After the government exercises it rights to terminate your contract for convenience, you then have to submit your damages in a termination for convenience settlement proposal. It must be done within one year.
The termination settlement proposal should be submitted in the form with the certification prescribed by the contracting officer, then the government and you should attempt to negotiate a settlement.
If the negotiations do not come to some amicable resolution, the contracting officer will typically issue a final decision to which you would have the right to appeal.
When Does a Termination Settlement Proposal Become a Claim?
Many companies make the mistake of filing an appeal simply because the contracting officer does not make a timely decision. This can be a costly mistake.
- The CO’s request for other information by itself is not grounds to file an appeal.
- If you file an appeal, the Board of Contract Appeals will dismiss the case for lack of jurisdiction.
A termination for convenience settlement proposal submitted pursuant to the Termination clause does not become a claim under the Contract Disputes Act (CDA) until the settlement proposal negotiations required by the clause has reached an impasse and the settlement proposal has been submitted to the contracting officer for a decision. The US Court of Appeals for the Federal Circuit made this ruling in James M Ellett Construction Co. v. United States, 93 F.3d 1537, 1543-45 (Fed. Cir. 1996).
Continuing letters of deficiency should be taken as positive feedback. Although there is an extreme amount of delay, and companies need termination for convenience damages, extreme care is necessary when deciding to launch litigation or appeal. See also Contractor Termination Tips.
- Sometimes more documentation and clarifications are needed to complete audits before the government can reach a final settlement decision.
When it comes to your termination for convenience settlement proposal, you are contractually obligated to follow the procedures specified in the Termination clause for a termination settlement proposal.
You cannot simply avoid this requirement by reaching for rights under the Contract Disputes Act procedures. Only when there is a final disagreement (impasse) and there is final agency decision can the settlement proposal be treated as a contract claim.
- Certain facts can constitute a final decision or impasse.
FAR 49.108 Subcontractor Settlement Proposals
Under FAR 49.108 , a federal subcontractor has no contractual rights against the Government when there is a termination of the prime contract. However, and pursuant to the subcontract, a subcontractor may have rights against the prime contractor or intermediate subcontractor with whom there is a subcontract. Upon termination for convenience of the prime contract, the prime contractor and each subcontractor are responsible for the prompt settlement of the settlement proposals of their immediate subcontractors.
FAR 49.108-3 — Settlement Procedure.
(a) Contractors shall settle with subcontractors in general conformity with the policies and principles relating to settlement of prime contracts in this subpart and Subparts 49.2 or 49.3. However, the basis and form of the subcontractor’s settlement proposal must be acceptable to the prime contractor or the next higher tier subcontractor. Each settlement must be supported by accounting data and other information sufficient for adequate review by the Government. In no event will the Government pay the prime contractor any amount for loss of anticipatory profits or consequential damages resulting from the termination of any subcontract.
Termination Settlement Proposals Suspected Fraud FAR 49.6 – Fraud or Other Criminal Conduct
If the contracting officer (CO) suspects fraud or other criminal conduct related to the settlement proposal of a terminated contract for convenience, the CO shall discontinue negotiations and report the facts under agency procedures. Sometimes, you may or may not be aware of the problem of suspected criminal conduct. If you are then you should immediately contact a government contracts attorney.
Applicable FAR Language for Termination Settlement Proposals
(a) Subject to the provisions of the termination clause, the contractor should promptly submit to the TCO a settlement proposal for the amount claimed because of the termination. The final settlement proposal must be submitted within one year from the effective date of the termination, unless the period is extended by the TCO. Termination charges under a single prime contract involving two or more divisions or units of the prime contractor may be consolidated and included in a single settlement proposal.
(b) The settlement proposal must cover all cost elements including settlements with subcontractors and any proposed profit. With the consent of the TCO, proposals may be filed in successive steps covering separate portions of the contractor’s costs. Such interim proposals shall include all costs of a particular type, except as the TCO may authorize otherwise.
