Federal Contracts: Termination for Convenience

Current Political and Economic Environment Government’s Right to Termination for Convenience Preparing for a Potential Termination for Convenience Governing Regulations and Unique Accounting Considerations Summary Additional Resources Rate this QuickCounsel

Current Political and Economic Environment

On March 4, 2009, President Obama released a Memorandum for the Heads of Executive Departments and Agencies in which he directed the Office of Management and Budget (OMB) to “…develop and issue…Government-wide guidance to assist agencies in reviewing, and creating processes for ongoing review of, existing contracts in order to identify contracts that are wasteful, inefficient, or not otherwise likely to meet the agency’s needs, and to formulate appropriate corrective action in a timely manner.” The memorandum identified corrective actions to include the modification or cancellation of current contracts.

On April 6, 2009, Secretary of Defense Robert M. Gates presented the key elements of the proposed 2010 defense budget, including the potential termination of a number of large and complex Department of Defense programs. In addition, Gates proposed reducing the number of support-service contractors from the current 39% of the Pentagon workforce to 26%, and replacing them with full-time government employees.

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The Unique Rights of the Federal Government to Terminate Contracts for Convenience

Termination for convenience (“T for C”) clauses provide government contracting officers with the right to unilaterally terminate contracts when it is in the government’s best interest. Federal procurement agencies in the United States initially began using the concept of T for C during the Civil War as a means for the government to terminate contracts for wartime supplies at the point they were no longer needed. The 1964 edition of the Federal Procurement Regulations gave agencies the option to use T for C clauses in government contracts, and a revision in June 1967 made the use of the clauses mandatory with limited exceptions. The clauses are incorporated in the Federal Acquisition Regulation (FAR), a set of procurement regulations issued pursuant to the Office of Federal Procurement Policy Act of 1974

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Preparing for a Potential Termination for Convenience

Although a contractor may be able to exert little influence over termination of a program, a contractor can and should take steps to minimize the adverse impact to its organization, preserve and protect its rights to equitable compensation and demonstrate its ability to protect the interests of the government. A termination settlement should compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract, including a reasonable allowance for profit for work performed prior to the termination. There are a number of steps a contractor should be prepared to execute if it has reason to be concerned about a potential termination for convenience. These include being prepared to:

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Governing Regulations and Unique Accounting Considerations

FAR Part 49 provides guidance to the Government Contracting Officer and to the contractor on terminations. Additionally, the cost principle set forth at FAR 31.205-42 prescribes regulations for some of the unique costs and circumstances that may arise in a termination for convenience. A T for C can give rise to recoverable costs, “if properly documented and supported,” for:

These costs are illustrative and not intended to be a full listing of the costs recoverable under a termination.

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Summary

Management of the termination settlement process can prove complex, particularly in instances where the contractor is terminated for a portion of the work under contract while continuing work under other aspects of the contract. On virtually all large complex terminations for convenience, contractors engage professional expertise to work their way through the unique regulations and the multitude of issues and steps involved in a termination. Using such professionals may help the contractor preserve and protect its rights to equitable recovery of costs, ensure compliance with regulations and allow it to focus its resources on ongoing and future business opportunities. The costs of professional assistance in preparing and presenting a termination settlement proposal to the government are allowable direct costs of the termination and are not an indirect cost to be allocated to other work.

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Additional Resources

Government Forms and Information

ACC Resources

Sponsor Resources

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