Termination for Convenience: What Happens When You Get the Chop By Jeffrey S. Burr With all the talk about deficits and the need to cut the federal budget, it appears likely that certain areas of federal spending are going to be cut. What do you do if your federal contract is terminated? What are your rights? Many contractors have never faced this situation before and are unsure of the process. The government has the right to terminate a contract for its own convenience (“T4C”) for any reason, but usually it is for lack of funding or because the contract no longer supports the agency’s mission. The FAR provides no specific guidance other than the contracting officer may terminate a contract when it is no longer in the government’s interest. The government has wide latitude in deciding whether to terminate a contract; fighting the decision is costly and difficult to overturn. The contractor has to prove bad faith or clear abuse of contracting authority, something that is not easily done. If a contract is terminated for convenience, the government must notify you in writing. This notice must give an effective date of the termination, extent of the termination and any other instructions. If you receive a termination letter, you should follow all directions carefully. Failure to do so can jeopardize any termination claim. Generally, the contractor should: 1. Immediately stop work. 2. Terminate all subcontracts. 3. Immediately contact the contracting officer if special circumstances preclude you from stopping work. 4. Settle subcontractor claims as soon as possible. 5. Preserve all federal property in your possession. 6. Draft and submit a termination settlement proposal. Contract termination generally halts the regular payments you had been receiving under the contract. The contractor may have money tied up in products, materials and/or labor. Termination clauses usually contain provisions to make partial payments to ease cash flow while a final settlement is reached. Navigating the way through the myriad arcane rules and procedures for a termination settlement is often beyond the expertise of small contractors. It pays to seek professional assistance from a government contracts attorney or consultant. Contractors have one year from the effective date of termination (defined as the date which the notice requires the contractor to stop work) to submit a termination claim. The government is required to make a fair and prompt settlement with you upon termination. This involves a lot of back-and-forth negotiations between the parties to come to an agreement. The idea is to agree on an amount that compensates the contractor for work performed through the date of termination, as well as the costs associated with preparing the termination claim. An allowance is made for reasonable profit. Reasonable profit is defined as profit on work performed. It does not include “anticipatory profit” on work terminated but not performed. It is simpler to terminate cost-plus-fixed- fee contracts rather than fixed price contracts in that the contractor has been reimbursed on a cost basis since the beginning of the contract. The contractor is entitled to recover all allowable costs associated with settling a termination for convenience. These costs include: 1. Preparation of claims. 2. Termination and settlement of subcontracts. 3. Storage and disposition of property acquired in the course of the contract. 4. Other termination costs. It is important for contractors to have adequate and reliable accounting data to support the costs that are being claimed in the termination settlement. If a contractor submits a timely but inadequate termination proposal, the government must advise the contractor that unless an adequate and complete proposal is received within one year from the date of termination, then the contractor will have no right of appeal from the government’s settlement determination. The government retains the right to approve any settlements reached with subcontractors. Once the contractor has reached a final agreement with the government, a written amendment to the contract – the settlement agreement – is signed and the contractor can then be paid. Contractors facing a T4C who have never gone through the process would be wise to consult a government contracting attorney or consultant, to ensure the regulations are followed and to maximize cost recovery. Jeffrey S. Burr, CPA, CFF, CFE, MBA is a director with Federal Strategies Group LLC. He provides government contract and management consulting, M&A advisory, forensic accounting and expert testimony services to the government contracting and technology industries. He can be reached via email at JeffB@FedStrat.com.