Termination for Default Reprocurement Costs Contractor Liability

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.

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.

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.

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

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