What Happens When a Contractor Files for Bankruptcy?

It doesn't happen frequently but contractor bankruptcy happens often enough to warrant a special contract clause that appears in every contract above the simplified acquisition threshold (currently set at $150 thousand). The Bankruptcy clause is found at FAR (Federal Acquisition Regulations) 52.242-13. and requires contractors entering into proceedings relating to bankruptcy, whether voluntary or involuntary, to furnish by certified mail (or electronic commerce method authorized by contract), written notification to the contracting officer responsible for administering the contract.

This notification is time sensitive. It must be furnished within five days of the initiation of the proceedings relating to bankruptcy filing. Additionally, the notification must include certain information:

1. The date on which the bankruptcy petition was filed
2. The identity of the court in which the bankruptcy petition was filed
3. A listing of Government contract numbers and contracting offices for all Government contracts against which final payment has not been made.

Once notified, the contracting officer has certain responsibilities as well. These responsibilities are delineated in FAR 42.902. When notified of bankruptcy proceedings, the contracting officer must do the following:

1. Furnish the notice of bankruptcy to legal counsel and other appropriate agency offices (e.g. contracting, financial, property) and affected buying activities
2. Determine the amount of the Government's potential claim against the contractor (in assessing this impact, identify and review any contracts that have not been closed out, including those physically completed or terminated)
3. Take actions necessary to protect the Government's financial interests and safeguard Government property, and
4. Furnish pertinent contract information to the legal counsel representing the Government.

The Government's financial exposure to bankruptcy is highly dependent upon the goods or services being purchased. A bankruptcy of a  fuel supplier for example, will not be too disruptive. The Government can go to the next supplier standing. On the other hand, purchases of systems that take months to produce and where advance payments or progress payments have been advanced represent significant financial risk to the Government.

Some of you have been subjected to the Government's financial capability review process. These reviews are simply the Government's way of mitigating the risk that contracts will be awarded to companies that are in financial distress and could end up in bankruptcy. If the Government doesn't think a prospective contractor has the necessary financial resources to complete a contract, and the prospective contractor cannot convince the Government otherwise, there will probably be no contract.