Another Tool in the GovCon Toolbox: Enter the Legal Show Cause Notice

Government contracting disagreements can reach an impasse when the parties dispute which requirements apply. Legal counsel may offer another avenue for documenting the contractor’s position and seeking clarification. An OTA termination matter illustrates how a legal show cause notice clarified FAR Part 31 applicability, even though DCAA retained its audit report.

Highlights

• Contracting Impasses. Legal counsel may provide another avenue for addressing disputed requirements when routine contract administration does not resolve the disagreement.
• Agreement Language Matters. The OTA’s termination provisions called for good faith negotiations and equitable reimbursement without incorporating FAR Part 31 cost principles.
• Contractor Initiated Notice. The contractor used a legal show cause notice to seek clarification from the Army Contracting Command about the disputed cost principles.
• Agency Response and Audit Outcome. The Army Contracting Command confirmed that FAR Part 31 did not apply, changing the position of the contracting office responsible for negotiating the termination settlement. DCAA retained its audit report.
• Practical Takeaway. A legal show cause notice may help move a disagreement forward by clarifying the contracting office’s position, even when other government participants remain unconvinced. It does not guarantee a final settlement or resolution of every disputed issue.

Sometimes in contract administration there is an impasse between the government contracting officer and the contractor providing the contracted service or product to the government. It almost has one asking: what do I do next? Have you ever heard of a legal show cause notice?

When FAR Part 31 Does Not Clearly Apply

I came across that situation in a government termination for convenience (T4C) with an other transaction authority (OTA) award. The question during this T4C Defense Contract Audit Agency (DCAA) audit was whether the cost principles of the Federal Acquisition Regulation (FAR) Part 31 applied? DCAA is geared for perhaps ONLY the application of FAR Part 31 compliance, and it is even in its master audit program under the purpose and scope. DCAA checked with its audit requester, and they wanted a routine FAR Part 31 cost principles audit applying to its OTA and the termination for convenience.

However, the OTA itself was silent on FAR Part 31 applicability. In the specific paragraph of the OTA, it stated that termination costs will be negotiated in “good faith” and “an equitable reimbursement of costs” for work performed. This is far from the restrictive FAR Part 31 cost principles and appears to allow much flexibility in acceptance of termination for convenience costs. Further, the lack of FAR Part 31 cost principles is consistent with the Department of Defense’s Other Transaction Guide, dated July 2023, where page 19 states:

“Government teams have significant flexibility in developing an appropriate award process for their projects, considering that FAR, Defense Federal Acquisition Regulation Supplement DoD Source Selection Procedures, and the Competition in Contracting Act (CICA) do not apply….”

Legal Show Cause Notice

Enter the legal show cause notice. Yes, this sounds like a legal document and it is. Having good legal advice is a force multiplier on your contracts team. Simply, a legal show cause notice is a formal written document requesting an individual or organization to explain or justify a proposed action taken. In this case, the applicability of the FAR Part 31 cost principles. The government agency, in my case, the Army Contracting Command, responded back within two weeks. In our case it was a favorable response that FAR Part 31 cost principles did not apply. This was good. It changed the minds of the contracting office that will eventually negotiate this OTA.

However, DCAA, which performed a FAR Part 31 based audit, still had its audit report which significantly questioned costs using FAR Part 31 cost principles as its basis. At that point, the contractor requested that DCAA reconsider its audit and do the right thing (i.e. rescind its audit report). No surprise, DCAA opted to “let it ride” which is a pragmatic decision by DCAA given that DCAA has absolutely nothing to substitute for FAR Part 31 when confronted with expressing an opinion on allowable, allocable and reasonable costs.

So, the show cause was successful in changing the party that matter the most, the Army Contracting Command, which will eventually negotiate this OTA termination settlement, but not DCAA. So, it is a split decision of sorts. DCAA is advisory to the contracting office, and the contracting office makes the final decision. So, the most important party’s mind was changed.

What I can say is, the legal show cause notice provided an opportunity for “clear heads to prevail.” Such as in real life, you have the opportunity to change minds, but you may not obtain a unanimous decision. However, you may just change the party that means the most to the decision. Is it a universal response for all your contract ills? Probably not, in fact, it may not provide agreement with all the parties, but when you need to get past an impasse, your legal representative may serve you well and perhaps allow an opportunity for all parties moving beyond an impasse, through use of a little known tool, the legal show cause notice.

Supporting Government Contractors Through Complex Contracting Issues

Redstone GCI assists government contractors with reviewing contract and agreement terms, assessing the applicability of FAR cost principles, preparing termination proposals and supporting cost documentation, and developing responses to government audit findings. When disputed interpretations require legal counsel, our subject matter experts can work alongside the contractor’s counsel to organize relevant agreement provisions, cost records, and audit correspondence that support the contractor’s position.

Frequently Asked Questions

• What is a contract administration impasse? An impasse occurs when the contractor and government cannot move forward because they disagree about a contract requirement, interpretation, or proposed action. In this article, the disagreement concerned which cost principles applied when evaluating termination costs.
• What is the legal show cause notice described in this article, and how does it differ from a government-issued notice? In the author’s example, the contractor used legal counsel to formally request an explanation of the government’s position. This differs from a government-issued show cause notice asking a contractor to explain why its contract should not be terminated for default. The notice discussed here sought clarification of disputed requirements rather than an explanation of contractor performance failures.
• What is a termination for convenience? A termination for convenience occurs when the government ends all or part of the work because it determines that doing so is in its interest, rather than because of contractor default. The applicable contract or agreement terms govern the termination process and how compensation is determined.
• What is FAR Part 31, and why does its applicability matter? Part 31 of the Federal Acquisition Regulation contains cost principles and procedures used to evaluate costs in certain government contract pricing and payment situations. Whether these principles apply can affect which costs the government accepts and how those costs are evaluated during a termination settlement.
• Does FAR Part 31 automatically apply to an OTA agreement? No. Agreements awarded under Other Transaction Authority operate outside the traditional FAR procurement framework, although their negotiated terms may incorporate particular FAR requirements. Contractors should review the agreement to determine whether it includes FAR Part 31 cost principles and seek legal clarification when applicability is disputed.