Converting a Termination for Default Into A Termination for Convenience

The Government usually has two options for terminating contracts: a termination for default (T4D) and a termination for convenience (T4C). Generally, the Government may terminate for default if the contractor fails to perform under the contract, but the FAR contains various default clauses that can be incorporated into a contract, each identifying different conditions under which a T4D is permitted. See e.g., FAR 52.249-8 and FAR 52.249-9. The clauses contain not only different bases for termination but also different notice requirements. For example, the Fixed-Price Supply and Service clause FAR 52.249-8 is different from the Fixed-Price Construction clause FAR 52.249-10.

From the contractor’s perspective, the difference between the two forms of termination is tremendous. One court has described a T4D as “contractual death sentence.” Pipe Tech, Inc., ENGBCA No. 5959, No. 6005, 94-2 BCA ¶ 26,649. When terminated for default, the contractor is liable to the government for any excess costs the Government incurred in acquiring supplies or services similar to those terminated for default (see FAR 49.402-6) and for any other damages, whether or not repurchase is effected (see FAR 49.402-7). A termination for default continues to have an on-going negative effect on a contractor beyond the specific contract which was terminated. This is true even when the contractor has appealed and even prevails in challenging the termination. See, e.g., Colonial Press Int’l, Inc., B-403632, 2010 CPD ¶ 247 (GAO upheld the exclusion of the defaulted contractor from the competition for the re-procurement contract even though the termination was on appeal); M. Erdal Kamisli Co. Ltd., B-403909.2, B403909.4, 2011 CPD ¶ 63, at *5 (2011) (holding that the agency could properly consider a prior T4D in rating past performance as an evaluation factor in a new procurement even though the T4D was on appeal; the Army could “properly rely upon its reasonable perception of a contractor’s inadequate performance even where the contractor disputes the agency’s position”).

On the other hand, when the Government terminates the contract for convenience, a contractor faces none of these downsides. And while a contractor cannot recover all anticipated profit, FAR 49.201(a) requires that the settlement with the government “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. Fair compensation is a matter of judgment and cannot be measured exactly. In a given case, various methods may be equally appropriate for arriving at fair compensation. The use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.”  As a general rule, a termination for convenience converts the terminated portion of a fixed-price contract to a cost-reimbursement type of contract, so costs on the settlement proposal are determined under FAR Part 31 Cost Principles and Procedures. FAR 31.205-42 – Termination Costs lists the following categories of costs:

  • Common items;
  • Costs continuing after termination;
  • Initial costs;
  • Loss of useful value of special tooling and machinery;
  • Rental under unexpired leases;
  • Alteration of leased property;
  • Settlement expenses; and
  • Subcontractor claims

Challenging a T4D

The contractor can challenge the CO’s decision to terminate the contract for default. The U.S. Court of Appeals for the Federal Circuit has ruled that a default termination is a final decision that can be appealed. Malone v. United States, 849 F.2d 1441 (Fed. Cir. 1988). Therefore, you can appeal the T4D determination immediately to the Boards of Contract Appeals or the U.S. Court of Federal Claims, without having to submit a certified claim to the CO and wait for a final decision on that claim, as you normally would have to do to establish CDA jurisdiction.

It is the government’s burden to prove, by a preponderance of the evidence, that the termination for default was proper under whichever default termination clause applies to the contract. Lisbon Contractors, Inc. v. United States, 828 F.2d 759 (Fed. Cir. 1987); Walsky Constr. Co., ASBCA No. 41541, 94-1 BCA ¶ 26,264. In addition to ground set forth in the relevant default termination clause, the Government can terminate for default independently under FAR 52.203-3 (the Gratuities clause); FAR 52.209-5 (Certification Regarding Debarment, Suspension, Proposed Debarment, and Other Responsibility Matters); FAR 52.222-26 (Equal Opportunity clause); FAR 52.228-1 (Bid Guarantee clause); and FAR 52.246-2 (the Inspection clause).  Courts and boards hold the government to a high standard when terminating a contract for default because of the adverse impact such an action has on a contractor. Lisbon Contractors, Inc., 828 F.2d at 759 (“[A] termination for default is a drastic sanction that should be imposed upon a contractor only for good cause and in the presence of solid evidence.”).

As to relief, all FAR default clauses provide that an erroneous default termination will be converted to a termination for convenience. FAR 52.249-8(g); FAR 52.249-10(c); FAR 52.249-6(b); ALKAI Consultants, LLC, ASBCA 56792, 10-2 BCA ¶ 34,493 (converted T4D to T4C based on unanticipated conditions and government failure to cooperate). Moreover, if the government acted in bad faith while terminating a contract for default, courts and boards will award common law breach damages rather than the usual termination for convenience costs. See Apex Int’l Mgmt. Servs., Inc., ASBCA No. 38087, 94-2 BCA ¶ 26,842 (finding 20 breaches ASBCA holds Navy liable for breach damages); Sigal Constr. Corp., CBCA No. 508, 10-1 BCA ¶ 34,442 (finding T4C to be in bad faith where GSA deleted work from a construction contract to have that work performed by another contractor at a lower price).

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