There can be several reasons to terminate a contract. In the U.S., one of these reasons is through a termination for convenience clause under the Federal Acquisition Regulation (FAR).
The termination for convenience is a mechanism that allows the government to adapt to changing circumstances without penalizing contractors unfairly. This clause also allows the government to terminate a contract when it’s in their best interest, even if the contractor has not defaulted in any way. However, while it serves a purpose in government contracts, it can leave contractors in a tough spot.
Why terminate for convenience?
In some cases, the government may decide to terminate a contract for their convenience due to unforeseen challenges. For example:
- There may be changes in budget allocation and funding.
- There may be a need to shift priorities.
- There may be evolving project needs.
For instance, let us say a government agency initially planned to build a new recreational facility. But then, an epidemic that requires isolation of patients arises. The government may take this call as a greater priority. The initial plan may no longer be necessary, and they may terminate the contract for convenience.
Contractors may face significant financial consequences after termination for convenience. It may include:
- Unrecovered costs: They might not be able to recover all their expenses.
- Lost profits: Their expected earnings may suddenly disappear.
- Resource reallocation costs: They may need to shell out more for redirecting resources, which can be expensive.
- Delayed reimbursement: Since their payments may be delayed, it can affect their cash flow.
Furthermore, termination for convenience can have a negative impact on a contractor’s reputation. Future government agencies may view a terminated contract as a blemish, even if not due to the contractor’s fault. This can affect their ability to secure future contracts.
The contractor’s option
When a contract is terminated for convenience, there are options for a contractor to recover damages. For example, FAR provides an opportunity for the terminated contractor to submit a termination settlement proposal. This proposal allows the contractor to outline their incurred costs and seek reimbursement.
However, it is crucial to act promptly. Contractors should gather all necessary documentation and submit their proposal as soon as possible to expedite the settlement process.