Wednesday, July 25, 2012


We've been asked to comment on the effects of sequestration on the government contract and subcontract community.  The first thing we thought of was the misuse of terminations for default.  When programs and contracts under them are on the cutting board, the proper mechanism for cancelling them is termination for convenience.  But what we've seen in the past is that some contracting officers decide instead to set the contractor up for termination for default.

Termination for default allows the government to move the funding off the contract.  Conversely, funding must be left on the contract pending resolution of the termination for convenience settlement proposal.  Thus, the contracting officer has a funding motivation for turning the cancellation into a termination for default.

Termination for default also shifts the burden of contract administration and all the contract risks to the contractor.  No termination contracting officer needs to be appointed and there is no administrative burden on the government.  There will be no reprocurement since the requirement is going away.  The contractor must defend the termination for default action.

In defending the termination for default, it may take the contractor up to four (4) years of litigation to obtain a conversion of the termination to one for convenience which finally entitles the contractor to payment under the convenience termination clause.  We have seen many termination for default cases where the government has delayed the litigation for up to and sometimes longer than 4 years.

So our initial comment on sequestration is a warning of the dangers of providing the government the incentive to place all the burden on the contractor to eventually be paid its costs of termination.  There is no question that the proper contract mechanism for implementing sequestration is termination for convenience.  But we are concerned that sequestration may result in the misuse of termination for default to at least postpone the government's liability.

Stay tuned.  We'll discuss what contractors should do about this in another article in the near future.

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