The government has the contractual right to terminate a contract, in whole or in part, either for default or for convenience if the contracting officer (CO) determines that a termination of an existing contractual arrangement is in the best interest of the government. In return for this right to terminate a contract for convenience, the government will usually pay the contractor the price of completed items (delivered and accepted or not yet delivered), its allowable cost and reasonable profit relating to the terminated portion of the contract, and settlement costs incurred by the contractor as a result of the termination.
Terminations for convenience are covered by myriad Federal Acquisition Regulation (FAR) clauses, but even when specifically deleted by the contracting parties, a termination for convenience clause is read into contracts as a matter of law. This is known as the Christian Doctrine. Terminations, either for convenience or default, are for the convenience of the government, not the contractor. They are not limited to situations where the subject supplies or services are no longer needed. Some factors that can trigger a termination include:
- Inadequate funding,
- A deteriorating government/contractor relationship,
- Cost overruns, or
- The contractor’s failure to agree to contract restructuring.
The government has broad rights associated with the termination of a contract for convenience, and it is virtually impossible for a contractor to successfully challenge the termination.
When confronted with contract termination, the contractor must immediately stop work on the terminated portion of the contract, terminate all open subcontracts, and protect and preserve any property of the government until disposal directions are received. Unless authorized in writing by the terminating CO (TCO), any work performed after receipt of the notification of contract termination is performed at the contractor’s risk. Charge numbers should be established to document any costs incurred as a result of, and after receipt of the termination notice. Subcontracts are the responsibility of the prime contractor, who serves as the TCO in place of the government’s assigned TCO. Subcontractors have no termination rights against the government.
The preparation, submission, and prompt resolution of a termination settlement proposal made to the cognizant TCO requires a dedication of time and a particular expertise not generally available within most organizations. To remain competitive, particularly in today’s downsizing environment, companies have taken to outsourcing the majority of these efforts. These costs, whether generated internally or externally, prior to the time that a claim arises under the Contract Disputes Act, are allowable. The types of costs generally included in this category include: accounting, legal, clerical effort, and similar costs reasonably necessary for the preparation and presentation, including supporting data, of proposals to the TCO. FAR 31.205-33(d).