Terminations - Part III

Today we continue our discussion on contract terminations by taking a look at the settlement process. If you missed Parts I and II in this series, you can read them here and here.

Once the Government issues its termination notice, contractors typically have a year to submit their settlement proposals to the Government. Now before you think that one year is plenty of time, consider that your proposal must also include settlements of all of your subcontracts as well. Many subcontract settlements take an extraordinary amount of time to settle and one year passess very quickly. Requests for extensions of the time to submit are typically granted. However, consider that additional time affects your cash flow. You won't get paid for all your costs until negotiations are complete.

The Government will assign a Termination Contracting Officer (TCO) to your case. Once the TCO receives your proposal, he/she will need to develop a negotiation objective. Almost always, he will request an audit of the proposal to assist in preparing that negotiating objective. The audit will focus on certain risk areas inherent to termination proposals. These include:

• Ensuring that the contract uses the correct form and methodology (inventory basis vs. total cost basis)
• Assessing contractor efforts to mitigate costs
• Evaluating costs continuing after the date of termination
• Reviewing settlement expenses for compliance with FAR 31.205-42 (and other cost principles)
• Evaluating the potential that the contract was in a loss position at the time of termination.

The process is lengthy and your chances of "fast tracking" the settlement process is slim. It is important therefore to get your proposal right the first time so that it is not sent back for rework. It is also important to ensure that you claim all the costs to which you're entitled. Sometimes, professional help in preparing settlement proposals can be beneficial.