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What is a waiver in the case of a termination?

To waive means to intentionally relinquish a right. If the government does not exercise its right to terminate for default within a reasonable amount of time after default, it will have waived that right. To take advantage of the government's waiver, the contractor must show that it was adversely affected by relying on the government's inaction. Once the government has waived its right to terminate for default, it must establish a new delivery schedule. If the contractor and the government cannot agree on a new schedule, the government may establish a new one unilaterally. Under that new schedule, the contractor must be given a reasonable time to make delivery.

A classic example of a waiver is one in which the government encourages continued performance after the initial delivery date. An important criterion of a waiver is the government's willingness, either express or implied, to accept the contractor's continued performance.

Why Terminate a Contract?

What are the main reasons the government may choose to discontinue a contract?

CORs should be aware that the government might need to discontinue the contract and terminate for convenience when:

There is no longer a need for the item or service called for under the contract

Funds are not available for continued contract performance

It is impossible for the contractor to perform as specified in the contract (i.e., according to contract terms defining specifications, acceptance, or delivery methods)

There has been a radical change in the requirement that goes beyond the contractor's expertise.

A termination for default (or cause) may be triggered by events such as:

The contractor fails to perform as required by the contract

The contractor's response to the government's cure notice or show cause notice fails to show that the contract will be completed in accordance with its terms.

The COR may use a default questionnaire to determine whether a contract should be terminated for default (see Figure 8-1).

Occasionally there may be evidence or rumors that a contractor is in "financial trouble." Warnings of the contractor's impending bankruptcy or financial difficulties sometimes go hand-in-hand with a delinquent contract. The COR should be aware of the following signs of a contractor's financial problems:

The contractor fails to pay subcontractors on time.

Late deliveries of materials to the job site are being made, and deliveries are usually brought in on a C.O.D. basis.

The contractor is falling behind schedule.

Laborers on the job make complaints about late wage payments or lack of pay increases.

Telephone calls to the contractor go unanswered.

Sloppy performance and workmanship are evident.

Questionnaire for Determining Whether to Terminate for Default

FIGURE 8-1. Questionnaire for Determining Whether to Terminate for Default

Noncommercial and Commercial Contract Terminations

What are the differences between noncommercial and commercial contract terminations?

Termination of noncommercial item contracts is addressed in FAR Part 49 and applicable clauses in the contract. Commercial item contract termination procedures are contained in FAR Part 12 and applicable clauses, but Part 49 is still used as guidance for instances in which it does not conflict with Part 12.

Noncommercial Contract Terminations

How are terminations of noncommercial contracts conducted?

The right of the government to terminate a contract when its completion is no longer in the government's best interest has long been recognized. Noncommercial contracts may be terminated either for convenience or for default.

This right has been the subject of many court decisions and boards of contract appeals decisions. The government has the right to terminate without cause and to limit the contractor's recovery (e.g., recovery of anticipated profit is not allowed) in a negotiated settlement (i.e., the contractor is allotted allowable costs, profit, and other considerations in the judgment of the CO). The settlement should compensate the contractor fairly for the work done and the preparations made for the terminated portion of the contract. Fair compensation is a matter of judgment and cannot be measured exactly.

The use of business judgment by the COas opposed to adherence to strict accounting principleslies at the heart of a settlement. Cost and accounting data may provide guidance, but should not be used as rigid measures of whether settlement is appropriate in a given situation. In fact, in appropriate cases, costs may be estimated and differences and questions settled by agreement.

Termination for convenience:

May be imposed at any time when termination is in the best interest of the government

Is a government right that provides flexibility to the government in the procurement process

Involves no fault or negligence on the part of the contractor

May be total or partial

Permits the contractor to propose an amount of compensation that it considers reasonable for accepted work up to the time of termination, costs for work completed plus a reasonable profit, and termination settlement costs. The final settlement amount is subject to negotiation by the CO.

In addition to termination for convenience, the government is also entitled to terminate a contract due to inadequate contractor performance. Such terminations for default stem from the government's contractual right to terminate a contract when the contractor is failing to perform its obligations under the contract, usually amounting to a breach of the contract. The breach may be either actual (a currently existing failure to perform the contract) or anticipatory (a potential failure to perform the contract, e.g., failure to make progress as related to the contract schedule). A contract may be terminated for default when the contractor does any one of the following:

Fails to deliver the supplies or perform the services within the time specified in the contract or within the time limit specified in an extension

Fails to make progress, so as to endanger performance of the contract

Fails to perform any other contractual provision.

Figure 8-2 presents additional factors to consider before terminating for default.

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