Termination for Default Government Contracts & Reprocurement Costs

When the federal government awards a contract, the Termination for Default Clause acts to the agency’s advantage in the end.When contractors attempt the appeal the agency’s contract termination for cause action, there are specific rules you must be aware of. One of them is paying damages to the government for Termination by Default reprocurement costs and cancellation charges.

• You want to assess whether the government’s reprocurement costs are excessive and unreasonable.
• Understand that there is an argument to be made that if the contract termination for cause was unjustified, then so too is the government’s attempt to collect reprocurement costs. 
• Many contractors lose on appeal because they focus on the amount the government is trying to collect before properly addressing the underlying termination itself. Having an experienced government contracts termination lawyer can help in this area.

When you think that the legal issues may only rest on the merits of the default termination, your appellate lawyer may now have to deal with the government’s counterclaim. The first step would be to always address the merits of the unlawful termination. By prevailing on that issue, the government’s counterclaim may become less effective.

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What are  Government Contracts Termination for Default Re procurement Costs?

Virtually all federal government contracts with a default termination clause provides for re procurement costs and cancellation charges by stating that if the contractor is terminated for default, the government “may acquire, under the terms and in the manner the Contracting Officer considers appropriate, supplies or services similar to those terminated, and the [c]ontractor will be liable to the [g]overnment for any excess costs for those supplies or services” unless “the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the [c]ontractor,” such as “acts of the [g]overnment in either its sovereign or contractual capacity” or “acts of God.” FAR 52.249-8(b)-(c).

Government contracts termination for default reprocurement costs  (sometimes called “excess costs”) as referred to in FAR 52.249-8(b) are distinct from common law damages for breach of contract.

The Federal Circuit made this determination in the case of M.E.S., Inc. v. United States, 104 Fed. Cl. 620, 639 (2012) (explaining that “a claim for excess reprocurement costs under the ‘Termination for Default’ clause is different than one asserted under common law”). Read also Contractor Termination Tips.

More on termination for default

Purpose of Termination Reprocurement Costs & Cancellation Charges

The purpose of the Termination by Default Reprocurement Costs clause is to reduce the burden of proving a market price for the re-procured services by instead looking to the government’s actual reprocurement costs and cancellation charges.  This relaxed shortcut for the government, however, requires a showing of specific factual findings.

In the case of Cascade Pacific Int’l v. United States, 773 F.2d 287, 294 (Fed. Cir. 1985), the court decided that an agency should only pursue excess termination for default reprocurement costs when the government can prove that:

1. The re-procured supplies or services are the same or similar to those involved in the termination,
2. The government actually incurred excess costs, and
3. The government acted reasonably to minimize the excess costs resulting from the default, i.e., the government used the most efficient method of reprocurement to obtain a reasonable price and mitigate its losses and cancellation charges. 

Absent a showing of bad faith (which is extremely difficult to prove), your termination for default lawyer would seek to explore the above requirements to minimize any costs the government now seeks.

Has the Government Met Its Burden When Requesting Reprocurement Costs?

It must do so in order to recover in a termination for default case.

“[E]xcess reprocurement costs may be imposed only when the Government meets its

burden of persuasion that the following conditions (factual determinations) are met

• The reprocured supplies are the same as or similar to those involved in the termination;
• The Government actually incurred excess costs; and
• The Government acted reasonably to minimize the excess costs resulting from the default.” See Cascade Pac. Int’l, 773 F.2d at 293-94; see also Armour of Am. v. United States, 96 Fed. Cl. 726, 759 (2011).

Once the government meets this burden, that analysis does not stop there. You, the contractor, then would have to rebut the government’s evidence.  See Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1300-01 (Fed. Cir. 2002).

How does the Court Assess the Government’s Actions?

 Under the first prong of this test, that the reprocured item is “the same or similar to those involved in the termination,” the court must compare “the item reprocured with the item specified in the original contract.” Cascade Pac. Int’l, 773 F.2d at 294; see also Lassiter v. United States, 60 Fed. Cl. 265, 271 (2004).

• These are specific approaches that your attorney should look at when the re procurement costs in the default termination seems excessive.
• In the court’s eyes, the word “similar” means “similar in physical and mechanical characteristics as well as functional purpose.” Armour of Am., 96 Fed. Cl. at 760 (quoting Tectonics Corp., 78-1 B.C.A. ¶ 12,986 (1978)).
• If the government has not accomplished this task, chances are that the court will not grant reprocurement costs

Reasonable Price and Mitigation of Government Cost

The government must also show that it had obtained the product or services  and associated at a “reasonable price” and had otherwise mitigated its losses. Cascade Pac. Int’l, 773 F.2d at 294; see also Astro-Space Labs., Inc. v. United States, 470 F.2d 1003, 1018 (Ct. Cl. 1972).

• There must be corroboration of the reasonableness
• The government must explain the vast variation in extra costs. See 5860 Chicago Ridge, LLC v. United States, Nos. 07-680 C, 09-576 C (Apr. 27, 2012).

Government Expert Conclusory Opinion About Extra Cost Not Enough

The government oftentimes will introduce experts to conclude that the extra reprocurement costs in a termination for default case was reasonable. They will often do this by stacking a set of invoices to the expert opinion. However, some courts have found this to be insufficient.

Tip: When litigating disputes about excessive reprocurement costs, the Federal Rules of Evidence 703 and 705 seem to suggest that the facts underlying an expert’s opinion do not come into the record as substantive evidence, but rather are admitted only for the limited purpose of enabling the trier of fact to scrutinize the expert’s reasoning. See also United States v. Affleck, 776 F.2d 1451, 1457 (10th Cir. 1985); United States v. Wright, 783 F.2d 1091, 1100 (D.C. Cir. 1986); see also 29 Charles Alan Wright & Victor James Gold, Federal Practice and Procedure § 6273 (1997).

• The government must provide some significant evidence to substantiate the remaining reprocurement costs

Tip: Government contractors on appeal tend to bring up these issues only to find that the court will more than likely reject defenses when the initial record to the contracting officer has no such comments. In other words, you should always protect your rights to appeal at the lower level.  See Limitations on the Government’s Right to Terminate a Contract for Default.

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Call Our Government Termination For Default Lawyers

For immediate help defending against termination for default re procurement costs, call our government contract termination lawyers at 1-866-601-5518.