What do I do if My Contract is Terminated for Convenience?

Many in the government contracting world will remember the Federal Government's "Super Committee" working to slash spending from the budget, and other Federal Agencies scrambling to identify ways to slash their own budgets back in 2011 - 2013. 

Now, as the threat of a potential recession looms over the horizon, it may be a good time to revisit one of our popular checklists from that period: "What to do When Your Contract is Terminated for Convenience (T4C)?"

Terminations for Convenience

The Federal Government has at its disposal, an occasionally used contract clause “Termination for Convenience (T4C) of the Government” (FAR 52.249-1 to 52.249-7). These clauses give the government the right to terminate your contract upon notice, and unfortunately, it is always included in a government contract.

“Termination for convenience,” refers to the government’s right to end the performance of all—or part of—the work provided in your contract, prior to the expiration of that contract,  “when it is in the Federal Government’s interest”.  In general, the "government's interests" are most often when the following circumstances apply to a particular situation or contract:

• the government or agency no longer needs a contractor's supplies or services
• the contractor refuses to accept a proposed contract modification
• the contractor is no longer eligible for the contract
• the relationship between the agency and the contractor has deteriorated
• the agency wishes to bring the work "in-house" 
• government funding is reduced or limited by political decisions

...among many other reasons.

While a T4C can be an unsettling and potentially crippling blow to many small business contractors, there are steps you need to take if this happens to your contract, as well as steps you can take to reduce the financial risk of a T4C  (which will be addressed in our blog, next week).  

Steps to Take When Your Contract is T4C:

1. Call your program manager or lead and initiate the work stoppage.
2. Contact your working subcontractors and notify them that the T4C has been received
   and to stop all work.
3. Alert your accounting and contracts group that the termination was received.
4. As the termination is not a regular event, you may be entitled to recapture some costs
   in this transition phase.
5. Establish a new project reference number or charge code to capture these labor and
   other costs separately from the actual contract work.
6. Pass the word to everyone who has been working on the project that a new number
   exists. Capture all costs from the termination date forward.
7. The contractor is entitled to reimbursement of reasonable costs incurred in the
   performance of the work that was terminated. This would also include a reasonable
   profit.
8. Keep track of the costs in the newly formed charge number. Here is one time where
   overhead costs may be billed as direct costs. These settlement expenses can include
   accounting, legal, and clerical costs. Indirect costs related to salary and wages
   incurred as settlement expenses can be included as well.
9. Keep track of unexpired lease costs continuing after termination, as these costs are
   generally allowable as well
10. After T4C, the contractor must submit a timely termination proposal that outlines all
    of your expenses requested for reimbursement. The timely submittal is defined as
    mailing the proposal within one year of the notice of termination.

If your business needs help with a contract termination, modification, close-out, or if you need any other government contract management and/or administration help, please contact ReliAscent at any time.  Our DCAA and DCMA compliance experts are here to help, and the success of our clients and all small business federal contractors is our top priority!