Monday, June 18, 2012


The termination for convenience provision in FAR Part 12 commercial item contracts is troublesome from any viewpoint.  The government has the right to terminate for its convenience just as with any other government contract.  However, the contractor's remedy appears to be far different.  Is it?  Should it be?

In what we will call regular government contracts (all those other than commercial item contracts), the contractor's remedy is recovery of essentially all its costs including its costs of preparing the termination settlement proposal.  In commercial item contracts, the contractor's remedy is recovery of the percentage of price for work performed and "any charges" that "directly resulted from" the termination.

The Armed Services Board of Contract Appeals (ASBCA) took this language to mean the contractor could not recover its costs of preparing to perform the terminated work (which would normally be recoverable under regular government contracts). The case was appealed and the appellate court reversed, but the appellate reasoning is not binding on the ASBCA in other cases.

As of now, it is uncertain whether recovery under the T for C clause in commercial item contracts includes costs incurred in preparing to perform terminated work.  In fact, just what "charges" means is still up in the air.  It also is unclear whether "directly resulted from" (the clause does not add "directly" -- that word is in the regulation only) should limit recovery to post termination costs.

Any day now, we may see clarification from the ASBCA.  The Civilian Board of Contract Appeals (CBCA) takes a broader view of recovery under the commercial item T for C clause.  It recognizes recovery of costs that are unamortized as a result of the termination.

Indeed, the regulatory history of the troublesome work "charges" indicates the proposed rule language was "actual direct costs" were allowable.  The word "charges", of course, is the word used in the Uniform Commercial Code (UCC) to describe all types of damages.

We suggest the word charges be viewed as another way to refer to actual costs. Given the broad usage today of commercial item contracts, we think it only fair look at the work "charges" in the broader sense of all allowable costs.

Postscript:  Don't forget, the Part 31 cost principles do not apply and the government has no audit rights as result of termination for convenience of commercial item contracts.  However, if the contract is indeed for a commercial item, it would seem fair that commercial incidental and consequential damages should be available.  In the commercial world, a termination for convenience would be a breach of contract.

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