From time to time, contracts are terminated for convenience for a variety of reasons, but as the sequestration deadline looms nearer, many of my clients have questions about what is a Termination for Convenience (“T for C”), what happens if their contract is terminated and most importantly, what do they do.  Here are some quick tips for understanding the T for C process and what to do if your company is an unfortunate recipient of such a notice.

First, we need to understand what a T for C is.  A Termination for Convenience (and I emphasize convenience) is any termination action taken for reasons other than the unsatisfactory performance of the contractor.  Unsatisfactory performance may result in a termination for default, and your recuperation rights are drastically different under default.  These tips apply to termination for convenience which may occur in full or in part.

In Part?  Yes, T for C actions may occur in part and not in totality.  Partial termination means the termination of a part, but not all, of the work that is inherent to the scope of a contract or subcontract.

So what do you do if you receive a full or partial T for C notice? 

First understand that actions taken following receipt of a T for C contribute to the termination claim process.  A termination claim is any claim (by a contractor permitted under the terms of the prime or subcontract) for compensation for the termination, in all or in part, of the prime contract or subcontract and any other claim authorized to be asserted and settled in connection with a termination settlement with the Federal government. The primary objective of a termination claim is to negotiate a settlement where the contractor and the government agree on the amount to compensate the contractor (and subcontractor) for costs incurred as a result of the termination (ramp down costs).  If only a portion of the contract/subcontract is terminated, a partial settlement can be reached as well.

Second, there are a number of steps involved in preparing a termination claim.  Below are summary actions to be performed in the event you receive a T for C notice from the Federal Government or your prime.

1)      First and foremost, IMMEDIATELY notify your accounting department to start/open a new project number/charging code.

2)      Ensure all personnel (both direct and indirect) supporting the terminated project are instructed to start charging time and expenses related to the terminated project to that new activity immediately.  This is critical in identifying and segregating allowable pre-termination and post-termination costs when preparing the termination settlement proposal.

3)      If subcontractors are employed on the terminated contract, immediately issue notice to the subcontractor that the subcontract is terminated and to stop work.  As best practice, provide written notice first via email (to capture written evidence and time stamp of stop work notice) and then provide verbal follow up by phone, followed by hard copy correspondence shortly thereafter by letter.

4)      Review the governmental agency’s termination requirements and the manner in which it is preferred that the contractor  handle certain termination activities (such as property disposition, negotiations schedule, etc)

5)      Following such assessment, it is recommended that a conference be scheduled with terminated subcontractors to discuss termination requirements, confirming time of termination, coordination of data and disposition of government property and inventory.

6)      Begin preparation of the termination settlement proposal in support of termination settlement negotiations.   At a high level, preparation of a Termination for Convenience claim consists of three phases:

1. Contract Review and Cost Identification;
2. Profitability Analysis;
3. Preparation of Termination for Convenience Claim.

7)      As with contract negotiations, the cost/price analysis in support of termination negotiation will likely differ depending on whether the contract is fixed price or cost-reimbursement.  FAR Part 31 cost principles provide guidelines on the allowability of costs for termination settlement agreements.

8)      The termination settlement proposal submitted to the government should include all costs including those from subcontractors and vendors as well as termination inventory.  Termination inventory means any items of physical property purchased, supplied, manufactured, furnished, or otherwise acquired for performance of the terminated contract properly allocable to the termination portion of the contract.

9)      Following submission of the termination proposal, the proposal will ordinarily undergo some sort of audit and then negotiation discussion, ultimately culminating in settlement.

Your Government Contract attorney or consultant (like CaaSus), can guide you through the preparation process and answer questions you may have.  Additional termination for convenience guidance is also provided in FAR Part 49.