Termination For Default – Contractor Edition

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Termination For Default (T4D) – Contractor Edition

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Government Will Protect Itself

The Government is going to protect its interest.  That is the reason that they insert clauses into contracts. This provides them with an option if the contractor does not perform the work or provide the services within the time frame specified. Also, if the contractor does not use the correct materials or refuses or fails to perform the work as required. No matter what you do not want to face a Termination for Default on a government contract. The result is a poor past performance, In addition, you may face fines or criminal action by the government.

Think about it like this, if you were hiring a contractor to perform work for yourself would you want to protect yourself? The answer is a resounding yes!. Well, the government is doing the same thing. Besides, this just makes sense from a business standpoint.

Now before we go on we need to talk about the rules and regulations that govern Termination for Default. Again, we will refer to the Federal Acquisition Regulation otherwise known as the FAR. For more information on the FAR see our blog. Otherwise, below I have listed the FAR references for termination of default.

FAR References for Terminations for Default

You will find the FAR reference for Termination for Default below. Please see the FAR 52.249 for further information. Also, the website that I will list next contains the latest updates on the FAR. Most government personnel involved in the acquisition process will use this website. The website for the FAR is Farsite.hill.af.mil.

  • 52.249.8 –    Supply and Service, Fixed Price
  • 52.249.9 –    Research and Development, Fixed Price
  • 52.249.10 – Fixed Price Construction

Next let’s discuss the definition of termination for default.

Termination for Default

Earlier, we mentioned that a termination for default means that the government believes that the contractor may have not performed on the contract in accordance with the contract terms.  Now, let’s look at the steps involved if the government wishes to terminate a contract for default.

Memorandum for Record

The first step the government will take is to decide the most appropriate action to take.  To do this the government will prepare and review a Memorandum for Record which addresses the factors contain in FAR 49.402.3.  Once the factors have been determined and review the government will make a termination decision.  What factors will the government review?  Well, the government will review and evaluate the following seven factors:

  • First the government will review the contract terms to include any applicable laws and regulations;
  • Secondly, the government will look at the specific contractor failure and the contractor excuses for this failure;
  • Third they will research the availability of the supplies or services from other sources;
  • Fourth, the government will consider the urgency of need for the supplies and/or services. In addition, they will also consider the time period required to procure these sources compared with the time the delivery could be obtained from the delinquent contractor.
  • Fifth the government will review 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;
  • Sixth, the effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments; and/or
  • Seventh any other important facts and circumstances.

As you can imagine a termination for default has serious implications not only for the contractor but the government also. Next we will look at those implications.

Impacts Both Government and Contractor

As you can tell the government is not going to take this action likely. The contracting representatives will have to gather the above information and discuss this situation with their legal department. Basically, a termination for default hurts both parties. The government does not get the goods or services that it needs and it damages the contractor’s past performance record.

As you can imagine a termination for default is overwhelming to the contractor. The contractor can face suspension and debarment or criminal conviction. For those that are unfamiliar with the term debarment is means that a contractor cannot compete or perform on a government contract. This debarment could last for years. If you are a construction contractor your surety company will use your bond to find another contractor to perform the contract. That is if the government elects this route. All of this should not take lightly. If you are headed down this road it is imperative that you have a great legal team on your side.

In addition, if your contract was terminated for default and you received a termination letter, you may still be entitled to payment for work that was properly performed in agreement with the contract before termination.

Now let’s talk about the Other Factors and circumstances that the government reviews.

Terminations – Other Factors

Remember in the beginning of this blog we stated that the government may terminate a contract if it feels it is in its best interest to do so. The government may elect to terminate all of the contract or only a portion of the contract. Below are some of the reasons for terminating a contract;

  • Attempted fraud by contractor.
  • Contractor failure to meet quality control requirements.
  • The Contractor failure to deliver the supplies or perform the services within the time frame specified in the contract.
  • Failure by the contractor to perform any other provisions contained in the contract.

Will the government just start termination proceedings without my knowledge?  No, the government will notify you.  Up next, we will talk about the Delinquency Notices.

Terminations – Delinquency Notices

 There are two delinquency notices available for use by the government.  The first notice is called a “Cure Notice” and the second notice is called a “Show Cause Notice”. Basically, the FAR states that the government must notify the contractor that they are responsible for a condition that is threatening performance of the contract.  See FAR 49.607 for more information on delinquency notices.

Next, we will discuss the “Cure Notice”.


Terminations – Cure Notice

Cure Notices are issued when a contract is in jeopardy of being terminated prior to the delivery date.  Before the government can use this notice, they must ensure that there is enough time left on the contract delivery schedule or any extension.  Why?  The government must provide the contractor with enough time to resolve the issues affecting the contract.  This time period is generally 10 days. If the timing is not enough to permit a realistic “cure” period of 10 days or more, the “Cure Notice” cannot be issued.

