Contractors are permitted to file a termination for convenience (T for C) proposal while a termination for default (T for D) is pending, even when the T for D is in litigation. All Federal Acquisition Regulation (FAR) default clauses provide that improper T for D's will be converted to T for C's. The government contract judicial tribunals have recognized that prior to the time the default is overturned, the contractor can submit its T for C settlement proposal and that proposal can be treated as a claim under the Contract Disputes Act (CDA) since the demand for T for C costs creates the dispute necessary to convert the proposal into a claim. An appeal of the T for C claim, however, probably will be dismissed as premature without prejudice to reinstatement when the T for D is converted.
The reason contractors submit T for C proposals when they are terminated for default is that the conversion, when it happens, is deemed by law to have occurred at the time of termination for default. That is, the T for C relates back to the time of T for D. This means that legally, the contract was the subject of a T for C all along. This in turn means that settlement expenses incurred in connection with the T for C can be recovered from the time the contract was terminated for default.
Settlement expenses include contractor in house costs and outside consultant and attorney fees. If the costs relate to and are properly allocable to the T for C settlement proposal, they can be recovered. Thus, during the pending negotiation and litigation of the T for D, if the contractor engages in attempts to settle the case based on its T for C settlement proposal, the costs properly can be included in the T for C settlement proposal. The contractor, consultants and attorneys keep separate accounts for litigation of the T for D and attempts to settle the case based on the T for C proposal.
As a practical matter, the smart contractor immediately prepares its T for C proposal when it appeals its T for D. It allocates litigation costs to the T for D litigation account. It also sets up a separate account for preparation and negotiation of the T for C settlement. As it engages the government in discussions on conversion of the T for D to a T for C and payment of its T for C proposal, it charges its costs for that effort to the T for C settlement account.
As we've pointed out before, contractors may also include an equitable adjustment in contract price as part of its T for C settlement proposal. The costs of this contract administration effort also are recoverable. Each compensable change is an excusable cause of delay or non performance and equitable adjustments through the changes clause can avoid the application of the adjustment for loss formula and any limitation on recovery imposed by the original contract price ceiling.
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