FAR Termination for Convenience Clause – How Does it Work?

Many government contractors struggle to understand their rights when the agency imposes a notice of termination for convenience or termination for default under the FAR. There are a myriad of situations that could amplify a contractor’s rights or, conversely, minimize them. 

Introduction

The FAR termination for convenience clause is a crucial aspect of government contracts that both contractors and suppliers should comprehend. By understanding this clause, parties can navigate potential termination scenarios and protect their rights. This article provides an in-depth analysis of termination for convenience clauses in government contracts, highlighting its definition, purpose, key elements, limitations, and considerations.

The FAR Termination for Convenience Clause gives the government a unilateral right to terminate the contract when it is in the best interest of the government.  See FAR 52.249-2.

Great care must be used to analyze whether  Agency’s reasoning is legally sound. For example, an agency should not merely terminate a contract for convenience merely because a contractor challenges the decision of the Contracting Officer (CO) during performance. A more acceptable reason would be lack of funding or the requirement no longer supports the mission.

Understanding Termination Clauses in Government Contracts

Termination clauses play a vital role in contracts, including those involving government entities. These clauses provide a framework for terminating the agreement in specific circumstances. Two primary types of termination clauses exist in government contracts: termination for cause and termination for convenience. By focusing on the termination for convenience clause, we can explore its significance within the realm of government contracting.

Key Elements of a Termination for Convenience Clause in Government Contracts FAR 52.249-2

A termination for convenience clause in government contracts encompasses specific elements that both parties should be aware of. These include:

1. Right to terminate the contract by the Government
   • The termination for convenience clause grants the government the unilateral authority to terminate the contract without needing to establish a specific reason.

Limitations and Considerations of a Termination for Convenience Clause

While the termination for convenience clause offers flexibility, certain limitations and considerations exist in government contracting.

A. Limits on termination rights

1. Notice period requirements
   • Government contracts often stipulate a notice period that the government must provide to the contractor before terminating the agreement. This period allows the contractor time to prepare for the termination and make necessary adjustments.
2. Payment of compensation (FAR Settlement Proposal)
   • The Federal Acquisition Regulation (FAR) governs government contracts and outlines the requirements for compensating contractors when invoking the termination for convenience clause. Contractors are entitled to submit a settlement proposal seeking compensation for incurred costs, as allowed by the FAR.

Agency Decision to Use the FAR Termination For Convenience Clause 

When deciding the government’s interest, the FAR provides no specific guidance as to what the CO must consider. The termination for convenience clause under FAR 49.101(b) merely states that the CO shall terminate contracts only when in the government’s interest. In reality the government has wide latitude.

Some courts even give the government a preference for a constructive termination instead of assessing it with a breach of contract. For example, a government directive to end performance of work will not be considered a breach of contract but rather a convenience termination if the action could lawfully fall under that clause, even if the government mistakenly thinks a contract invalid, erroneously thinks the contract can be terminated on other grounds, or wrongfully calls a directive to stop work a “cancellation.” See G.C. Casebolt Co. v. United States, 421 F.2d 710 (Ct.Cl.1970); John Reiner & Co. v. United States, 325 F.2d 438 (Ct. Cl. 1963). Contractors should be very careful when litigating the Agency’s right to termination.

On the other hand, the government cannot use the FAR. termination for convenience clause as a defense to retroactively terminate a fully performed contract and to limit its liability for failing to order the contract’s minimum amount of goods or services. See Ace-Federal Reporting , Inc., v. Barram, 226 F.3d 1329 (Fed. Cir. 2000).

What Must You Do When Given Notice of a Termination for Convenience?

Under the T4C Clause, when you receive a termination letter, you should consider do the following:

• Terminate all subcontracts (hopefully, you have a provision in your subcontracts to allow this);
• Immediately stop work and order subcontractors to stop work;
• If there are special circumstances when you cannot stop work, then immediately notify the CO;
• You should consider immediately settling subcontract claims.
• Any property in your possession, then immediately preserve it
• Promptly retain a contract termination for convenience attorney to help you draft and submit your termination settlement proposal

Is the Termination Really a Breach of Contract?

Oftentimes, federal contractors are privy to facts that question the government’s decision to terminate for convenience.  Sometimes, the facts are so egregious, that businesses want to challenge the termination decision. Unfortunately, the legal burden is substantially high. The Contractor has to show bad faith or clear abuse of discretion (often called the “Kalvar Test”). See Kalvar Corp., Inc., V. United States, 543 F.2d 1298 (Ct. Cl. 1976).

