Wednesday, August 31, 2011

Contract Terminations - Part II

Yesterday we discussed some of the reasons why the Government might want to terminate a contract. Sometimes the termination is for the convenience of the Government and sometimes because the contractor failed to meet expectations. These are usually referred to as T4C (termination for convenience) and T4D (termination for default).

The Government will usually go out of its way to avoid T4Ds. When contract problems arise, T4D is a last resort, primarily because it significantly extends the completion date of whatever project or service is needed. Even if there is a performance bond involved, delays occur. Therefore, the Government will usually explore alternatives to termination. For example, the Government might (i) revise a delivery schedule, (ii) allow the contractor to subcontract some effort or enter into other third party arrangements, or (iii) change contract requirements to permit continued performance (usually with some kind of consideration on the contractor's part).

Termination is not an all or nothing event. The Government can also "partially" terminate a contract. You see this when production is curtailed because of funding constraints or when there is a troop draw down in a particular area and less "support" is required. A partial termination can also be used in a T4D situation.

Cost recovery depends on the type of terminations. The regulations are much more generous under a T4C than under T4D situation. Under a T4C, contractors can be compensated for actual performance to date, profit on work performed, left over inventory, subcontractor settlement costs, and settlement proposal preparation costs. Under a T4D situation, the contractor is entitled to almost nothing.

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