Traditional government contracts use a cost-based formula to calculate termination costs where termination of a fixed price contract calls for the contractor to recover (a) allowable costs incurred in the performance of work (b) a reasonable profit for work performed (c) reasonable settlement expenses and (d) certain “continuing” (post termination) costs. Though not addressed by the authors, for most fixed price contracts the contractor is entitled to contract price for non-terminated accepted items and incurred costs for the terminated items. A contractor is not entitled to recover profit on settlement expenses. Recovery of allowable costs incurred and profit under the fixed price contract is limited to the total contract price. “Total contract price” may include any equitable adjustments to which the contractor is entitled. As we shall see, if the contractor can prove the contract would have been completed at a loss, the contractor is not entitled to a profit and recovery of costs (excluding settlement costs) can be adjusted downward for the loss.
For commercial item and certain construction and A&E contracts a “modified price-based” formula applies where recovery is composed of two elements: (1) the percentage of the contract price reflecting the percentage of work performed prior to the notice of termination and (2) any charges the contractor can demonstrate resulted directly from the termination. This is considered “modified price based” because the first element is price while the second is cost.
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