Be Prepared: “Termination for Convenience”

Since President Trump’s inauguration, actions to cut Federal spending proposed by President Trump and his Elon Musk-led Department of Government Efficiency (”DOGE”) have been prominent in the news. While the initial focus of these cuts has been on reducing the federal employee workforce, there have also been cuts in federal contracting and the use of federal contractors. This can be accomplished by delaying or cancelling the future award of federal contracts.

How can the Federal Government terminate or curtail government contracts that are already being performed?

The Government has two tools at its disposal to affect such contracts even if a contractor is satisfactorily performing the contract and the Government is happy with the contractor’s performance. These tools primarily consist of the Government’s rights under contract clauses that in some form are included in most government contracts – the Changes clause and the Termination for Convenience (“T4C”) clause. This article explores the basics of the Government’s right to terminate a government contract for convenience under a T4C clause, a concept that is largely unique to federal contracting.

HISTORY AND BACKGROUND

The U.S. Civil War saw an increased reliance on government contractors to support the war effort and after the end of the war, the U.S. government needed to end much of this support. Normally, under U.S. contract law (often referred to as the “common law”) one party cannot just unilaterally void a contract or suspend the other party’s performance unless that other party is in material breach of contract—scrawny horses or faulty rifles in the context of the war—or contract performance is legally excused.

In an 1875 case, the U.S. Supreme Court held that the Federal Government as a matter of public policy possesses the inherent right to suspend a private contract and settle with the contractor to avoid the unnecessary expenditure of taxpayer dollars. During World War I and World War II, Congressional action codified this principle.

In the 1950s and 1960s, federal procurement regulations prescribed the inclusion of termination for convenience clauses in federal contracts. These regulations and T4C clauses gave the Federal Government a very broad right, upon written notice, to terminate a government contract at any time without cause and eliminated the right of contractors to recover profit on unperformed work (so call anticipatory or lost profits) and “consequential damages” — damages that contractors were previously allowed to recover. These clauses also give the Federal Government the right to T4C a government contract in whole or in part — meaning that if the Government terminates a contract in part the contractor must continue to perform the unterminated part of the contract.

A final crucial point bears mentioning. First, in Christian & Associates v. United States, a federal court held that a mandatory clause which expresses a significant or deeply ingrained strand of public procurement policy may be considered included in a government contract by operation of law even if it isn’t cited in the contract.

Current Federal Government terminations for convenience rules can be found in Part 49 of the Federal Acquisition Regulation (“FAR”). The specified T4C clauses that the FAR mandates be included in federal contracts can be found at FAR 52.249-1 through 52.249-7. The specific clause required to be used in a federal contract will vary depending on contract type and dollar value, though in general these clauses carry many of the same common themes. FAR 52.213-4 and FAR 52.212-4 contain different T4C clauses for Simplified Acquisitions and the purchase of Commercial Items, respectively, both of which differ from their FAR Part 49 counter parts, the primary focus of this article.

FOCUS FOR CONTRACTORS

For contractors, two of the most important things which FAR Part 49 T4C clauses specify are: (1) the contractor’s obligations upon termination and (2) the costs the contractor can recover because of the termination. Generally, under FAR Part 49 contractors are, subject to the actual language of the T4C clause in the applicable contract and the Government’s T4C notice, required to:

1. Stop work immediately and stop placing subcontracts;
2. Terminate all subcontracts;
3. Immediately advise the Government of any special circumstances precluding work stoppage;
4. Perform any continued portion of the contract and submit promptly any request for equitable adjustment to the price;
5. Protect and preserve property in the contractor’s possession, and dispose of termination inventory (inventory of government property) as directed or authorized by the Government;
6. Notify the Government in writing concerning any legal proceedings growing out of any subcontract or other commitment related to the terminated portion of the contract;
7. Settle subcontract proposals;
8. Promptly submit a termination settlement proposal; and
9. Dispose of termination inventory as authorized by the Government.

In addition, under FAR Part 49 Government T4C clauses generally provide that the terminated contractor is only entitled to the following monetary remedies:

1. The contract price for completed supplies or services accepted by the Government;
2. Reasonable costs incurred in the performance of the terminated work;
3. A fair and reasonable profit (unless the contractor would have sustained a loss on the contract if the entire contract had been completed); and
4. Reasonable costs of settlement of the work terminated.

A contractor’s submission to the Government for T4C costs is generally referred to as a termination settlement proposal. In general, this proposal must be submitted within one year from the effective date of. After the contractor submits a timely proposal, settlement negotiations between the Government and the contractor ensue. If the parties reach an impasse, the Government fails to respond to the contractor’s termination settlement proposal, or the contractor objects to the Government’s unilateral determination of the amounts owed to the contractor, then the contractor is entitled to file a claim against the Government under the Contract Disputes Act. If the contractor fails to submit a termination settlement proposal on time, then the Government is authorized to unilaterally determine the amount due to the contractor because of the T4C.

WHAT’S AHEAD

Federal contractor executives, segment leaders, legal teams, and contracting teams should be ready to respond to a T4C today more than ever. Examples of T4C this year include support for CISA’s Red Team, hundreds of USAID programs, GSA leases, and reportedly scores of Department of Education contracts.