Saturday, July 21, 2012


The incongruity between the actual and the expected result is by no means more poignant than in the termination for convenience (T for C) of commercial item contracts.  The T for C of commercial contracts may well result in the contractor receiving no where near the cost recovery it would have received under the standard government contract T for C clause.

The regular T for C clause permits recovery of all allowable costs under FAR Part 31. It is often said the contract, even if fixed priced, is converted to a cost reimbursement contract for the purpose of T for C recovery.  Significantly, those allowable costs include all cost preparing to perform the terminated work.  In the regular clause, they are fully reimbursed.

The commercial item contract T for C clause, on the other hand, limits the T for C recovery to the percentage of the price for the portion of work done plus costs directly related to the termination itself.  In Red River, the Armed Services Board of Contract Appeals (ASBCA), denied the recovery of the costs of preparing to perform the terminated work.

On appeal in Red River, the U.S. District Court (the case went there because Maritime Law was involved) reversed the ASBCA, allowing properly allocable costs of preparing to perform the terminated work.  The court was impressed that the regulation allowed use of the cost principles as a guide and it held in particularly high regard FAR 49.201 which speaks of compensating the contractor "fairly" for the work done "and the preparations made for the terminated portion of the contract."  (The word "fair" is used two more times in the first paragraph.)

Obviously, the thought behind the clause was that in truly commercial item buys, the item would easily be sold in the commercial marketplace, so there was no need for full (and fair) cost recovery for preparing to perform.  However, the question of full recovery of costs is squarely back in litigation before the ASBCA and ultimately the Court of Appeals for the Federal Circuit (CAFC).  The Civilian Board of Contract Appeals CBCA) takes the broader view and permits cost recovery more closely resembling that which a contractor receives in a regular T for C settlement.

The Red River contract (like so many others) should never have been a commercial item contract.  Had the case arose in the CBCA's jurisdiction, the result would have been different. Since the appellate court's opinion in Red River is not binding in other ASBCA cases, the issue remains whether costs incurred preparing to perform will be allowed at the ASBCA (and the CAFC) in terminations for convenience of commercial item contracts.  Stay tuned for further developments.

At the solicitation review stage, contractors should insist on the standard fixed price T for C clause in place of the commercial item clause.

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