Termination for Convenience Settlement Proposals

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Termination settlement proposals are key to ensuring the contractor is adequately compensated when the Government chooses to terminate the contract for its convenience. Understanding the rules and regulations governing such settlements will help maximize recovery for the contractor.

FAR 52.249-1 thru 5 and FAR Part 49.502 address terminations for the convenience of the government. When the government terminates a fixed price contract, the contractor is permitted to recover allowable costs incurred during performance, reasonable profit for the work performed, settlement expenses, and some continuing or post-termination costs. FAR 52.249-2. Total recovery is limited by the total contract price, including any equitable adjustments. The FAR states that the “use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.” FAR 49.201(a). However, the government may try to use this “business judgement” against contractors.  If so, the contractor should not be deterred in maintaining its position.  The government bears the burden of proof showing the contract would have been performed and completed at a loss. If the government meets this burden, the contractor may not receive any profit. Other termination costs may also be subject to a loss adjustment.

The contractor is responsible for preparing the proposal, which must be submitted within one year of the date to stop performance as stated in the termination notice. FAR 49.206-1(a); FAR 52.249-2(e). If the termination notice is delivered after the date to stop performance, the one-year timer begins on the date the termination notice is received. This time period may be extended by the Termination Contracting Officer; however, the contractor must make such an extension request in writing before the deadline. FAR 52.249-2(e). If a contractor does not meet these time requirements, it is left without a remedy, and the contracting officer may decide what the contractor is entitled to. FAR 52.249-2(e), (j). A subcontractor’s timeframe to file a proposal with the prime contractor is typically set out in the subcontract agreement.

While strict documentation may be burdensome and is not required, the contractor must show the termination costs “with sufficient certainty” to prove the amount requested is “more than mere speculation.” See Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 767 (Fed. Cir. 1987). When forming the proposal, the use of estimates are permitted if accounting records are inaccessible. However, the contractor must show that these estimates have a reasonable basis in fact. See Appeal of Tagarelli Bros. Const. Co., Inc., ASBCA No. 34793, 88-1 BCA ¶ 20363.

Though there are many types of costs that may confront a contracting officer, they may only pay “allowable” costs.   There is a standard to determine whether continuing costs are allowable. See FAR 31.205-42(b). This standard takes into account whether the contractor negligently or willfully failed to discontinue the costs. For example, if a contract was terminated and the contractor waited months before reassigning an employee, the government would not likely reimburse the full costs of the employee’s compensation.

If the government delayed performance before eventually terminating for convenience, costs associated with the delay (including increased cost of performance) may also be included in the settlement proposal. Additionally, the time spent in preparing and negotiating this proposal are recoverable costs, including legal and accounting expenses. The contractor should carefully document such time spent by both in-house personnel and those providing professional services to the contractor.  Both will likely be necessary and represent allowable and recoverable costs.

Another example of allowable costs might be initial costs.  This includes the costs incurred in anticipation of the contract award and the costs incurred to comply with a delivery schedule. If these costs were necessary, they are allowable to include in a settlement proposal. FAR 31.205-42(c). Another example of allowable costs are costs related to familiarizing the contractor with the product or the processes to create or deliver the product.  These  may also be approved since these costs were intended to be spread over the lifetime of the contract. See Appeal of Lockley MFG. Co., Inc., ASBCA No. 21231, 78-1 BCA ¶ 12987.

To maximize recovery of allowable costs in the event of termination for the government’s convenience, contractor’s should obtain legal counsel.  Ward & Berry PLLC. attorneys have extensive experience in this area and have successfully litigated disputes arising from disagreements with the government on costs.  Part of the costs that are recoverable in such  negotiations are reasonable fees  to prepare and  negotiate termination settlement proposals.  As a result,  retaining counsel is cost-effective and a great investment to maximize recovery.

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