Every federal contract contains the government’s right to end it early, and the clause that applies says a great deal about what happens afterward. A termination for convenience lets the government stop work because it no longer needs it, with the contractor compensated for what it has done. A termination for default is a finding that the contractor failed to perform, with consequences that can follow the firm for years. Knowing how each works is part of understanding the contract you signed.
Termination for convenience
The government’s right to terminate for its own convenience is one of the features that distinguishes federal contracts from commercial ones. The clause allows the contracting officer to terminate all or part of a contract when it is in the government’s interest: the requirement has changed, funding has disappeared, a program has been cancelled or a protest has been sustained. The contractor is not accused of anything. In commercial contracts a cancellation like this would often be a breach; in federal contracts it is an agreed term.
After a convenience termination, the contractor must stop work as directed, terminate subcontracts, protect government property and submit a termination settlement proposal within the time the clause allows, typically one year. The settlement generally covers the contract price for work accepted, the costs incurred on work in progress, reasonable profit on that work, and the costs of settling with subcontractors and preparing the proposal. Anticipated profit on the unperformed portion is not recoverable. Commercial item contracts use a simpler formula based on the percentage of work performed plus reasonable charges resulting from the termination.
Termination for default
Default is the government’s remedy when the contractor fails to deliver on time, fails to make progress so as to endanger performance, or fails to perform other provisions of the contract. For the latter two grounds, a cure notice generally precedes termination. The contractor can defend by showing that the failure was excusable, arising from causes beyond its control and without its fault or negligence.
The consequences are significant. The contractor is paid only for items accepted, may have to return progress or performance-based payments on unaccepted work, and is liable for the government’s excess costs of reprocuring the work from another source. The default appears in the government’s performance databases and must be disclosed in future representations, where it weighs on responsibility determinations. Contractors may appeal a default termination through the disputes process, and if it is found improper it is converted to a termination for convenience.
Partial terminations and stop-work orders
Terminations can be partial, ending some line items or tasks while others continue. A stop-work order is a related but distinct tool that suspends work for a limited period, after which the government must either cancel the order or terminate. Costs resulting from a stop-work order may be recoverable through an equitable adjustment.
What contractors should do
- Read the termination clauses before signing so the rights and procedures are not a surprise
- Keep cost records that can support a settlement proposal, including costs by task and by subcontractor
- Flow termination provisions down to subcontractors so your obligations and theirs align
- Respond to cure notices and show-cause letters promptly and in writing
- On receiving a termination notice, follow its instructions exactly and document every step
- Talk with a lawyer and, for settlement proposals, an accountant experienced in government contracts
Keeping perspective
Terminations for convenience are uncommon and rarely personal; terminations for default are rarer still and almost always preceded by warnings. The right to terminate is part of the price of doing business with a customer that must answer to taxpayers and to Congress. Contractors who understand it can price it, plan for it and, in the unusual case where it happens, handle it without losing what they are owed.