Understanding Government Contract Terminations

April 21, 2017

By Meghan F. Leemon
Practice Areas: Government Contracts Law and Small Business Programs & Advisory Services

It is important for prime contractors to understand what it means if its contract with the Federal Government is terminated and what rights and obligations it has. Nearly every Government contract contains a clause allowing the Government to terminate a contract either for convenience or for default (also known as for cause).

The Government may terminate your contract, or a portion of your contract, for convenience when it is in the Government’s interest. Essentially, this means that the Government has made a determination that it no longer has a need for the services or goods contemplated under your contract. Once you receive a termination for convenience notice, you, as the prime contractor, must generally stop work immediately on the terminated portion of your contract and terminate any subcontracts that you have in place related to the terminated portion of the prime contract. If your contract has been partially terminated, you must also continue to perform on the remaining portion of the contract.

After a termination for convenience, you and the Government will need to settle what you are still owed under the contract, including reasonable loss of profit. This typically occurs through a negotiated agreement, where you submit a settlement proposal which the Government can either accept, counter, or deny. Understanding what you are entitled to recover is crucial in putting together your settlement proposal. It is also important to keep clear records relating to the contract, as the Government will want to be able to trace each claimed cost to contract performance. And, the contracting officer will submit any settlement proposal of $100,000 or more to the appropriate audit agency for review and recommendations.  

Although not impossible, it is difficult to challenge a termination for convenience. To successfully do so, there needs to be a showing of bad faith or a clear abuse of discretion on the part of the contracting officer. This is especially difficult given the presumption that government officials act in good faith. Because of this, settlement negotiations are even more important when your contract is terminated for convenience. If you cannot reach an agreement with the contracting officer, you may be able to appeal the decision to the appropriate contract appeals board or Court of Federal Claims. However, before you may do this, you should request some form of a final decision from the contracting officer and ensure that your settlement proposal is certified if seeking costs in excess of $100,000, which would then convert your settlement proposal into a certified claim for costs. Without this step, the contract appeals board or Court of Federal Claims may not exercise jurisdiction over the appeal.

On the other hand, the Government may terminate your contract for default, either completely or partially. This typically occurs where the contractor fails to perform or meet certain contract requirements, but also includes anticipated failure to perform. Just as with a termination for convenience, you must stop work immediately on the terminated portion of the contract and terminate any subcontracts that you have in place related to the terminated portion of the prime contract. If a surety is involved, the contracting officer will typically send the termination notice to the contractor and the surety. 

Typically, before a contract is terminated for default, the prime contractor receives a written cure notice, which allows you to cure the defects cited in the notice within a set time frame, usually 10 days. If the defects are not cured, the Government may, but does not always, issue the default termination notice. The Government may also allow you to continue performing. In addition to a cure notice, the Government could also issue you a show-cause notice, which affords you the opportunity to show and explain to the Government why your contract should not be terminated for default. As an example, there could have been unforeseen delays, which were not caused by your fault or negligence and were beyond your control, which resulted in an excusable delay. If it is determined that your failure to perform is excusable, your contract should not be terminated for default.

Ultimately, if your contract is terminated for default, you are entitled to the contract price for any supplies or services accepted by the Government. The Government will not pay you for costs on undelivered work and the Government may seek repayment of any advance or progress payments made related to the terminated portion of the contract. If there is still work remaining on the contract, the Government will likely seek to have the work completed by another contractor, and if the re-purchase is more than the cost of work contemplated under the terminated contract, the Government will make a written demand to the terminated contractor for the amount in excess. 

Unlike a termination for convenience notice, a termination for default notice is considered a contracting officer’s final decision which may then be appealed to the appropriate contract appeals board or the Court of Federal Claims under the Contract Disputes Act. If a termination for default is found to be improper, it is converted into a termination for convenience, and the contractor may be entitled to termination for convenience costs. 

If your contract has recently been terminated or you are concerned that it may be terminated, we are available to assist in preparing responses and to help with any appeals. 

About the Author: Meghan Leemon is an associate with PilieroMazza in the Government Contracts Group. She may be reached at mleemon@pilieromazza.com.

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