The first step in maximizing recovery is to determine whether the cancellation is a breach of contract. If so, the contractor would normally be entitled to more because it would not be subject to recovery limitations of the T for C clause (e.g. cost principles do not apply, anticipatory profits are allowed). Example of breach of contract provided by the authors are:

1. When a prime or upper-tier subcontractor purports to terminate a subcontract without a T of C clause. As we mentioned above the Christian Doctrine means a prime contract is held to include a T of C clause even if it was not included in the prime contract while the Christian Doctrine does not apply to subcontracts so the absence of the clause would entitle the subcontractor to anticipatory profits.

2. The government’s failure to order the guaranteed minimum in an IDIQ contract is a breach unless the government terminated the unordered portion of the guaranteed minimum. The government cannot avoid liability by issuing a termination after the contract performance period.

3. The government’s failure to order all of its needs under a requirements contract is a breach. Since a requirements contract obligates the government to order all of its needs from the contractor the breach would allow it to recover anticipatory profits.

4. Though less common than the three above, bad faith or abuse of discretion is a breach which requires showing an intent to harm the contractor or the government did not have the intention of honoring its obligations.

• Seek Fair Compensation

This principle discussed earlier has a long history of inclusion in government regulations but nonetheless, is often overlooked by contractors and the government, who must almost always be clearly reminded of its existence. If disallowance of a cost would be unfair you should claim it even if the cost is not allowable under the cost principles. For example, direct bid and proposal costs were allowed where the court stated “a contractor is not supposed to suffer as the result of a termination for convenience nor to underwrite the government’s decision to terminate.” You should include a narrative on any form used stating why any cost that may be disallowed under a cost principle is necessary to provide fair compensation.

• Avoid Second Guessing by the Government

It is quite common for government auditors and price analysts to disallow certain costs because the work should have allegedly been performed in a different manner. For example, they may question subcontractor, lease arrangements and personnel decisions. FAR 49.113 and 49.201(a) indicate the government may not substitute its judgment for that of the contractor to disallow costs. The determining question is whether the cost is reasonable, not whether the auditor or CO would have incurred it.

• Reject Impractical Proof Requirements

Unlike a cost or even T&M contract, a fixed price contract is not required to document its costs of performance. Nonetheless the government often attempts to avoid paying termination costs because that fixed price contractor does not have the documentation required under a cost reimbursable contract. A liberal approach to proof of costs is required (FAR 49.201(a), Algonac Mfg. Co. ASBCA 10534) and use of estimates is sufficient when accounting records are unavailable due to no fault of the contractor though the contractor does have the burden to determine its estimates have a reasonable basis in fact (Tigarelli Bros. Const. Co, ASBCA 34793). Another case held that the contractor has the burden to prove its proposed costs “with sufficient certainty so that the determination of the amount will be more than mere speculation.” A contractor’s burden of proof is higher on settlement expenses and other costs incurred after termination because it then knows it is entitled to costs incurred and has a duty to keep appropriate records. The authors state you should not allow the government to impose impractical proof requirements after it terminates a contract – as long as you incurred the costs and provide a reasonable factual basis to substantiate the amount, disallowance for lack of proof would be improper.

• Claim All Allowable Costs

Sometimes proposed costs are rejected because the government claims the contractor is not entitled to an equitable adjustment. Unlike an equitable adjustment, where the contractor must show the government caused the cost to increase (e.g. delay, acceleration) a T of C entitles the contractor to recover all of its costs up to the contract price no matter who is responsible for the costs.

• Charge Indirect Costs Directly

A termination often leaves the contractor in a position where if it uses its normal way of recovering indirect costs (applying an indirect rate to direct costs) it will not result in a fair compensation because the direct costs are not incurred. When this occurs, indirect costs may be charged as direct costs following the fair compensation principle. Numerous appeals boards have continuously permitted costs normally charged indirect to be charged directly for purposes of a termination. Of course, contractors must be careful to avoid double counting by removing these costs from indirect cost pools.

