If the government loses a termination for default case in court, the termination is converted to a termination for convenience. At this point, the government will pay the contractor for any fnancial loss they experienced.
large businesses to avoid termina- tions for default. Terminations for default have negative implications for business. However, the government must en- sure that its own actions are legally sound. If the government loses a ter- mination for default case in court, the termination is converted to a termina- tion for convenience. At this point, the government will pay the contractor for any fnancial loss they experienced. In other words, the government tends to pay mightily when it loses in court. In fact, even when the gov- ernment wins in court, it could still be ordered to pay settlement cost as was in the case of Laka Tool & Stamp- ing Co. v. United States (1980). The court found that the government’s defcient contract specifcations im- pacted the contractor’s inability to perform, which illustrates that, even when a default termination is upheld, contractors may recover certain costs. Government contracting ofcers must not assume the power of termination clauses without solid footing. Before leaving the subject of termi- nation for default, it should be noted that the government may terminate part or all of the contract, whatever is in its best interest. In addition, in accordance with FAR 49.402-3(f), various factors should be considered prior to defaulting a contractor. For example, the contracting ofcer is to consider the degree of essentiality of the contractor in the government ac- quisition program and the efect of a termination for default upon the con- tractor’s capability as a supplier under other contracts. In addition, there may be mitigating circumstances that may have impacted the contractor. In other words, the government has
other options prior to going straight to termination for default. Termination for Convenience Unlike a termination for default, which places all blame on a contrac- tor, a termination for convenience occurs when the contractor has done nothing wrong. The government de- cides the efort, or some portion of the efort, is no longer necessary. As with terminations for default, commu- nication is the key to easing the pain for both the government and supplier. The first order of business is to coordinate closely with the require- ments ofce to clarify the exact efort to be terminated. It also makes sense for the requirement owner to conduct a cost analysis to ensure that termi- nating will not cost more than allow- ing the supplier to deliver. Although this may seem illogical, a point may be reached in the contract’s duration when terminating the remaining ef- fort will cost more than completing the contract as planned. Few people consider the termination costs that the government must potentially pay, including subcontract termina- tion costs, unabsorbed overhead, and proft on partially manufactured goods. Assuming the termination cost analysis refects a savings, the con- tractor, just as with the termination for default, will be sent a letter stating what is to be terminated. In addition, the letter requests a cost proposal as well as various other administrative requirements, including the cost of terminating all subcontracts related to the terminated portion of the prime efort. Instructing the contractor to immediately stop work on the efort
is also an integral part of the termina- tion letter. After receiving the letter, it is a good idea to hold a conference with all parties. An important part of this conference is developing a program to efect settlement. Clear communica- tion at this point is critical to lessen the cost impact to all and to expedite the process. This cost avoidance and expediting the closing of the efort are two of the main tenets of a termina- tion for convenience. As a contracting ofcer, I assumed that I could accomplish a settlement proposal somewhat routinely because I had formerly worked as a price ana- lyst. However, my frst settlement pro- posal included unabsorbed indirect cost. I then realized that I was in over my head and could potentially use the services of the Defense Contract Audit Agency and/or a TCO from the DCMA. The settlement proposal often ar- rives with a cost shock. The govern- ment often overlooks the many costs required to stop an efort. Therefore, a good, upfront termination cost esti- mate by the requiring element is very important. The cost to settle a deleted efort can include paying for subcon- tracted efort already underway, fees to abort subcontracts, and abroga- tion costs at multiple subcontract tiers. The settlement proposal may include unanticipated labor costs and unabsorbed indirect costs, which may require cost models like the Eichleay Formula, widely used as a method of calculating home ofce overhead damages in construction delay cases. In other words, settlement proposals are complicated and somewhat difer- ent than estimating the cost of a new product or service. The government
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