Beware the Terminator!

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The government retains the right in every contract, to terminate a contract at any time, either through a "termination for convenience", or "termination for default".   A termination for convenience is typically benign, as all it does is end the contract early, at the government's discretion, and in result, provides equitable settlement to the contractor.  No harm; no foul.  However,  a termination for default not only ends the contract early, but does so due to a charge of fault or negligence against a contractor.  In consequence, a T4D can seriously damage the affected contractor. Beware the Terminator!

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The Termination for Convenience

The T4C is not a termination based upon contractor fault or negligence.  Termination is at the discretion of the government, for its own interests, as it sees fit to implement.  That is it.  Once decided, the contractor must follow the prescribed process.

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When the government executes a T4C it must pay the contractor the cost of work completed to date, its overhead and profit on that work, and the cost to the contractor to comply with the termination process.  The T4C does not impose a "black-mark" upon a contractor's past-performance record.  It is simply a process whereby the government, for whatever justification it chooses, decides not to complete the work under a given contract and exercises its right to close out the contract early.

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Once the Contracting Officer ("KO") implements a T4C, the contractor will be requested to submit a cost proposal and enter into settlement negotiations.  Of course, this can pose potential cost risks to the contractor, as for instance, if it has already lost money on the project due to its own fault or negligence, it will not be able to recover on those loses.  However, a T4C close out proposal can include outstanding and current REA’s (Request for Equitable Adjustment), as may apply, which can become part of the negotiated settlement. A T4C should neither improve nor diminish a contractor's financial situation on the project, and should resolve any and all outstanding issues, and issues of cost and time.

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The Termination for Default

The T4D  is a contract termination based upon contractor fault.  Contractors must do all they can to avoid it, and if unavoidable, must contest it always. The T4D is a serious action for the government to take against a Contractor.  Contractors facing a T4D need to go to DEFCON 1 immediately.  A T4D is a WMD to the contractor's future government business.

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Obviously, contractors should avoid giving the government cause to T4D in the first

place, but that is not always possible.  Although regulations set a supposedly high-

bar for a KO to justify a T4D, justification is still a matter of their discretion, and

therefore, can be rationalized and wrongly justified and implemented. It happens!

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Whenever a contractor believes a T4D may be looming against them, and the early

warning signs should be self evident, they need to immediately engage with legal counsel experienced in federal contracting.  Early warning signs must be heeded, and a

“cure” and recovery effort implemented by the contractor as soon as possible.  As a contractor, if your project is falling behind schedule; your performance and quality are being questioned; you are in frequent disagreements or arguments with the COR or KO;  critical materials / equipment deliveries are delayed or wrong; you have missed critical phasing or delivery milestones, and multiple other failures, or even “perceived failures” as may arise--a T4D is waiting in the wings.  Contractors need to be vigilant to the signs and work hard to “cure” the causes and cut the T4D off at the pass!

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Given the array of justifying circumstances, coupled with the KO's broad discretionary

power, T4D's happen more often than many may realize.  KO's can, and sometimes do,

wrongly justify a T4D, because they can always rationalize that it is in the government's

best interests, whatever that means.   Maintaining a cooperative and communicative engagement with the KO is not just good business practice, it is essential to help derail any attempt to terminate for default.  

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Wrongful or not, once a KO executes a T4D, all the King's horses and all the King's men cannot put the poor contractor together again.  It is too late. The decision has been made and damage to the contractor will begin to unfold.  Of course, the vast majority of Contracting Officers and Contracting Officer Representatives (COR) are generally competent, reasonable and honest in their dealings with contractors. However, there are a few difficult and contrarian KO’s and COR’s who can severely damage unprepared contractors who have mismanaged their projects or who unwittingly fail to protect their interests.  Similarly, there are incompetent and simply unlucky contractors who set themselves up, or by events and actions are set up, for failure and a termination for default.  It cuts both ways.

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Contractors need to take great care to understand both the power the government has over them, and the undercurrent of various tactics that can be used against them.  For example, a KO may use the implied threat of a T4D in an attempt to neuter or offset a contractor's submitted Claim; to get the contractor to rescind its Claim in return for the KO not implementing a T4D.  They may call this tactic "negotiating", but there are better names for it.  I have seen this happen more than once.

