Avoid Costly Mistakes With Contract Terminations

The staggering statistic of cases filed at the Court of Federal Claims (COFC) should make contractors aware that the government does in fact deny claims that include terminations for convenience. The process is not as easy as most contractors may think. By the time they reach the appeals stage, the damage is substantially done. An appeals attorney can only try to salvage the situation and recoupe kuendigung.services and much damages as possible.

U.S. Court of Federal Claims (COFC)Judgments and Appeals for the 12-Month Period Ending September 30, 2011

Number of cases terminated 609

Judgment Amounts Amount in Dollars
Amount claimed in fiscal year 2011 filings 122,302,466,000
Amount awarded in judgments for plaintiffs/petitioners 1 471,077,558
Amount awarded in judgments for plaintiffs carrying interest 16,280,213
Amount awarded in judgments for defendants on counterclaims or offsets 5,732,690
Amount awarded in judgments for defendants on counterclaims or offsets carrying interest 87,879
Amount awarded in judgments for third-party plaintiffs/petitioners 0
Appeals pending October 1, 2010 302
Appeals filed October 1, 2010, to September 30, 2011 120
Appeals terminated October 1, 2010, to September 30, 2011 138
Decisions

Affirmed 76
Reversed (including those reversed in part) 11
Dismissed 47
Vacated 4
The following information should make government contractors aware of the dangers facing a termination for convenience.

First, government contractors must understand that in a termination for convenience, they bear the burden of proof to demonstrate compensable damages resulting from the termination. Jacobs Engg Grp., Inc. v. United States, 75 Fed. Cl. 752, 759 (2007). The scope of damages that contractors can recover following the Government termination for convenience is covered by the contract and the FAR terms incorporated therein. This means that:

You are limited to statutory provisions
You have to prove your damages to some extent
You alleged damages are not always the government’s damages to you
To prevail on a termination for convenience claim, you must demonstrate that you have suffered an actual injury. See, e.g., Centex Corp. v. United States, 395 F.3d 1283 (Fed. Cir. 2005). In a breach of contract case, the innocent party should be placed in the same position that it would have been had the breach not occurred, but should not be placed in a better position. Bluebonnet Sav. Bank, FSB v. United States, 339 F.3d 1341, 1345 (Fed. Cir. 2003). Likewise, when the Government terminates a contract for convenience pursuant to the contract terms, the contractor is entitled to recover costs allowed by the contract and FAR clauses incorporated therein, but should not expect to be placed in a better position than had the contract run its normal course and the termination not transpired.

Even if you are attempting to assert that the agency has acted in bad faith, and you are looking to assert breach of contract damages, you simply cannot get a windfall. This is basic contract law. Any attempt to collect more than you would have absent the termination, such damages will be denied by the Court of Federal Claims.

Claims for Governments Failure to Exercise Options

The Federal Circuit has also held that contractors are not entitled to damages based upon the Governments failure to exercise options where the Government has the discretion to exercise the options, such as here. Hi-Shear Tech. Corp. v. United States, 356 F.3d 1372, 1380 (Fed. Cir. 2004).

Contractors face the danger of a dismissal if this is the basis for its claims. You must understand the power of a termination for convenience clause at the initial stages of the contract award. The government simply has a unilateral right to terminate for convenience when it is in the best interest of the government. The stunning question always becomes what is an allowable reason for the agency’s termination of a contract?

Pre-contract Costs Allowable in Termination for Convenience?

There is a difference between direct costs and pre-contract costs. Direct costs must be directly attributable to the performance of the terminated contract. Pre-contract cost are incurred prior to the contract award in anticipation of being awarded a contract for the fire season.

To recover pre-contract costs in a termination for convenience case, a contractor must show that the costs were (1) incurred in order to meet the contract delivery schedule, (2) incurred directly pursuant to the negotiation and in anticipation of the award, and (3) would have been allowable if incurred during contract performance. Penberthy Electromelt Intl, Inc. v. United States, 11 Cl. Ct. 307, 315 (1986).

This is a danger that many contractors face when handling terminations for convenience without an attorney.

Settlement Costs and Proposals

Settlement costs generally are recoverable under FAR 31.205 and include[a]ccounting, legal, clerical, and similar costs reasonably necessary for… [t]he preparation and presentation, including supporting data, of settlement claims to the contracting officer.FAR ยง 31.205-42(g)(I). FAR49.206-1(c) provides:

Settlement proposals must be in reasonable detail and supported by adequate accounting data. Actual, standard (appropriately adjusted), or average costs may be used in preparing settlement proposals if they are determined under generally recognized accounting principles consistently followed by the contractor.

Although every receipt is not required, you should always keep track of actual costs in anticipation for a termination for convenience. This is one internal control policy that you should always put into place at the initial award stage.

The FAR allows for the reimbursement of reasonable costs that a contractor incurs to prepare and submit a settlement proposal to a contracting officer following a contract termination. However, the danger is that the time spent for preparation of this level of termination must be in a manner that can be used for audit purposes. It must comply with the requirements of FAR 49.206-1.

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