What contractors need to do now to prepare for terminations for convenience

Stephen Bacon: They issue a notice of termination for convenience that gives the contractor formal notice that the contract has been terminated and typically includes some instructions for how the process will unfold after that.

Terry Gerton: And how much time does a contractor have to respond to that?

Stephen Bacon: So the biggest thing after a termination for convenience is preparing a terminations settlement proposal. And under most of the standard termination for convenience clauses that are in most federal contracts, the deadline is one year, which sounds like a long time, but depending on the complexity and the size of the contract and how many subcontractors you have, that can often be a challenge to get that settlement proposal within a year. And that deadline can be extended. If the termination contracting officer agrees to an extension.

Terry Gerton: So if the government provides that notice to a contractor, and it’s really kind of a stop work now notification, but the contract doesn’t really end until that proposal is received back to the government?

Stephen Bacon: That’s right. The termination settlement proposal will ultimately result in a resolution of the government’s termination liability under the applicable clauses. And so while the work is supposed to immediately end, unless the contracting officer directs you to continue with certain aspects of it, the government final liability is resolved through that settlement proposal process.

Terry Gerton: In that settlement process, contractors have some rights, like what are they entitled to as that process unfolds?

Stephen Bacon: Sure, and that gets into why the contractor’s rights differ pretty significantly, depending on what type of contract you have and what termination clause is included in your proposal. We can go through what some of the differences are, but in general, the contractor can recover costs that it’s incurred and profit on the work that it has performed. The biggest thing to understand, at least at the outset, is that anticipatory profits, so profits that you could have earned at contract continued are not recoverable as part of a normal termination for convenience process. And that differs pretty significantly from the commercial world where when you have a breach of contract, an improper termination that occurs prematurely, a contractor could typically recover those anticipatory loss profits.

Terry Gerton: So it matters a lot if you’re a big weapon system manufacturer, for example, or if you are selling printer supplies to the government. You’re going to have a lot of different provisions in those kinds of contracts.

Stephen Bacon: That’s right. If you’re dealing with something very small scale, you could have a clause in your contract determination for convenience clause that’s known as the short form clause where you’re really not entitled to much beyond your work performed. But in a larger contract there’s more rules and regulations around what kinds of costs you can recover.

Terry Gerton: And sometimes, I guess, something like an indefinite delivery, indefinate quantity, an IDIQ, a contractor may incur some costs to set up upfront before they ever know if they’re going to get an order. How does that work?

Stephen Bacon: That’s right, that can be a big problem if there are preparatory activities that the contractor has to perform. Their own resources and sort of getting ramped up to be able to perform task orders with the expectation that they’re gonna come eventually. And if the government terminates before you get those orders sufficient to kind of cover your initial investment, that can be a major risk to the contractor that they are not able to recover some of those preparatory costs. And there’s some differences in some of the case law and how that’s turned out.

Terry Gerton: So for all of these different kinds of contracts and the contractors who are involved and who are kind of watching the environment right now and not knowing what’s going to happen to their particular contract, what should they be thinking about or planning for in anticipation of the potential that they might face a termination for convenience?

Stephen Bacon: Yeah. I always like to think, start with your contract. That’s the place to start and look at your termination for convenience clause and see which one you have. You know, if you have a fixed price contract, you’re going to have the standard fixed price termination for convenience clause. If you have cost reimbursement, you are going to that one, and your rights are going to vary pretty significantly depending on that and your strategy in terms of how you maximize your recovery, is going to be different as well. So you want to start there and then kind of build an understanding of how your strategy is going differ by type of contract.

Terry Gerton: What about the implication for these contractors’ workforces? There’s a lot of uncertainty here. How did they think about the obligations that they have to their workforce or how they managed that kind of uncertainty?

Stephen Bacon: Yeah. So typically one of the things that can be recovered in a termination for convenience are things like severance costs. And there are particular rules around that. And so if you get in a situation where you have a contract that’s terminated and you can’t shift your workforce onto another program or another contract, and you ultimately have to lay them off, those are costs if you have to, as a company, incur severance cost for your workforce that you have to lay off, those are the kinds of costs that can be recovered. And also, if you have people that are idled for a period of time because of the termination, those are costs that could be recovered under certain circumstances. Those are all things you want to think about if you’re facing those kinds of challenges.

Terry Gerton: So those would go into that termination proposal?

Stephen Bacon: That’s right. And all of that, those costs that you claim have to be backed up with records and accounting records. And so that’s all part of the process of preparing a proposal that’s defensible and that the government can review and ultimately reimburse you for.

Terry Gerton: Most of the big contractors that support the government probably have some experience with this process. But what about the small businesses or companies who haven’t been through this kind of environment before? How did they best prepare? Can they get help?

Stephen Bacon: They can, and one of the good news is that legal costs and consulting costs, to bring on an outside expert consultant, to bring an outside law firm to help you through the process, that’s all recoverable as part of the termination settlement process. So there’s a line item in your termination, settlement proposal for legal and consulting costs. And so those things can be reimbursed. And so it really behooves you as a contractor, particularly contractors that don’t have experience with this, to take advantage of that, to make sure that they understand what their rights are, to make sure they are maximizing their ability to recover. And it’s interesting some of the larger contractors have experience with this, and that’s certainly true, although at a program level, the people involved in the actual programs that are being terminated may have never experienced a termination for convenience before. And so, you know, what we’ve found in practice is that is that oftentimes, sometimes even the larger contractors aren’t as familiar with the process, at least the people on the ground that are dealing with the contract and they’re helping you put together that proposal.

Terry Gerton: I can imagine it could be pretty intimidating to think that you’ve got to go up against the government contracting shop to make your case for what your settlement costs should

Stephen Bacon: It is. It’s a unique thing in government contracts that termination for convenience is sort of a unique process in government contracting and relatively unusual. And so having the right team together that that includes outside consultants and people internally who really understand the contract and the work that was done is very important.

Terry Gerton: So we’ve been focused here mostly on what contractors need to know in the case of a termination for convenience, but what do you want to make sure that the government’s contracting officers are thinking about and putting into practice when they have to initiate these kinds of actions?

Stephen Bacon: Yeah, I mean, they should understand that this is a significant impact, obviously, on the contractors and that the contractors, I think, for the most part, are trying to do their best to make sure that they’re getting the costs that they’re entitled to and to help. There’s a lot of flexibility that the termination contracting officer, in particular, has over how the process runs and how responsive they are. Obviously, that’s a challenge with things like workforce reductions, but to the extent that the termination contracting officer or TCO, as he or she is referred to, to the extend that they can use their discretionary flexibility to kind of ease some of the administrative burden on the contractor throughout the process, that can be really helpful. So things like delegating authority to settle with subcontractors at a particular level, right, without having to get the TCO’s approval before you enter into that settlement agreement can be a helpful thing to ease some of that administrative burden, particularly on a larger contract.