Tuesday, August 30, 2011

Contract Termionations - Part I

Under all Government contracts, the Government reserves the right to terminate the contract. Every contract contains one or more of the clauses at FAR 52.249-1 through 10 (or FAR 212-4 for commercial items). By far, most of the contracts that are ultimately terminated are done so for the convenience of the Government. A few are terminated for default or for cause.

There are any number of factors, circumstances, or conditions that make terminations necessary. Sometimes the Government runs out of money for a particular project or the requirement is no longer needed. Sometimes quantities of requirements need to be reduced (draw down of troops in Iraq). These are all situations where the Government terminates contracts for its convenience (T4C). Other T4C situations include a change in requirement beyond the contractor's capability or expertise, a significant increase in the scope of a requirement, or the impossibility of contract performance (such as sometimes occurs in Research and Development programs).

While the prospect of having a contract terminated for convenience might hurt financially, it doesn't carry any negative connotations for a contractor. At its root, it is simply the Government's decision to spend its money elsewhere. Not so when it come to "terminations for default" (or "terminations for cause" in the case of commercial items). Terminations for default (T4D) occurs because there has been, in the Government's estimation, a material breach of the contract. Examples of material breaches include:
  • Refusal to perform
  • Prohibited activity
  • Poor performance (product or service does not meet specification)
  • Failure to comply with material contract terms and conditions
  • Abandonment of work

T4Ds can jeopardize a contractor's chances of winning future contracts. All such actions are recorded in the Government's FAPIIS (Federal Awardee Performance and Integrity Information System) which contracting officers consult prior to awarding any contract. If a contractor appears in that database, a contracting officer must prepare additional documentation and rationale, and solicit higher-up approval before awarding a contract. Unless that contractor is a sole source for a particular item, a contracting officer will not be able to justify award to a contractor with such a black mark.

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