One of the most fascinating aspects of government contracts and also high on the list of things to remember is the interrelationship between the changes clause and both the termination for default and the terminations for convenience clauses. There also exists, of course, an interrelationship among all three clauses. We all know all about changes. They can be formal, informal or constructive. They can arise out of interpretation disputes, specification errors, conflicts or omissions, commercial impracticability, acceleration of delivery, failure to disclose vital information, failure to cooperate, interference in performance and failure to communicate. But just how do changes become involved in terminations?
Every termination for default necessarily implicates possible changes and requires an investigation as to whether changes contributed to the default. The default clause refers to acts of the government in its contractual capacity as part of a list of possible defenses to the default. The changes become possible excuses for non performance or delays. When confronted with a cure notice or show cause notice, every circumspect contractor should investigate and analyze whether constructive changes contributed to the performance issues. The contractor also should be aware that even if it loses its appeal of the determination for default, it still may be able to recover an equitable adjustment for some constructive changes.
In addition, the contractor is well advised to submit its pro forma termination for convenience settlement proposal in response to a termination for default. If the default is converted to convenience, the conversion relates back to the time of termination for default, therefore allowing the contractor the opportunity to fully recover its termination settlement expenses.
And every termination for convenience necessarily implicates possible changes. FAR 49.114 requires examination of whether there are any outstanding changes before the settlement can be completed. In fact, the smart contractor investigates changes carefully since they can be used to offset and defeat any proposed application of the adjustment for loss formula. Moreover, if the settlement proposal exceeds the original contract price (which limits recovery), the price can be increased under the changes clause to allow full recovery of the contractor's proposal. The equitable adjustment in price becomes part of the termination settlement.
The changes clause may be at work in any termination. Every compensable change is an excusable cause of non performance. Every compensable change also defeats adjustment for loss. Every termination implicates the changes clause.