Terminations – Ten Days To Respond

So, what happens if there is not 10 days or more available on the contract?  The government has the option of issuing another delinquency notice called a “Show Cause Notice”.  But first, let’s discuss what a contractor should include in their written response to the government regarding the cure notice.

Contractor’s Response to Cure Notice

It is imperative that you, the contractor, respond to the cure notice within the time frame specified on the letter.  Under no circumstances should you not respond to a cure notice. The Government will consider your non-response as you agree with everything contained in the cure notice. Therefore you need to provide the Government with your written response. Make sure you address the following information in your response to the government.

  • First make sure to discuss the alleged problem affecting contract performance.
  • Second explain the actions you are taking to resolve the alleged condition.
  • Third list the costs to correct the work and who will bear those costs.
  • Fourth provide a schedule of performance on corrective work.
  • Fifth address the impact the corrective work will have on the completion of the contract.
  • Sixth Identify and list the corrective actions that you have taken to reduce the effect of the condition on your completion of the contract.
  • Seventh Address the Government’s role in creating the condition.
  • Lastly, discuss any other relevant factors bearing on timely completion of the contract

Terminations – Address All Allegations

Remember that you only have 10 days to respond to the cure notice. It is important that you address all the allegations contained in the notice and present your side as best as possible. 

No one wants to receive a cure notice but it does happen. If it happens to you make sure to consult with an attorney that specializes in government contracting and has experience in contract terminations. An experienced attorney can help you through this process.

Now, let’s move on to the other delinquency notice, the “Show Cause Notice”.

Terminations – Show Cause Notice

As stated earlier a “Show Cause Notice” may be issued when the contract delivery schedule is not sufficient to permit a realistic cure period of 10 days or more.  This notice will advise the contractor that the government is considering terminating the contract for default.  However, the government has not made a final decision on this matter.  The government needs to determine if the contractor failed to perform was from causes beyond its control and without fault or negligence on the contractor’s part.

Gather Facts

The contractor is given an opportunity to present any facts to the contracting officer (in writing) within the 10 days after receipt of this notice.  If the contractor fails to present any facts within the 10-day period, the government may consider this an admission that none exist. 

Do not under any circumstance fail to submit your response in writing to the contracting officer. The government will consider this is an admission of fault. Besides the government may not have all the facts or may have left out important facts in your favor.

What should a contractor include in their written response to a “Show Cause Notice”? That is what we will discuss next.

Contractor’s Response to Show Cause Notice

It is suggested that a contractor address the following when responding to a “Show Cause Notice”:

  • Discuss your contract performance over the term of the contract.
  • Make sure you talk about your control over the work performed on the contract.
  • State your reasons why you are not at fault or negligent regarding the alleged deficiency.
  • Present the percentage of cost completion on the contract.
  • Make sure to address the fact that the project completion will be delayed because of this wrongful termination.
  • Include the delay to project completion caused by this wrongful termination
  • Lastly address a possible conversion of Default Termination to a Convenience Termination.

Things to Consider

When writing your response to either a cure notice or show cause notice it is important to remove the personal feelings from the letter and state the facts as you see them.  Now is not the time to let your emotions get the better of you.  Make sure that you have someone review the letter being as objective as possible.

Remember a Termination for Default has serious consequences not only for you but the government also.  A contractor that received a Termination for Default must disclose this fact when bidding any new work.  This will impact your past performance rating as well.  In addition, the government may hold the contractor 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.

In addition, the government could suspend or debar your business from performing any future government contracts. Or worse, the government could seek criminal proceedings.

Next we will talk about excusable behavior.

Is there an Excusable Behavior?

If you can show that your failure to perform the contract was excusable, your contract cannot be terminated for default.  In order to be excusable, the failure must be beyond your control and not your fault or neglect.

Examples of Excusable Behavior

The following are examples of excusable failures:

  • Acts of God
  • Acts of public enemy
  • Actos of government
  • Fires
  • Floods
  • Epidemics
  • Quarantine restrictions
  • Strikes
  • Freight embargoes
  • Unusually severe weather.

What Happens if the Default is Excusable?

If after the termination you are found not to be at default or the default is excusable, the termination will be treated as one for the convenience of the government.  As a result, the government will remove the bad image that the termination for default gave you and you will recoup some of your money back as well.

This is great news for you and your business.  However, what happens if the buying agency or contracting officer does not agree with you?  Or worse, you believe their decision is not correct?

Well, the contracting regulations provide contractors with several remedies, all the way from filing a simple protest or dispute to taking the government to court.

Summary

In summary, no contractor wants to face a termination for default however there are things that you can do to protect yourself. One of the biggest things to do is to document EVERYTHING and HIRE the BEST Attorney!

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