In times of fiscal austerity, we usually see an increase in terminations for convenience. The government has an almost unfettered right to terminate a contract for its convenience. Only in very rare cases has a termination been treated by a judicial tribunal as a breach of contract. These cases involve bad faith attempts to just get the contract switched to another contractor. In some cases we’ve also seen the termination rules abused by contracting officials who terminate for default when they should terminate for convenience. The remedy in such a case is conversion to a termination for convenience.
The distinction between breach of contract and termination for convenience is important since one of the hallmarks of a T for C is the inability to recover lost anticipated profits or any form of incidental or consequential damages. These remedies are available, however, in the case of breach of contract.
A T for C places many responsibilities on the contractor. These are all covered not only in the T for C clause but also in FAR Part 49, one of the best written regulations the government has ever written. Among the responsibilities is the requirement to submit a T for C settlement proposal. There even are special forms. See FAR 53.301-1436, 37, 38 and 39.
It is extremely important to remember the rules for termination settlement proposals are very different if your contract is a commercial type contract under FAR Part 12. These rules also are currently undergoing some controversial judicial interpretations. However, if your contract is not a FAR Part 12 contract, there are four important things to keep in mind when submitting a T for C settlement proposal:
- The cost principles in FAR Part 31 apply. Only the costs allowable under that regulation can be recovered.
- Your proposal very likely will be audited.
- Your recovery is limited by the original contract price unless that price is increased through the changes clause.
- The adjustment for loss formula may be applied when the government projects you would have lost money if you completed the contract but the changes clause can be used to avert that result.
In any event, the government should be guided by the following language in FAR 49.201:
“A settlement should compensate the contractor fairly for the work done and the preparations made for terminated portions of the contract, including a reasonable allowance for profit. Fair compensation is a matter of judgment and cannot be measured exactly. In a given case, various methods may be equally appropriate for arriving at fair compensation. The use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.”
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