Posted on 8/25/2011 10:30 AM

SURPRISE! YOU HAVE A COMMERCIAL ITEM CONTRACT

Lately, we’ve noticed several contractors were surprised to find out their contracts contain FAR Part 12 Commercial Item clauses. In fact, in one case, commercial item clauses were improperly used in a construction contract. So, check your contract to see if it contains any of the clauses set forth in FAR Subpart 12.3. If so, here is what to expect.

You essentially have no changes clause. That is, the changes clause says changes can only be made by mutual agreement (bilaterally). The government has no right to make unilateral changes. Any attempt to change the contract unilaterally is a breach of contract. Therefore, there are no constructive changes. If the government breaches any of its implied obligations (see our editorial on “The Big Five Implied Contractual Obligations”), your remedy is based on straight breach of contract principles. That in turn means you may be able to recover lost anticipated profits in the event of a breach of contract.
 
Welcome to the new world of government contracting. Actually, it’s the old work of contract law working its way back into our new world of government contract law.
 
But there is even a bigger surprise. The old government contract termination for convenience (T for C) clause is replaced with a new clause purporting to limit T for C recovery to a percentage of the price which represents the percentage of completion plus “charges” associated with the termination itself. This new T for C clause has been interpreted to severely limit your T for C recovery. However, the issue is very much up in the air and subject to further analysis by judicial tribunals.
 
It really makes no sense to limit T for C recovery on commercial item contracts. At least that is what a U.S. District Court in Maryland thinks. Since FAR Part 49 applies as a guide in the termination of commercial contracts, the Maryland court says most of the old rules should apply. But be wary. The law is very much in a state of flux on this issue of T for C recovery on commercial item contracts.
 
One of the interesting twists (which feeds the legal analysis controversy) is FAR Part 12 makes it clear the FAR Part 31 cost principles do not apply in commercial item contract terminations for convenience and the government has no right to audit your proposal.
 
Have you checked your contract? Does it have the FAR Subpart 12.3 clauses? Surprised? You may be having to learn a new language.

For more information contact bill@spriggsconsultingservices.com

Visit our website at www.spriggsconsultingservices.com

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