the condition
• Any other factors bearing on timely completion

The Contractor should present the following information in response to a Show Cause Notice:

• Discussion of contractor’s performance of the work for the term of the contract
• Discussion of contractor’s control of work
• Discussion of reasons why the contractor is not at fault or negligent as to alleged deficiency
• Percent cost completion of contract
• Delay to project completion caused by Wrongful Termination
• Potential conversion of Default Termination to a Convenience Termination

A Termination for Default has serious consequences for both the contractor and the Government. A contractor must disclose such a Default Termination in bidding for new work. The Government may be held responsible for costs if the default is converted to a Convenience Termination, because the contractor may pursue recovery of allowable costs associated with the termination.

Excell can help a contractor to gain a better understanding of the intricacies of Termination for Default. When you partner with Excell Consulting, our consultants will conduct a specialized review of your particular situation and develop recommendations to guide you in making a business judgment. Please feel free to reach out to the professional consultants at Excell to discuss your particular situation.