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Commercial Contract Terminations

How are terminations conducted under commercial contracts?

Commercial contracts may be terminated for convenience or for cause.

The Federal Acquisition Streamlining Act (FASA) of 1994 established a government-wide preference that government contracts acquire commercial items whenever possible. The procedures for terminating commercial item contracts are contained in FAR Part 12.

Factors to Consider before Terminating a Contract

FIGURE 8-2. Factors to Consider before Terminating a Contract

for Default

The need to terminate a commercial item contract for convenience is no different from that associated with noncommercial item contracts; for example, a commercial item contract can be terminated when the government no longer requires the item. The difference between termination of a noncommercial item contract and a commercial item contract lies in the applicable settlement procedures. When a CO terminates a commercial item contract for convenience, the government must pay:

A percentage of the contract price, reflecting the percentage of work performed prior to the notice of termination

and

Any costs that the contractor can demonstrate resulted from the termination (e.g., restocking fees charged by a supplier when the contractor returned purchased parts). The contractor may use its standard record-keeping system to demonstrate such costs.

Under commercial item contracts (unlike noncommercial item contracts), the government cannot require the contractor to comply with the cost accounting standards or the contract cost principles outlined in FAR Part 31, nor does the termination for convenience automatically give the government a right to audit the contractor's records. However, the government will not pay for any work or costs incurred that the contractor reasonably could have avoided.

The government may terminate a contract for cause in the event of any default by the contractor, or if the contractor fails to comply with any contract terms and conditions or fails to provide the government, upon request, with adequate assurance of future performance. These causes are essentially identical to the three causes found in the FAR Part 49 default clause.

When an "excusable delay" occurs, the contractor must notify the CO as soon as possible after its occurrence. One possible remedy for an excusable delay is for the CO to issue a modification to the delivery schedule. Show cause letters are not necessary in these cases, as the contractor is responsible for notifying the government of any delay or disruption of the delivery schedule. However, cure notices are required prior to terminating a contractor for any reason other than late delivery.

In the event of a termination for cause, it is crucial that the contractor assure the government that the contractor will afford the government all remedies available to any buyer in the commercial marketplace. When a termination for cause is effected, the government's preferred remedy is to acquire similar items from another contractor and to charge the defaulting contractor with any excess costs associated with the repurchase (e.g., if the price of the items has increased), together with any incidental or consequential damages related to the termination.

Delinquency Notices

What is a delinquency notice?

A delinquency notice is a written notice from the CO to the contractor to inform the contractor of problems with contract performance as perceived by the government. The CO may also issue a delinquency notice to determine whether delays in contract performance are excusable. FAR Part 49 provides the format for two notices, the cure notice and the show cause notice. These notices are also required by the FAR to be sent with proof of delivery requested, to document the government's action in the event of legal proceedings resulting from the contract termination.

COs will issue cure notices or show cause notices prior to terminating a contract. Generally, a cure notice is used for "action," for example, to request that the contractor advise how it plans to remedy a problem that is causing its failure to progress. A show case notice is generally used for "information, for example, to determine if the contractor has an excusable delay that justifies its problem.

 
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