Does Shutdown mean Termination for Convenience?
We have to ask ourselves what some of the underlying causes of the government shutdown are. Certainly there is the debate about the health care plan, but that is too obvious. The counter argument is all about the budget and about the spiraling federal deficit. Even the argument about the health care is deeply rooted in the budget talks (can the government afford this program?). So, when you combine the effects of Sequestration from earlier this year (which continues into 2014 by the way) with the current squabble over the budget and deficit, will this find its way to the business sector outside of government? My immediate concern today is with the pool of government contractors and whether or not they would be faced not only a crippling reduction of cash flow but possible contract termination. I don't know how many contractors know the process for termination for convenience of a government contract. I will try to summarize that here.
Almost all government contracts will have a clause in the contract that allows for a termination for convenience (Usually noted as FAR Part 49.502 in your contract). So if this clause is in your contract, what happens if this is implemented by the government? Well, the DCMA website has a good summary of the process. The major steps in the process include:
- Review Termination for Convenience Notice
- Forward Termination Notice and Contract Documents and Establish Docket
- Conduct Post-Termination Conference
- Issue No-Cost Bilateral Agreement
- Initiate Request for Plant Clearance Action
- Issue Non-Appealable Determination
- Review Settlement Proposal
- Obtain Field Reviews
- Prepare Prenegotiation Position
- Negotiate Settlement and Issue Bilateral Modification
- Close Docket
- AGO Actions on OT Terminations
So what does all that mean? Certainly it means to stop work immediately when notified. This means stopping work not only within your company but also issue commands to your suppliers to stop work immediately. This is an important step to help prevent doing any work that might not be paid for. The termination event is not a regular even so there may be costs that will be incurred during the process that will be reimbursed. For this reason it is imperative that you establish charge codes and accounts to capture these expenses. These should be new and distinguishable accounts and everyone doing any further work will be using exclusively these accounts. As a matter of fact, this is an example of a time where traditionally overhead expenses will be billed as direct costs. The government will be asking for reports of the termination process and expenses in addition to previous expenditures on the project prior to termination. These will need to be kept separate and distinguishable. If there is any inventory involved it will need to be accounted for and value determined since it will probably not be a finished item. You can probably count on a "field review", especially if there is inventory involved. The DCAA may get involved in auditing the final closing statement. You can begin to see that this process will involve a lot of specialized effort. This effort is reimbursable by the government but, like other cost type work, it will be subject to doing it in a specific manner and it will be audited and reviewed. It is imperative that you do this right as this will be your last time to receive money on this contract. ReliAscent has a team of experts that have been through this process and can help you formulate a strategy and then help you implement that strategy, complete with audit and field review support.