How to Assess Termination for Convenience Costs Recoverable

Before you submit your termination for convenience settlement proposal to the federal government, make sure you understand the regulatory allowances for costs recoverable.

Given the push from the administration, government contracting agencies are instituting termination for convenience actions to do away with unwanted contracts. Although there are statutory damages and costs associated with them, the government actually saves money in the long run.

What is Contract Termination for Convenience Costs?

The FAR Contract Terms and Conditions-Commercial Items clause includes a paragraph that permits the Government to terminate the contract for the convenience of the Government.

When the contracting officer terminates a contract for commercial items for the Government’s convenience, the contractor shall be paid —

(i) (A) The percentage of the contract price reflecting the percentage of the work performed prior to the notice of the termination for fixed-price or fixed-price with economic price adjustment contracts, or

(B) An amount for direct labor hours (as defined in the Schedule of the contract) determined by multiplying the number of direct labor hours expended before the effective date of termination by the hourly rates(s) in the Schedule; and

(ii) Any charges the contractor can demonstrate directly resulted from the termination. The contractor may demonstrate such charges using its standard record keeping system and is not required to comply with the cost accounting standards or the contract cost principles in Part 31. The Government does not have any right to audit the contractor’s records solely because of the termination for convenience.

(2) Generally, the parties should mutually agree upon the requirements of the termination proposal. The parties must balance the Government’s need to obtain sufficient documentation to support payment to the contractor against the goal of having a simple and expeditious settlement.

What Should be the Government’s Termination Settlement Objective? When the government terminates your contract for convenience, the agency should be consulting with (FAR 12.403(d) and Part 31). This requires them to consider termination for convenience settlement costs in negotiating settlements to pay you for allowable damages. All too often this is not done.

Instead, the ploy is to simply find fault in the claims submission and use that to negotiate a settlement.

You can avoid this by learning how to submit proper settlement proposals. Termination for convenience costs should include payment for the work done. In addition, you are entitled to additional statutory costs.

Investigating Your Accounting Records: Simply because the contracting officer does not agree with your claims for termination of contract costs, this does not authorize them to investigate your cost accounting records. (FAR 12.403(d)(1)(ii)).

Your standard accounting system should be sufficient to analyze your costs. He or she should be comparing your claims against the statutory requirements and then looking for your supporting documentation.

When it comes to termination for convenience costs, the agency should be working with you and not against you. (FAR 12.403(d)(2)). There should also be some mutual agreement as to what is included in the settlement proposal. 

Assessing Noncommercial-Item Fixed-Price Contract Termination for Convenience Costs Recoverable

Recoverable termination for convenience settlement costs as applied to non-commercial items should allow you to get paid for work done, preparations for the terminated part of the contract and you should also receive cost for profit. See(FAR 49.201).

A common mistake made by the agency is to use rigid cost accounting measures. This goes against the grain of termination of contract for convenience law. The government should use cost and accounting data as guidelines only. The focus should be on getting you to a reasonable position after suffering the termination blow to your business.

 What are the Caps to Termination For Convenience Costs Recoverable and Associated Damages? The maximum amount of termination settlement costs should not exceed the sum of:

Total contract price as reduced by:

The amount of any payments previously made, and

• The contract price of any work not terminated; plus
• Reasonable settlement costs including:
• Accounting, legal, clerical, and other expenses reasonably necessary for preparation of termination settlement proposals and supporting data;
• The termination and settlement of subcontracts (excluding the amounts of such settlements); and
• Storage, transportation, and other incurred costs reasonably necessary for the preservation, protection, or disposition or the termination inventory.

Inventory Basis (FAR 49.206-2(a)). The inventory basis is the preferred basis for settling most complete and partial terminations for convenience. This section also covers the cost for subcontractors. Ensure that you have both a government contracts attorney and a reputable accountant to assist you when developing your termination cost proposals.

Total Cost Basis (FAR 49.206-2(b)). This section covers settlement pricing for terminations for convenience based upon total cost. 

Recoverable Termination Costs for Profit Allowances

Generally, you are not allowed to recover profits for the entire contract under the termination for convenience clause. This is the primary reason why the termination for convenience clause is there. The laws were intended to expressly avoid government liability for either breach of contract allegations or having to pay for profits when there is a legitimate termination for convenience.

This is why as a government contracts termination attorney, the first analysis should whether there is legal termination or whether the government has, in fact, breached the contract. Not every termination for convenience is legal and valid.

Always ensure that you understand the basic rules of government contract termination for convenience costs and your allowable damages for costs associated with the termination. In addition, gather your supporting documents.

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