Termination for Convenience. Those three little words are something that no contractor wants to hear. After all, who wants the government to seek termination actions on their contract. But let’s be honest, it does happen. Contract terminations can happen at any time. Sometimes the contractor is at fault and sometimes the contractor is not at fault.
Our goal for today’s episode is to educate you on the procedures that transpire when the government terminates a contract. In addition, we will go over the resources available to both parties (government and contractor).
Remember the better educated you are the better business decisions you can make. Up next, we will go over the contract termination options used by the government.
Types of Contract Terminations
There are three types of contract terminations available to the government. The first called Terminate for Convenience otherwise known as T4C. The second called Termination for Default otherwise known as T4D. The third termination called the no-cost cancelation.
Generally, contracts greater than $25,000 will contain a contract clause allowing the government to terminate the contract if the contractor defaults on the contract. The reason for this is obvious. The government needs to protect itself.
Because it is in the government’s best interest to do so.
The Government will use a Termination for Convenience clause when it is in the Government’s best interest to do so. If you have been following along with our episodes, you will notice that this is a common theme with the government. In essence, this allows the Government an exit strategy. The government can now discontinue a contract due to technological developments that make the contract obsolete. Perhaps there is a lack of funding due to budgetary restrictions. Finally, the government can terminate the contract because the work is no longer needed. Thus allowing the government to reallocate taxpayer money for something that needed by the government. Essentially this clause avoids liability for the government for a Breach of Contract action by a contractor.
Next we will look at the Federal Acquisition Regulation (FAR) references for Termination of Convenience.
FAR References for Termination of Convenience
Below, I have included the FAR references for Termination for Convenience:
- 52.249.1 & 2 – Fixed Price
- 52.249.3 – Dismantling, Demolition, or Removal of Improvements
- 52.249.4 – Services
- 52.249.5 – Educational & Other Nonprofit Institutions
- 52.249.6 – Cost-Reimbursement
- 52.249.7 – Fixed Price Architect-Engineer
It is important that you review the clauses contained in your contract. Generally these clauses are the only ones that the contracting officer can use. Make sure to go to the FAR and read about each clause. Make sure that you not only read but comprehend what is contain in the clause. Sometimes the wrong clauses added to a contract. If you suspect that a clause is not relevant contact your contracting officer immediately. Do this before you even begin work on the contract.
As we discussed earlier, a termination for convenience allows the government to terminate all or part of a contract for its convenience. When the government terminates a contract for convenience, they must notify you in writing. The notice of termination must contain an effective date of the termination, the extent of the termination and any special instructions. What do you mean when you say the extent of termination? Well, the government may not eliminate the entire contract but only a portion of the contract. Thus, leaving part of the contract still intact. If the government leaves part of the contract intact then you, the contractor, will need to perform the parts of the contract that the government did not remove.
Next we will discuss termination notices.
The termination notice will instruct the contractor to stop work immediately only on the terminated portion of the contract. This includes any subcontractors that are performing work on a portion of the contract that the government is terminating. However, the contractor and subcontractors must still perform the portions of the contract that are not terminated. In addition, the government will settle termination claims from both the contractor and its subcontractors. Good to know right!
You must follow the instructions in the termination notice. If you fail to do so you are opening yourself up to risk and expense. The government will include detail instructions on the protection and preservation of all property that is or may become government owned.
Do not under any circumstances continue to perform work on any portion of the contract that the government is terminating! The chances of you being reimbursed for expenses is low. Next, we will talk about the settlement process.
Because the government is eliminating part or all of a contract they still must compensate you for the work that you have performed and any preparations that were taken before the termination.
In addition, the government is required to make a fair and prompt settlement with you. Generally, this will result in a negotiated agreement between both parties. The objective here is to compensate you fairly and fully for the work you have done and for any preparation you have made for the terminated portion of the contract. Also a reasonable allowance for profit is also included. This settlement is much easier in cost-reimbursement contract since you were reimbursed on a cost basis since the beginning of the contract.
Furthermore you are entitled to recover all allowable costs incurred in settling a termination for convenience. These reimbursable costs include:
- Costs incurred for work completed and accepted at the time of the Termination;
- In addition, costs considered include allowable, allocable, and reasonable;
- Don’t forget your profit on the above costs incurred; and
- Finally close-out, demobilization, and settlement proposal costs associated with preparing a final cost proposal for submission to the government are allowable, less profit.
As soon as you receive notification that the government is going to terminate a portion or the whole contract start gathering the above information. It is in your best interest to be as detailed as possible. Besides you do not want to leave money on the table.
Termination – Settlement Agreement
More importantly, the government will retain the right to approve or ratify any settlements made with subcontractors. Once the government and the contractor agree to all or part of your compensation claim as a result of the termination, a written amendment is made to the contract. This is known as a settlement agreement. Your contracting officer will amend the contract accordingly.
Under normal circumstances a termination will stop regular payments to you under a contract. However, since you may have money tied up in finished and unfinished products, materials and labor, most termination clauses provide you with interim financing through partial payments. In fact discuss this with your contracting officer as soon as possible.
In future articles we will discuss your rights for termination for convenience. Make sure to sign up to our newsletter so that you are kept up to date on our latest articles. Don’t have time to read? Check out our podcast or YouTube channel for more information.