Navigating Recent Government Contract Terminations—Key Considerations and Best Practices

Mass Terminations and Evaluation of Potential Breaches
The Department of Government Efficiency has publicized through mainstream and social media that its actions have led to the termination or cancellation of thousands of contracts across Department of Defense and civilian agencies. By way of example, the Trump administration has eviscerated the United States Agency for International Development (USAID), causing most of its large-dollar contracts to end. These so-called en masse terminations have given rise to new legal considerations. For instance, contractors are evaluating whether such actions may constitute breach of contract, especially in circumstances where there is no evidence that the Contracting Officers made independent assessments to support the termination. Contractors who prove that the government breached a contract when it wrongfully terminated are entitled to recover their allowable costs, a reasonable profit on work performed, and lost profits on the work that the termination deprived. As we discuss below, when a contractor is terminated for conveniences legally and appropriately, they are not entitled to recover lost profits.

Preparing Termination for Convenience Settlement Proposals
Upon receiving a legitimate termination for convenience, contractors have one year to prepare a termination settlement proposal. FAR 49.201(a) stipulates that settlements should fairly compensate contractors for work performed, including a reasonable allowance for profit on work performed. Contractors also may recover reasonable proposal preparation costs, including those incurred in paying legal and professional consultants. (See FAR 31.205-47.) Although the FAR provides forms to use, in our experience the most successful termination settlement proposals are not formulaic and instead follow typical commercial and common-sense practices. In our proven termination settlement proposal process, we have comprehensive guidelines to execute the following best-practice steps:

• Immediate Action. Contractors should cease work as directed and notify subcontractors accordingly.
• Inventory Management. Contractors should carefully document and protect all materials and work-in-progress.
• Cost Documentation. Contractors should compile detailed records of incurred costs and associated profits. Per FAR Part 49, costs recoverable in a Termination for Convenience Settlement Proposal include direct costs, allocable indirect costs, depreciation, settlement expenses, storage fees, work-in-process and inventory.
• Justify Entitlement to Costs. Contractors should prepare and include with their settlement proposal an entitlement narrative that explains the legal justification for entitlement to each cost.
• Timely Submission. Contractors must adhere to submission deadlines to avoid forfeiting entitlements. These deadlines are jurisdictional, and the government has no obligation to consider anything submitted on the 366^thday or later. Prudent contractors often submit their proposals early and recover uncontested categories of costs as the parties negotiate the remainder or the proposal.

Addressing Potential Default Terminations
Given the current environment, there is an elevated risk of default terminations. We have seen certain agencies use heightened standard of scrutiny to review contractor performance because Terminations for Default cost the Government less than Terminations for Convenience. Contractors may encounter the enforcement of minor contract requirements for the first time, more costly audits and reviews, and frequent Cure Notices and Show Cause Notices.

Contractors should understand the mechanisms of Cure and Show Cause Notices, as well as how to adequately respond to them:

• Cure Notices. These notices are a typical first step toward a termination for default, but they are not required if the contractor fails to make a delivery of supplies or perform the services within the time specified in the contract. Contracting Officers typically issue Cure Notices when the contract has sufficient time left for the contractor to rectify alleged performance problems. Issues that must be cured include the failures to satisfy an operable schedule; make progress in performance; perform a material provision of the contract; and provide adequate assurance. Contractors typically have 10 days to address the government’s concerns. (See FAR 49.402, 49.607(a).)
• Show Cause Notices. Show Cause Notices sometimes follow a contractor’s alleged failure to cure. The government also issues Show Cause Notices when time constraints preclude a cure period. In responding to a Show Cause Notice, contractors must demonstrate why the contract should not be terminated for default. They can, for example, demonstrate that they have cured any material breaches. They can also demonstrate that the government is requiring enforcement of something that is not a contract requirement. Contractors also can establish excusable delay under FAR 49.607(b) and 52.249-14. Excusable delay includes factors beyond the contractor’s control or those that arise without the contractor’s fault or negligence. The regulations cite fires, floods, epidemics, acts of war and acts of God as excusable delay that should prevent a default termination. Prompt communication with the Contracting Officer is crucial to establish the validity of such delays. (See FAR 49.607(b).)

Conclusion
The landscape of government contracting is experiencing significant shifts, with increased scrutiny on terminations. We are in uncharted territory. Contractors must stay informed and take initiative to safeguard their interests. For personalized guidance, please contact our Government Contracts & Disputes team. We would be honored to assist you.