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Friday, May 17, 2013

Terminating Contracts for the Government’s Convenience: Answers to Frequently Asked Questions

Kate M. Manuel
Legislative Attorney

L. Elaine Halchin
Specialist in American National Government

Erika K. Lunder
Legislative Attorney

Edward C. Liu
Legislative Attorney

Andrew Nolan
Legislative Attorney

Termination for convenience refers to the exercise of the government’s right to bring to an end the performance of all or part of the work provided for under a contract prior to the expiration of the contract “when it is in the Government’s interest” to do so. Federal agencies typically incorporate clauses in their procurement contracts granting them the right to terminate for convenience. However, the right to terminate procurement and other contracts for convenience has been recognized as an inherent right of the government and “read into” contracts which do not expressly provide for it on this or other grounds.

Where termination for convenience is concerned, the “Government’s interest” is broadly construed. Federal courts and agency boards of contract appeals have recognized the government’s interest in terminating a contract when (1) the government no longer needs the goods or services covered by the contract; (2) the contractor refuses to accept a modification of the contract; (3) questions have arisen regarding the propriety of the award or continued performance of the contract; (4) the contractor ceases to be eligible for the contract awarded; (5) the business relationship between the agency and the contractor has deteriorated; or (6) the agency has decided to restructure its contractual arrangements or perform work in-house. Terminations in other circumstances could also be found to be in the “Government’s interest.”

In contrast, terminations based on the contractor’s actual or anticipated failure to perform substantially as required in the contract are known as terminations for default. Such terminations are generally distinct from terminations for convenience in both their contractual basis and the amount of any recovery by the contractor in the event of termination. However, an improper termination for default will typically be treated as a constructive termination for convenience. Terminations for convenience are similarly distinguishable from “de-scoping” pursuant to any Changes clause incorporated in the contract. The Federal Acquisition Regulation (FAR) also distinguishes between termination for convenience and cancellation of multiyear contracts.

As a rule, the government cannot be held liable for breach when it exercises its right to terminate contracts for convenience because it has the contractual and/or inherent right to do so. This means that contractors generally cannot recover anticipatory profits or consequential damages when the government terminates a contract for convenience. The contractor is, however, entitled to a termination settlement, which, in part, represents the government’s consideration for its right to terminate. The composition of any termination settlement can vary depending upon which of the “standard” Termination for Convenience clauses is incorporated into the contract, among other factors, although such settlements typically include any costs incurred in anticipation of performing the terminated work and profit thereon. Some settlements are “no cost”; others are sizable. Agencies are generally required to obligate or otherwise “reserve” funds to cover potential termination liability, which can affect the amount of funds available for other purposes at a given time. In certain cases, though, exercise of the right to terminate for convenience could result in breach of contract (e.g., the agency entered the contract with the intent to terminate).

Congress is perennially interested in termination for convenience because it is part of the overall framework of federal procurement. However, congressional interest has been particularly high in the 112
th and 113th Congresses due to sequestration and other attempts to reduce federal spending. Some commentators have suggested that sequestration could result in contracts being terminated for convenience. There has also been interest in ways to reduce the amount of funds that must be obligated or otherwise “reserved” to cover potential termination liability.

Date of Report: May 1, 2013
Number of Pages: 29
Order Number: R43055
Price: $29.95

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