Friday, February 12, 2010

Terminations for Convenience

Every Government contract includes a clause that gives the Government the absolute right to terminate the contract for convenience (T4C). There are no limitations on the circumstances under which the Government can exercise its rights. A T4C does not mean that the contractor has failed to perform under the contract. In most T4C cases, the Government decided that it doesn't need or can no longer fund a project, system, or service.

When a contractor receives a notice of termination, it must comply with the notice. Generally, the notice will require the contractor to stop work immediately, terminate all subcontracts, immediately advise the terminating contracting officer (TCO) of any special circumstances precluding the stoppage of work, perform any continued protion of the contract, protect and preserve government property in the contractor's possession, settle outstanding liabilities, submit a settlement proposal, and dispose of termination inventory.

Timing is critical. When the Government directs contractors to stop work immediately, it really means immediately. Settlement proposals greater than $100 thousand will be audited. One of the first audit steps an auditor will undertake is to check for costs (including labor costs) incurred after the date of termination. Such costs will be challenged and unless the TCO has approved specific costs incurred after termination, will be disallowed.

Settlement expenses are a special category of costs under termination settlement proposals and are generally allowable. Settlement expenses include accounting, legal, clerical, and similar costs reasonably necessary for the preparation and presentation, including supporting data, of settlement claims to the TCO, reasonable costs for the storage, transportation, protection, and disposition of property acquired or produced for the contract, and indirect costs related to salary and wages incurred as settlement expenses. 

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