The Termination for Convenience Clause in a federal government contract gives the agency the unilateral right to give you an early termination notice if it is in the government’s “best interest.” Sometimes there are questions as to the government underlying reasons.
Regardless of fault, the termination for convenience clause requires the government to make you “whole.”
The government has to reimburse you for all reasonable, allowable, and allocable costs incurred in connection with the performance, as well as reasonable profits for the work that you have completed.
- The termination for convenience clause does not allow you to get anticipated profits
- You must file a settlement proposal within one year of the early contract termination notice
Watch for Termination For Convenience Clause Notice as a Ploy For Debarment
Under the termination for convenience clause, the federal government cannot give you termination notice for convenience when it is part of an attempt to debar you from future business with the government. The court will overturn the termination on appeal. If you are in this situation, you should contact a contract lawyer. Learn more about suspension and debarment.
Another important aspect of the termination for convenience clause in government contracts is that you should include a similar clause in your subcontracts.
When the government terminates your contract, you want to have some recourse and an escape from obligations to your subcontractors.
If you do not have a contract termination for convenience clause in your subcontracts, you could possibly be facing a lawsuit for breach of contract and have to pay profits to your subs.
Is the convenience clause actually considered a mandatory flow-down clause to subcontractors? Prime contractors are responsible for drafting sound subcontracts. Therefore, each prime is responsible for making sure that this clause is expressly discussion in their subcontracts.
There are some mandatory flow-down clauses that in essence protects the government’s interest. However, the agency does not generally get into disputes between you and your subcontractors.
Understand Your Rights Under the Termination for Convenience Clause
The government is now tasked to exercise its rights under the Termination for Convenience Clause due to cutbacks in federal spending. Government contracts will not decrease. However, the unwanted and unnecessary contracts are being terminated to save additional funds. This was not historically the case.
As a contractor, you should make yourself aware of your rights and obligations. You should gather information about the statutory costs that you can recover and ways to minimize the chance of losing out on those damages. For example, you could potentially receive:
- Full compensation for costs incurred to prepare for and to complete work,
- Costs incurred post termination to settle subcontracts, protect and disposition property acquired or produced under the contract, and
- Costs incurred to prepare and present its termination settlement proposal to the Government.
How Should You Minimize the Impact of the Termination For Convenience Clause?
As attorneys, we usually suggest acquiring additional contracts to relieve any financial pressure. For the companies that rely on one contract for business income, a termination for convenience clause can cause you to close your doors.
- You want to set a goal to have at least four government contracts in your arsenal.
- This is but one way to minimize the impact of a termination for convenience case.
What Obligations Do You Have Under the Termination for Convenience Clause?
The Contracting Officer should give you a termination letter that provides specific instructions. You want to follow those instructions to the letter. Nevertheless, as general rule you should do the following:
- Issue stop work and termination notices to your subcontractors without delay
- Hold meetings singularly or collectively with your subcontractors to clarify requirements and respond to questions
- Stop your own work without delay
- Control and account for all government-owned property and inventory including prescribed government property reporting for you and your subcontractors
- Establish cost collection codes to segregate and accumulate allowable costs incurred subsequent to termination consistent with regulatory guidance
- Assess the status of the prime contract and subcontracts for undefinitized change orders
- Complete the required Schedule of Accounting Information, SF 1439, for each termination for which a settlement proposal is submitted in which the contractor must describe its accounting practices, including deviations to its normal accounting practices to describe the accounting practices used in the preparation of its termination settlement proposal.