What Government Contractors Need to Know: Terminations for Convenience

The first months of the Trump Administration have seen a flurry of executive orders related to government contracts. Many of these executive orders – as well as public statements by heads of federal agencies or the Department of Government Efficiency (DOGE) – signal a continued intent to terminate government contracts across a variety of programs and agencies for the convenience of the government. A termination for convenience allows the government to unilaterally end a contract without the contractor being at fault. As a result, many government contractors have found (or will find) themselves in a surprising situation where the government terminated a contract for convenience after finding the work "not essential" to the agency or because the program no longer meets agency priorities.  

Regardless of the legality of these terminations for convenience, many contractors find themselves in unfamiliar territory where a government contract has been unexpectedly terminated – not because of poor performance but rather a budget-cutting tactic. This blog post serves to better place contractors up for success in terms of 1) understanding rights and affirmative obligations the federal government has in entering into termination settlements with contractors and 2) ways contractors may recoup costs related to work performed and termination costs, including legal costs associated with preparing termination settlement proposals.

Step 1: Review Your Termination Notice

Contractors should first carefully review the agency's termination notice to determine whether the agency has terminated the contract in full or has issued a partial termination. If you have questions about the termination notice, engage your legal counsel prior to signing an acknowledgment or taking other action.

Next, ensure that you stop all work internally at the company and to send termination notices and stop work orders to each immediate subcontractor and consultant. Assess how terminations may cascade down to subcontractors and ensure compliance with notice and settlement provisions. Proactive communication with subcontractors can help mitigate potential disputes and delays.

Finally, ensure that you determine any deadlines set in the termination notice (e.g., to submit your settlement proposal within a certain amount of time).

Step 2: What Termination Clause Is in Your Contract?

The next step contractors should take is to review the specific government contract and identify the applicable "termination for convenience" clause that is included in the agreement. The specific rights a contractor has depends on the contract type and the corresponding Federal Acquisition Regulation (FAR) termination for convenience clause.¹ The applicable FAR clause will provide instructions on steps a contractor must take following receipt of a notice of termination, including stopping work, terminating subcontracts and other related steps. It also details information related to a termination settlement proposal the contractor has the burden to draft and submit. Contractors should also be familiar with FAR 49.104, which outlines responsibilities upon receiving a termination notice.

Step 3: Start Collecting Information and Documentation on Costs You Will Claim in Your Settlement Proposal

Notably, contractors have the burden of establishing its proposed settlement amount. As such, a contractor is responsible for collecting documentation and proof of costs to submit with a termination settlement proposal. Maintaining thorough and up-to-date records of all project-related expenses, deliverables and progress will help substantiate claims for compensation. See FAR 49.206-2 (outlining documentation requirements for contractor settlement proposals).

A contractor should also establish separate internal timekeeping and cost collection codes for personnel working on the settlement proposal. Having a separate timekeeping number and cost code will provide proof of these costs in the settlement proposal.

In some instances, a contractor may have first received a stop-work order (which requires a contractor to maintain readiness in the program's interest in the event a program is resumed) prior to receiving a termination notice. If this case, collect contemporaneous documentation or document the reasons the company was required to maintain readiness and how the contractor minimized costs. For idle personnel during this time period, draft a narrative explaining why it wasn't feasible to temporarily move them to another billable project.

Step 4: What Types of Costs Can a Contractor Recover?

As a general rule, a termination for convenience converts the terminated portion of a fixed-price contract to a cost-reimbursement type of contract. Costs on the settlement proposal are determined under FAR Part 31-Cost Principles and Procedures.

Where a "commercial" contract, subject to FAR Part 12, is terminated for convenience, contractors are entitled to either:

1. "[A] percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system, have resulted from the termination. The Contractor shall not be required to comply with the cost accounting standards or contract cost principles for this purpose. This paragraph does not give the Government any right to audit the Contractor's records. The Contractor shall not be paid for any work performed or costs incurred which reasonably could have been avoided." See FAR 52.212-4, Contract Terms and Conditions—Commercial Products and Commercial Services (emphasis added), or
2. "[A]n amount for direct labor hours (as defined in the Schedule of the contract) determined by multiplying the number of direct labor hours expended before the effective date of termination by the hourly rate(s) in the contract, less any hourly rate payments already made to the Contractor plus reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system that have resulted from the termination. The Contractor shall not be required to comply with the cost accounting standards or contract cost principles for this purpose. This paragraph does not give the Government any right to audit the Contractor's records. The Contractor shall not be paid for any work performed or costs incurred that reasonably could have been avoided." FAR 52.212-4 Alternate 1 (emphasis added).

Where a non-Part 12, non-commercial, government contract is terminated for convenience, contractors are generally entitled to recover the following categories of costs.

• Payment for Work Performed: Contractors can claim compensation for the value of work completed up to the date of termination.
• Reasonable Profit: Contractors can generally recover profit on work completed prior to receipt of the notice of termination. Profit recovery does not extend to unexecuted portions of the contract.
• Reasonable Costs of Settlement of the Work Terminated: Accounting, legal, clerical and other expenses reasonably necessary for the preparation of termination settlement proposals and supporting data are allowable costs.
• Wind Down Costs: These include costs directly associated with halting operations, such as demobilization expenses, severance for personnel, and subcontractor terminations and settlements (excluding the amounts of such settlements).

Step 5: Submit the Settlement Proposal and Enter Negotiations with the Government

Contractors must submit the termination proposal within the required time frame. Although the FAR provides particular time frames (generally one year from receipt of a termination notice), a termination notice may seek to shorten this time without approval by a contracting officer (e.g., periods as short as 60 days). If a contractor fails to submit its termination settlement proposal within the required time period, or any extension granted by the contracting officer, the contracting officer may then unilaterally determine the amount due to the contractor.

If you have questions about the time-frame requirements to submit a settlement proposal, reach out to your legal counsel. Putting together a settlement proposal can take time depending on the contract type, and it's important to put together a logical, well-supported and documented package to the agency. It is also important to establish open lines of communication with agency contracting officers to stay informed about timelines, procedures and expectations. Clear communication can help clarify ambiguities and reduce the likelihood of disputes.

Key Takeaways

1. Engage Legal Counsel Early in the Process. Reasonable legal costs are allowable costs that can be claimed in a settlement proposal. Additionally, having legal support during settlement negotiations can be key to helping a contractor in recovering costs to which it is entitled, especially in today's rapidly evolving political climate.
2. Promptly Provide Termination Notices to Subcontractors. Contractors should timely terminate subcontracts and consultant agreements one tier down upon receipt of a termination notice.
3. Submit a Well-Documented Settlement Package. It is your responsibility as the contractor to prove you are entitled to costs you are claiming in the settlement package. Set yourself up for success by taking steps such as setting up separate internal timekeeping. Maintaining thorough and up-to-date records and documents will also help substantiate claims for compensation.
4. Remain Alert on New Trump Administration Actions. Contractors should remain vigilant about potential future executive orders that might impact termination settlements, including anticipated pace of negotiations due to personnel layoffs or contract reviews across federal agencies. Proactive engagement with trade associations and legal advisors can help anticipate and address emerging risks.

Notes

¹ See, e.g., FAR 52.249-2, Termination for Convenience of the Government (Fixed-Price); FAR 52.249-4, Termination for Convenience of the Government (Services) (Short Form), FAR 52.249-6, Termination (Cost-Reimbursement); FAR 52.249-5, Termination for the Convenience of the Government (Educational and Other Nonprofit Institutions); FAR 52.212-4(l); FAR 12.403(d).