(c) Settlement proposals must be on the forms prescribed in 49.602 unless the forms are inadequate for a particular contract. Settlement proposals must be in reasonable detail supported by adequate accounting data. Actual, standard (appropriately adjusted), or average costs may be used in preparing settlement proposals if they are determined under generally recognized accounting principles consistently followed by the contractor. When actual, standard, or average costs are not reasonably available, estimated costs may be used if the method of arriving at the estimates is approved by the TCO. Contractors shall not be required to maintain unduly elaborate cost accounting systems merely because their contracts may subsequently be terminated.
(d) The contractor may use the Settlement Proposal (Short Form), SF 1438 (see 49.602-1(d) and 53.249), when the total proposal is less than $10,000, unless otherwise instructed by the TCO. Settlement proposals that would normally be included in a single settlement proposal; e.g., those based on a series of separate orders for the same item under one contract, should be consolidated whenever possible and not divided to bring them below $10,000.
(e) The Schedule of Accounting Information, SF 1439, must be submitted for each termination under a contract for which a settlement proposal is submitted, except when the Standard Form 1438 is used. Although several interim proposals may be submitted, SF 1439 need be submitted only once unless, subsequent to filing the original form, major changes occur in the information submitted.
Bases for Settlement Proposals
(a) Inventory basis.
(1) Use of the inventory basis for settlement proposals is preferred. Under this basis, the contractor may propose only costs allocable to the terminated portion of the contract, and the settlement proposal must itemize separately —
(i) Metals, raw materials, purchased parts, work in process, finished parts, components, dies, jigs, fixtures, and tooling, at purchase or manufacturing cost;
(ii) Charges such as engineering costs, initial costs, and general administrative costs;
(iii) Costs of settlements with subcontractors;
(iv) Settlement expenses; and
(v) Other proper charges.
(2) An allowance for profit (49.202) or adjustment for loss (49.203(b)) must be made to complete the gross settlement proposal. All unliquidated advance and progress payments and all disposal and other credits known when the proposal is submitted must then be deducted.
(3) This inventory basis is also appropriate for use under the following circumstances:
(i) The partial termination of a construction or related professional services contract.
(ii) The partial or complete termination of supply orders under any terminated construction contract.
(iii) The complete termination of a unit-price (as distinguished from a lump-sum) professional services contract.
(b) Total cost basis.
(1) When use of the inventory basis is not practicable or will unduly delay settlement, the total-cost basis (SF 1436) may be used if approved in advance by the TCO as in the following examples:
(i) If production has not commenced and the accumulated costs represent planning and preproduction or “get ready” expenses.
(ii) If, under the contractor’s accounting system, unit costs for work in process and finished products cannot readily be established.
(iii) If the contract does not specify unit prices.
(iv) If the termination is complete and involves a letter contract.
(2) When the total-cost basis is used under a complete termination, the contractor must itemize costs incurred under the contract up to the effective date of termination. The costs of settlements with subcontractors and applicable settlement expenses must also be added. An allowance for profit (49.202) or adjustment for loss (49.203(c)) must be made. The contract price for all end items delivered or to be delivered and accepted must be deducted. All unliquidated advance and progress payments and disposal and other credits known when the proposal is submitted must also be deducted.
(3) When the total-cost basis is used under a partial termination, the settlement proposal shall not be submitted until completion of the continued portion of the contract. The settlement proposal must be prepared as in subparagraph (b)(2) of this section, except that all costs incurred to the date of completion of the continued portion of the contract must be included.
(4) If a construction contract or a lump-sum professional services contract is completely terminated, the contractor shall–
(i) Use the total cost basis of settlement;
(ii) Omit Line 10 “Deduct-Finished Product Invoiced or to be Invoiced” from Section II of SF 1436 Settlement Proposal (Total Cost Basis); and
(iii) Reduce the gross amount of the settlement by the total of all progress and other payments.
(c) Other basis. Settlement proposals may not be submitted on any basis other than paragraph (a) or (b) of this section without the prior approval of the chief of the contracting or contract administration office.
If you need help with preparing or litigating issues related to a termination for convenience settlement proposal, contact our government contract claims attorneys at 1-866-601-5518.