Avoid Unnecessary Audits of Your Government Contract Termination for Convenience Settlement Proposal:  How to Make the Most of the New $750,000 Audit Limit.

government termination for convenienceAuthor:  Cheryl Adams, Esq.

Let’s face it.  It is a sad day for the contractor when the government must terminate for convenience an otherwise smoothly performing federal contract.  A termination for convenience settlement payment is designed to make the terminated contractor whole.  In the usual situation, a contractor should ask for every cost item they can legitimately request.  However, settlement proposals approaching the $750,000 mandatory formal audit limit may be an exception to that common-sense rule.

On May 31, 2018, the Federal Acquisition Regulation (FAR) 49.207 was amended to raise the dollar threshold requirement for the audit of prime contract settlement proposals and subcontract settlements from $100,000 to $750,000.  The threshold was raised to align with the threshold for obtaining certified cost or pricing data. (Federal Acquisition Regulations:  Audit of Settlement Proposals, 48 CFR 49, 83 Fed. Reg. 19149 (05/01/18))

Why would this threshold matter, when you, as a contractor, collect your cost data and decide which cost items to submit to the Termination Contracting Officer (TCO) in your termination proposal?  How much is too much to ask?  If your costs are running very close to $750,000 you might want to think about not asking for every cost you can find that might arguably be submitted.

For proposals at or above $750,000, certified cost or pricing data is required.  Further the TCO “shall” refer each prime contractor settlement proposal valued at or above the threshold set forth in FAR 15.403-4(a)(1) to the appropriate audit agency for review and recommendations.

By contrast, while the TCO may choose to send a proposal of less than $750,000 to the audit agency, the TCO may decide that a formal examination of the settlement proposal is not warranted.  If no formal audit is warranted, the TCO only needs to perform, or have performed, a desk review with a written summary of the review in the termination file.

Everyone prefers quick, efficient turn-around and closure on settlement proposal negotiations.  That is less work for the government (saves tax dollars), and the contractor can get paid and move on to other projects sooner.

Scraping the bottom of the barrel for every possible cost item you, as a terminated contractor, may arguably ask for might not be the best plan, if:

(a) your proposal costs, in the aggregate are totaling just under $750,000;

(b) the dollar amount of a cost item that bumps your proposal above the threshold is small; and

(c) the cost item that will bump you over the threshold is a gray-area cost that stretches the limits of allowability and stands a significant chance of being questioned and disallowed under the scrutiny of a formal audit by GAO (U.S. Government Accountability Office), DCAA (Defense Contract Audit Agency), or other audit agency.

Unless the amount a contractor hopes to recover through the settlement proposal process is significantly more than $750,000, the added burden and liability associated with providing certified cost or pricing data, as well as the resources expended to deal with a possibly unnecessary formal audit, may not be worth the inclusion of that one last possibly questionable cost item that bumps the proposal into the mandatory audit zone.

For a free and confidential consultation with government contracts attorney Cheryl Adams, call Watson & Associates, LLC on 1-800-601-5518 or 720-941-7200.