No matter what "changes" clause applies to the contract, all authorize the contracting officer to make an equitable adjustment in the contract price for a deductive change. In calculating the price adjustment, the general rule is the government is entitled to a credit representing the difference between the reasonable cost to the contractor of performing the work without the change (e.g. the deletion) and the reasonable cost of performing with the change. Most of the time, the relevant costs are those expected to be incurred, that is, prospective costs. Under a termination for convenience (T of C), a price adjustment may be requested on the continued portion of the contract. When calculating costs under a T of C circumstance, the costs are usually those already incurred, that is retrospective (for more on T of Cs, see our two part series in the GCA DIGEST Vol. 1 and 2, Nos. 4 and 1, respectively)

Generally reductions that are "major" are considered a partial termination while "minor" reductions are considered changes. Hence deductions that are neither clearly major or minor can go either way. When determining whether deleted work is major or minor, Courts and Appeals Boards have stated there are no "hard or fast rules" and have given a high level of deference to the CO or agreements between the parties. When major portions of work are deleted without substitution of other work a partial termination applies (J.W. Bateson Co.). In one case, a deletion of 20% of contract work was ruled a partial termination (Ideker, Inc.) while in another, 12% was considered a deductive change (American Constr. & Energy). When a specification change results in a reduction of units or supplies to be delivered, elimination of identifiable items of work or in the quantity of work to be supplied a deductive change is sometimes considered to have occurred even with a major deduction. Generally, deletions in excess of 20% are considered terminations while deletions of 10% or less are considered changes. However, when reductions exceeding 20% result from specification changes or substituted work does occur, numerous decisions have allowed for deductive changes.

Why Chose One over the Other? There are several reasons why a termination or a change would be preferable over the other:

1. Difference in Recovery. The advantage of using the changes versus the termination method of calculating a price adjustment shifts under varying circumstances. As a general rule, if the contract is profitable, deletion of work through a deductive change is better for the contractor while on a loss contract, a partial termination for convenience is better. The difference in advantage stems from whether there is an advantage of calculating the costs on a prospective (change) or retrospective (termination) basis. Under a deductive change, the contractor is entitled to the full contract price unless the government can prove it is entitled to a price reduction for deleted work. Under the change scenario, unusually large profit in non-deducted work is preserved and not subject to scrutiny by the government. In other words, if the projected costs are greater than originally anticipated, the price adjustment under the change will be greater than under a termination analysis (i.e. you will owe the government more). Under a partial termination, the contractor is entitled to a reasonable profit on work not deleted, even if that rate of profit is less than what was bid or actually earned on the project. In this case, if the deleted work will cost less than originally anticipated, the government will recover a greater amount under the termination rather than changes scenario.

2. Time Limits. Under the T of C clause, a contractor must submit its termination settlement proposal within one year of the effective termination date while no such limit applies under the changes clause. In one case, the CO denied a contractor’s proposal submitted after one year on the grounds the deleted work was a partial termination while the Court ruled for the contractor because the deletion should be considered a change not subject to the one year limit. Of course the opposite result could occur if a Board or Court ruled the proposal in dispute should be considered a T of C. When in doubt, submit the proposal within one year.

3. Burden of Proof. Under a change, the government has the burden to prove its entitlement while under a T of C, the burden falls to the contractor. This consideration may be critical when proof of cost is scant or cost records are shoddy.

4. Applicability of FAR Cost Principles. Whereas FAR Part 31 cost principles fully apply to changes, their application to terminations are less strict. This is because the "fair compensation" principle overrides strict FAR cost principles under the T of C analysis.

5. Allowability of Consultant and Legal Services. Whereas these costs are routinely allowed under a T of C proposal, they might not be under the changes clause if they are considered to be costs related to a "claims presentation" (unallowable) rather than "contract administration" effort (allowable).

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