Some auditors and contractors have raised the issue that charging these normally indirect costs directly violates FAR and CAS 402 requirements to treat like costs incurred under like circumstances consistently. However, several court decisions have ruled that a terminated contract is not considered to be incurred “in like circumstances” (AT&T Techs, Inc. v US, 18Ct 315).

• Avoid Loss Adjustments

If a contract is performed at a loss (i.e. it would have been completed at an amount in excess of the contract price), the contractor is not entitled to profit and termination costs are subject to a downward adjustment for the percentage of loss. The authors point out several ways to avoid assertions of loss: (1) submitting an equitable adjustment claim that will increase the price of the contract and hence avoid the loss (2) avoid submission of information that auditors can use to infer a loss (e.g. estimate-to-complete for the terminated portion of the contract, verbal assent to a loss, etc.) or admissions of a loss since the burden of proving a loss falls on the government or (3) document how numerous changes caused primarily by the government created the loss.

• Request Partial Payment

Though we have rarely been successful in receiving significant partial payments, especially where we have attempted to maximize recovery, FAR 49-112 does provide for partial payments on termination settlement proposals before settlement. The request for partial payment may be submitted with or after submission of the termination proposal. Partial payments that can be received are, in the aggregate (1) 100% of the contract price adjusted for items completed before the termination date or to be completed after the termination date with the CO’s approval (2) 100% of subcontractor settlements approved by the CO (3) 90% of direct costs of termination inventory including materials, purchased parts and supplies and direct labor (4) 90% of other allowable costs not included above such as settlement costs and (5) 100% of partial payments made to subcontractors. The FAR states the government must “promptly” process partial payment requests. Though the expectation of receiving partial payments should not be too high, they should always be requested since not only do they help with cash flow but also helps avoid the incentive to accept an unreasonably low government offer.

• Do Not Agree to Perform Work at No Cost

The FAR suggests COs consider including a provision in a settlement to preserve the government’s rights in defects, warranties, guarantees and other obligations for the terminated work. Contractors should either avoid any post termination obligations or not agree to continuing obligations other than those in the T of C clause without adequate compensation.

• Request for an Equitable Adjustment for Non-Terminated Work

In spite of boilerplate language alluding to a complete termination, it is quite common for a termination to be partial in which case the contractor is entitled to an equitable adjustment for its increased costs for performing the continuing work. It is important to understand the difference because there is usually greater recovery for obtaining the equitable adjustment. Note the time requirements for the EA is 90 days as opposed to the one year for a termination.

• Submit a Timely Proposal

A prime contractor in a traditional contract must submit its final termination settlement proposal to the government within one year of the effective date of the termination. The effective date is the date on which the notice requires the contractor to stop performance unless the notice is received after the stop work date in which case it becomes the date received. If a Board or Court converts a termination for default into a T of C, then it is the date the contractor receives the Board’s decision. The deadline for a subcontractor to submit its proposal to the prime or higher tier sub is set forth in the subcontract. Commonly that period is six months which is less than the one year available to the prime.

The period for submitting a proposal can be extended by the Termination Contracting Officer (TCO), prime or upper-tier sub but the request must be in writing before the deadline. Courts have provided some flexibility, particularly with EAs and costs related to terminated contracts but still the request in writing should be followed. Deadlines should be met even if the proposal needs to be revised at a later date. If the deadline is not met, the contractor forfeits its right to judicial review – this allows the CO to pay whatever it wants and the contractor has no remedy. The T of C clause for a commercial contract does not set a time limit.

 

• Obtain Professional Help

T of Cs are full of arcane accounting and legal problems while creative approaches can often yield considerable benefits so contractors should obtain professional help. The good news is that costs of professional help should not be a barrier because these costs are considered to be recoverable settlement costs, even when a contractor has no other termination costs to claim other than the fees for professional advice. We have prepared over one hundred termination proposals for clients and never had our fees questioned so contractors should not hesitate to use qualified professionals when they receive a notice of termination.