Terminating contracts for default and convenience
June 3, 2011
Contract terminations by the government are not always due to the inability of a company to perform. Sometimes the termination is based upon the requirement being met and the services or product is no longer needed.
The majority of contracts terminated fall into two categories: termination for convenience and termination for default.
"A termination is not always due to actions on the part of the contractor. Termination for convenience is the government’s right to completely or partially terminate a contract when it is in the government's interest [to do so]," said Henry Molnar, a procurement analyst with the Army Contracting Command’s contracting operations division. "Through the use of termination clauses, the government may terminate or end a contract at any time whether it is for the convenience of the government or due to fault by the contractor.
"There are certain situations where the government may no longer require the services/supplies under contract and therefore would terminate for convenience. In these cases, the government negotiates settlement costs with the contractor and mutually terminated the contract once an agreement is reached to release the government from future liability for costs associated with the contract that was terminated," Molnar said.
The right to terminate for convenience is written into almost all government contracts by inclusion of the standard termination for convenience clause.
In these cases, Molnar said, the government negotiates an agreement to pay the contractor for things like costs incurred in performing the terminated work, the cost of settling and paying settlement proposals for subcontracts, and a fair and reasonable profit on the work done.
"Termination for default is when the government exercises its right to completely or partially terminate a contract because of the contractor's actual or anticipated failure to perform its contractual obligations. This is included in almost all government contracts by the inclusion of the standard default clauses," Molnar added.
Terminating a contract for anything other than convenience can be a traumatic event for both the government and the contractor.
"Both parties may suffer economic and time losses," said Carol Wolf, ACC attorney advisor. "Supplies and services to the warfighter may be delayed if the contractor does not fulfill their obligations. The contractor may suffer financially if a contract is terminated prematurely for cause. A for-cause termination could also affect their reputation."
Molnar said of the more than 500,000 contractual obligations created in fiscal years 2009 and 2010, he’s confident that far less than one percent of the contracts were terminated.
"We’re talking about contracts that are anything from one purchased with a credit card for under $2,500 to contracts that may be worth billions of dollars," Molnar said. "It’s rare that we terminate them, but we do from time to time."
In the event a contract is terminated for whatever reason the data is stored in the Federal Awardee Performance and Integrity Information System and, like all contract actions, terminations are reported in the Federal Procurement Data System.
"The government should only terminate a contract if it has clear grounds for doing so. If the termination is for default or cause, the government is entitled to obtain various forms of damages from the contractor as relief, and may also charge the contractor whatever additional costs result from re-procuring the supply or service," Molnar said.
"The contracting professional does not function in a vacuum, but rather part of an acquisition team. When considering a potential termination, contracting officers should coordinate closely with the customer. Although a contracting officer has unilateral authority to terminate a contract, that authority should not be exercised independently of other members of the acquisition team."