Since we wrote numerous articles on how to prepare an effective termination proposal and maximize recovery we have received a variety of questions from readers and clients on the subject of terminations.  One of the most frequently asked one is “what actions should we take” when either we believe a termination is coming or we receive a notice.  In this article, we will discuss both what the regulations say and don’t say and make a few good business suggestions.

The most important first step is to follow the government’s lead – where they immediately select a terminating contracting officer (TCO) a contractor needs to pick an appropriate point person.  The person needs to be carefully selected because they will be called upon to coordinate a variety of internal functional efforts requiring skills in project management, accounting, contracting issues, subcontract administration as well as liaison with numerous government specialists such as the TCO, auditors, project administrators, technical personnel, etc.  Since considerable dollars and future government work is at stake, picking the right person to manage the termination process is key.

As for regulation guidance, FAR Part 49 governs most aspects of a termination.  For convenience terminations, most of the termination-related clauses in your contract or subcontracts require certain actions with the intent to minimize settlement costs to the government.  While the clauses affecting default terminations do not impose such requirements, it is still a good idea to take similar actions to minimize government expenses since default terminations often convert to terminations for convenience

When a notice of termination is received, the FAR 49.104 and the termination clauses are quite specific, requiring the contractor to:

Stop work immediately on the terminated portion of the contract and stop placing subcontracts
Terminate all subcontracts on the terminated portion of the contract
Continue performing the portion of the contract not terminated and promptly submit any requests for equitable price adjustments on the non-terminated work
Take action to protect government property in contractor’s possession and deliver it to the government as directed by the TCO
Notify TCO of any disputes with either subcontractors or other parties related to the terminated portion of the contract
Settle outstanding liabilities with subcontractors and obtain any required approvals or ratification from the TCO
Promptly submit a settlement proposal to the TCO
Dispose of termination inventory as directed by the TCO

Though the FAR states a prime contractor must “immediately advise the TCO of any special circumstances precluding a stoppage of work” none of the FAR clauses include this requirement.  Since many disputes arise out of alleged failure of the contractor to take timely action, it is very important to keep the TCO fully apprised, in any format preferred by them, of any significant developments that will impede complete stoppage of work or will minimize expenses.  Also, if the termination is for default and the contractor believes it is unwarranted, the TCO should be promptly advised of extenuating circumstances that would either rescind the termination or convert it to a convenience termination.

Finally, there is no clear formula for dealing with subcontractors under a default termination.  Whether or not the default is sustained, there may not be any default on the subcontractor’s part.  In this case, the prime contractor can only minimize its costs by terminating the subcontractor for convenience.  If a subcontractor is clearly in default vis-à-vis the prime, the prime contractor may terminate the subcontractor for default, whether or not the prime contract is terminated for convenience or default or not even terminated at all.  Good business judgement suggests this is the prudent approach to avoid endangering performance or to avoid payments to a non-performing subcontractor.

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