Common Mistakes in Termination Proposals for Government Contracts

The Government can terminate its contracts, in whole or in part, through special contract clauses referred to as “termination clauses.” Terminations can be frequent occurrences and can happen for numerous reasons, such as lack of funding, bid protests, changes in military strategy, technological advancement, federal operations, or national political agendas that change the government’s needs. FAR 49.201(a) [Termination of Contracts] states, “…A settlement should compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract, including a reasonable allowance for profit….” This compensation decision, unfortunately, is made through the government’s lens. A contractor must be focused on telling their story and providing proof through adequate documentation of claimed costs.

A contractor will be primarily responsible for preparing a termination settlement proposal (TSP) that focuses on its allowable costs. A TSP must be completed within one year of the effective termination notice. This seems straightforward. So, what can go wrong? Let’s look at a few common mistakes and how to overcome these:

Do You Know What to Do?

First, look for direction from the contracting officer in the termination notification sent and in the contract clause. How are you following and documenting adherence to those directions?

Secondly, FAR 49.104 states the duties of the prime contractor upon receiving notification of contract termination. These duties essentially direct the contractor to stop contract performance, in all or part, to reduce further costs. Any special circumstances need to be discussed with the termination contract officer (TCO).

A way to overcome any issues is to communicate this throughout your organization and ask the TCO if you have questions.

What Are You Documenting?

• Preparation for eventual settlement starts with the termination notification received. Many contractors fall short in this area. Consider these:
  • How are you documenting your “termination story?” Are you using separate charge numbers for any work continued after the termination notice?
  • How are you documenting what your key players did to terminate the contract and reduce contract termination costs? Your documentation should be able to show what was done and support your termination settlement proposal claimed costs.
• What special situations occurred?
• You overcome issues through planning and getting the key players involved. Again, start this in the beginning, focusing on your eventual termination settlement proposal. Remember that you want to document that the government’s termination action caused the termination settlement proposal claimed costs.

Do You Understand the FAR Guidelines?

A terminated contract will give rise to the incurrence of contractor costs or the need for special treatment of costs had the contract not been terminated.

• FAR 31.205-42, Termination costs, this allows for special treatment where the government’s termination decision impacted specific costs such as:
  • Common items,
  • Continuing cost after termination notice,
  • Initial costs,
  • Loss of useful value on special tooling, machinery, and equipment,
  • Rental costs, under unexpired leases, including leased property alterations,
  • Settlement expenses for accounting, legal, clerical, and similar costs reasonably necessary for termination settlement proposal preparation and presentation are allowable costs, and
  • Subcontractor claims, including any indirect costs allocable.
• FAR Part 49, Termination of Contracts, establishes policies and procedures for the Government relating to the complete or partial termination of contracts for the Government’s convenience or for default.
• FAR Part 31, Contract Cost Principles and Procedures, if applicable, FAR 49.113 may require these cost principles to be used in determining the claimed cost in the TSP and will be evaluated by a government auditor.
• FAR Part 12.403 Termination (under-Acquisition of Commercial Products and Commercial Services) uses the contract clause FAR 52.212-4 to enforce a contract termination and has the following procedures for the Contracting Officer:
  • TSPs are not required to be submitted on any particular form,
  • FAR 12.403(d) states that the contractor and TCO should:
    • agree upon the requirements of the termination proposal,
    • a contractor is not required to comply with the cost accounting standards or contract cost principles in FAR Part 31 when demonstrating entitlement to reasonable charges resulting from termination, and
    • the Government does not have audit rights.

Knowing and understanding these regulations and how they impact your TSP is essential.

Takeaway

Terminations are sometimes considered extraordinary or nonrecurring but can happen frequently. A termination settlement proposal provides a vehicle for contractors to seek reimbursement of contract costs that were due to the government’s decision to terminate the contract. Although the government's primary objective is to fairly compensate the contractor for work performed and other costs due to termination and efforts made to settle the termination, fair compensation is a matter of the government’s judgment. Your TSP should be based on your supporting documentation to tell your story for obtaining reimbursement of costs due to contract termination. Make your case and provide clear documentation to achieve a successful resolution.

Redstone Government Consulting, Inc., with its experienced compliance and accounting consultants, can assist contractors through the maze of government regulations on terminations as well as provide training. Make us part of your team!