As a part of a broader effort to reassess federal spending priorities, on January 27, 2025, the Trump administration issued a directive instructing federal agencies to pause the disbursement of loans and grants while conducting a review to ensure that spending aligns with the administration’s agenda (the hill). Changes like these are not uncommon in the world of federal procurement, where contractors must regularly navigate a complex regulatory framework, including the Federal Acquisition Regulation (FAR). One of the most significant provisions within FAR is the government’s broad ability to terminate contracts for convenience. While FAR’s convenience termination allows the government flexibility in managing contracts, it also can create critical financial and legal obstacles for the government’s contractors.
This article provides an overview of FAR, terminations for convenience, and the steps to challenge those terminations. For additional legal guidance, trust the attorneys at LPJ Legal to help your team navigate the complexities of government contracting.
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What Is Termination for Convenience?
Termination for convenience is a contractual clause that allows the government to unilaterally cancel a contract without cause. Unlike a termination for default, which occurs when a contractor fails to meet contractual obligations, a termination for convenience can be executed for reasons such as budget constraints, shifting government priorities, or project discontinuation.
Contractor Rights and Compensation
When the government terminates a contract for convenience, the contractor is entitled to compensation of reasonable costs for the work performed and preparations made for the terminated portions of the contract, including a reasonable amount for profit.
What Reasonable Costs may a Contractor be able to Recoup?
Under FAR 52.249-2, reasonable costs in a termination for convenience settlement typically include:
- Performance Costs: Costs directly incurred in executing the contract, including labor, materials, and subcontractor expenses.
- Settlement Expenses: Costs related to the termination process, such as accounting, legal, and clerical expenses associated with closing out the contract.
- Unabsorbed Overhead: If applicable, contractors may seek compensation for indirect costs that cannot be allocated to other projects.
- Storage and Transportation: Costs incurred for storing, protecting, and transporting contract-related materials after termination.
- Fair Profit: A reasonable allowance for profit on the completed portion of the contract, unless the project was already at a loss.
These costs are subject to review and approval by the contracting officer to ensure they align with the principles outlined in FAR Part 31.
If a contractor was operating at a loss on the project, the compensation may be reduced accordingly, preventing the contractor from receiving additional profits beyond their incurred costs (FAR 52.249-2).
Challenging a Termination for Convenience
Although the government holds broad rights to terminate contracts for convenience, there are limited circumstances where a contractor may challenge the decision. Courts have ruled that a termination can be overturned if the contractor can prove that the government acted in bad faith or abused its discretion (Boarhog LLC v. United States, 129 Fed. Cl. 130). This is a high burden of proof, as the presumption is that government actions are taken in good faith.
Settlement Process and Considerations
The settlement process following a termination for convenience involves several steps:
- Submission of a Termination Settlement Proposal – Contractors must submit a detailed proposal outlining recoverable costs and supporting documentation.
- Negotiation with the Contracting Officer – The government reviews the claim and negotiates a fair settlement amount.
- Appeals and Disputes – If a contractor disagrees with the settlement amount, they may appeal the decision through established legal channels.
Requesting an Extension for Damage Claims
If additional time is needed to calculate damages and submit a claim, contractors can request an extension from the contracting officer. According to England v. Swanson Group, Inc. (353 F.3d 1375) and Librach v. United States (147 Ct. Cl. 605), contractors generally have one year from the effective termination date to submit a settlement proposal, but extensions may be granted upon written request.
Key Takeaways for Government Contractors
While termination for convenience can disrupt contract performance, understanding the FAR framework ensures that contractors can navigate the process effectively and recover fair compensation. By staying proactive, government contractors can safeguard their financial interests and maintain a strong position in federal contracting.
- Understand Your Rights: It is crucial that you familiarize yourself with FAR clauses relevant to termination for convenience.
- Prepare for Compliance: Keep detailed records of contract-related expenses to streamline the settlement process.
- Act Promptly: Submit settlement proposals within the required timeframe to avoid forfeiting claims.
- Consider LPJ Legal: If facing a disputed termination, seeking legal expertise may be necessary to challenge the government’s decision or negotiate fair compensation.
To become a government contracting client, visit the LPJ Legal website, or call us directly at 202-643-6211.