In other words, inept government actions do not constitute bad faith. If you are contemplating challenging a FAR termination for convenience decision, ensure that you have an experienced government contract law attorney to provide you with guidance.

What Compensation is Allowable Under the FAR Termination for Convenience Clause?

Under FAR 52.249-2, contractors have the opportunity to seek compensation for costs incurred due to termination for convenience. This compensation may include costs associated with the termination itself, such as winding down operations, subcontractor terminations, and disposal of materials or inventory.

If you and the Contracting Officer fail to agree on the whole amount to be paid because of the termination of work, the Contracting Officer shall pay the Contractor the amounts determined by the Contracting Officer as follows, but without duplication of any amounts agreed on under paragraph (f) of this clause:

(1) The contract price for completed supplies or services accepted by the Government (or sold or acquired under paragraph (b)(9) of this clause) not previously paid for, adjusted for any saving of freight and other charges.

(2) The total of-

(i) The costs incurred in the performance of the work terminated, including initial costs and preparatory expense allocable thereto, but excluding any costs attributable to supplies or services paid or to be paid under paragraph (g)(1) of this clause;

(ii) The cost of settling and paying termination settlement proposals under terminated subcontracts that are properly chargeable to the terminated portion of the contract if not included in subdivision (g)(2)(i) of this clause; and

(iii) A sum, as profit on subdivision (g)(2)(i) of this clause, determined by the Contracting Officer under 49.202 of the Federal Acquisition Regulation, in effect on the date of this contract, to be fair and reasonable; however, if it appears that the Contractor would have sustained a loss on the entire contract had it been completed, the Contracting Officer shall allow no profit under this subdivision (g)(2)(iii) and shall reduce the settlement to reflect the indicated rate of loss.

(3) The reasonable costs of settlement of the work terminated, including-

(i) Accounting, legal, clerical, and other expenses reasonably necessary for the preparation of termination settlement proposals and supporting data;

(ii) The termination and settlement of subcontracts (excluding the amounts of such settlements); and

(iii) Storage, transportation, and other costs incurred, reasonably necessary for the preservation, protection, or disposition of the termination inventory.

(h) Except for normal spoilage, and except to the extent that the Government expressly assumed the risk of loss, the Contracting Officer shall exclude from the amounts payable to the Contractor under paragraph (g) of this clause, the fair value as determined by the Contracting Officer, for the loss of the Government property.

Can You Appeal the Contracting Officer’s Denial of a Convenience Termination for Convenience Settlement Proposal Costs?

Upon receiving a denial of their settlement proposal from the contracting officer, the contractor must take swift action to appeal the contracting officer’s final decision. The first step is to carefully review the denial letter to understand the specific reasons for the denial. This analysis helps the contractor identify the key issues to address in the appeal. Once the contractor has assessed the denial, they must determine the appropriate appeals forum, such as the Boards of Contract Appeals or the Court of Federal Claims.

It is crucial to adhere to the designated appeal deadlines, as statutory and contractual time limits apply. To strengthen their position, the contractor may engage in legal representation, particularly if the case is complex. Experienced government contract FAR termination for convenience attorneys can provide valuable guidance throughout the appeals process, ensuring that the contractor’s rights are protected and that their appeal is presented effectively.

After thorough preparation, you must draft the appeal document to either the respective board of contract appeals or the US Court of Federal Claims (COFC), adhering to specific format and content requirements set by the chosen appeals court. The appeal should present a persuasive argument, supported by compelling evidence and legal analysis. should highlight key factual and legal points that contradict the reasons for the denial, emphasizing any errors or inconsistencies in the contracting officer’s decision. Once the appeal document is prepared, it must be submitted to the appropriate appeals forum, following the designated filing procedures.

Options to Maximize Settlement Under the FAR Termination for Convenience Clause?

Normally, a contractor has one year to send a settlement proposal from the date of the contract termination notice. The two bases of settlement include under the FAR Termination for Convenience Clause include (a) inventory settlement and (b) total cost basis. See FAR 49.206-2. Inventory basis in the preferred method.

• Cost of subcontractor settlement
• Settlement expenses
• Rentals under unexpired leases
• Subcontractor claims
• Profits

These are but only a few issues that arise under the FAR Termination for Convenience Clause. For help, contact a government contracts attorney. Call 1-866-601-5518.