Contract Terminations

The Government has the right to terminate a contract. It can terminate the contract for its own convenience or it can terminate the contract because the contractor defaulted on the contract. Termination for Default (T for D) is a somewhat infrequent event. Termination for Convenience (T for C) on the other hand is not that uncommon. We will focus here on "T for Cs". 
The Government's right to terminate a contract is provided for in a standard contract clause that allows it to terminate work in whole or in part. When a contract is terminated for convenience, a contractor is entitled to the following:

• Reasonable costs for the terminated work
• Termination costs
• Settlement expenses
• Reasonable profit

Under fixed price contracts, the total amount of the termination settlement, exclusive of settlement expenses, cannot exceed the total contract price. If the contract was in a "loss" position, the projected loss will be reflected in the final settlement.

Cost type contracts, on the other hand, are not subject to settlement limits or loss ratios. However the potential recovery under cost type contracts is constrained by the limitation of funds clause that exists in all cost-type contracts.

In future posts, we will discuss specific allowablility criters for termination costs, steps that a contractor must immediately take upon receipt of a termination notice, and some advice on how to "settle".