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No doubt, contracting with the federal government can be a high-risk venture.  The challenge for all contractors is to always be aware and prepared, and simply not give the government the ammunition it needs to T4D in the first place.  To "Beware the Terminator" really means contractors must avoid tripping up and falling down on their projects; to avoid self-inflicted wounds, and to know how to deal properly with all the issues and events that may trigger a T4D against them.   Otherwise, they are asking for trouble.

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Once a T4D is executed, the only viable recourse for a contractor is to hire an attorney and litigate, which is as expensive as it sounds.  Fighting a T4D is a stress-filled, arduous and expensive process, with an uncertain outcome.  The Boards or Courts may eventually agree with the Contractor and find the T4D wrongful—but unfortunately, the financial and reputational damage has already been done.

 

Typically, once the contractor's attorney files its "Complaint", the Court or Board will request both parties first engage in ADR (Alternative Dispute Resolution), as a "Mediation" attempt to attain settlement between the parties.  Throughout the road to litigation, any contractor wanting to continue in the federal market must insist that settlement require the government rescind its T4D and remove any poor performance entry from the CPARS database. 

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In every T4D case I have been involved with, the government had its own critical failures, defects, omissions and contrary actions intertwined with the contractor’s alleged failures.  Finding facts and evidence of this government fault is usually enough to overturn a T4D, and is a necessary part of any contractor’s defense to overturn a default termination. 

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Still, by the time a contractor is lucky enough to settle in Mediation or prevail in Court,

one to two years have elapsed, at which point the contractor is likely damaged

financially and in reputation, or possibly even out-of-business!  Litigation is an expensive, stress-filled process within a slow-moving legal system, with a much delayed and uncertain outcome. That is why Contractors should do all they can to avoid “Litigation Hell” at all costs as a solution, and simply do not get terminated in the first place!  See how easy that sounds!

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Contractors need to take this stuff seriously BEFORE they fall into any of the pot-holes

that may trigger a T4D action--and there are many.  A T4D of a contractor creates

financial, business and legal challenges.  Contractors need to be prepared to do whatever

they reasonably can do to avoid it in the first place, and have a competent expert

consultant and legal counsel at the ready to assist. 

 

Following is the FAR (Federal Acquisitions Regulations) provisions on the Termination

for Default: Subpart 49.4 - Termination for Default

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49.401 General.

1. (a) Termination for default is generally the exercise of the Government’s contractual right to completely or partially terminate a contract because of the contractor’s actual or anticipated failure to perform its contractual obligations.

2. (b) If the contractor can establish, or it is otherwise determined that the contractor was not in default or that the failure to perform is excusable; i.e.,arose out of causes beyond the control and without the fault or negligence of the contractor, the default clauses prescribed in 49.503 and located at 52.249 provide that a termination for default will be considered to have been a termination for the convenience of the Government, and the rights and obligations of the parties governed accordingly.

3. (c) The Government may, in appropriate cases, exercise termination or cancellation rights in addition to those in the contract clauses (see for example, paragraph (h) of the Default clause at 52.249-8).

4. (d) For default terminations of orders under Federal Supply Schedule contracts, see subpart 8.4.

5. (e) Notwithstanding the provisions of this 49.401, the contracting officer may, with the written consent of the contractor, reinstate the terminated contract by amending the notice of termination, after a written determination is made that the supplies or services are still required and reinstatement is advantageous to the Government.

 

49.402-1  The Government’s right.

Under contracts containing the Default clause at 52.249-8, the Government has

the right, subject to the notice requirements of the clause, to terminate the

contract completely or partially for default if the contractor fails to—

(a) Make delivery of the supplies or perform the services within the time specified in the contract,

(b) Perform any other provision of the contract, or

(c) Make progress and that failure endangers performance of the contract.

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This definition gives the KO wide latitude to justify a T4D at any time.  Remember, ultimately a T4D is at the discretion of the KO.   That should give every contractor pause, since even if a T4D is later determined in ADR settlement of litigation to have been unjustified and wrongful, it is the contractor who has suffered the consequences.  The government continues to go about its business.  Again, the only recourse to a contractor seeking to overturn a T4D is to contest it through litigation--and that is hardly a process any non-attorney would recommend.

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The road to termination--points to consider:

 

• Although the government has the burden of proof to justify a T4D, be aware that  "justification" is fairly easy to find.  Failure to make adequate progress; missing interim milestones; installing 'out of specification' materials or equipment, and on it goes.  Even giving the KO the belief that the project will not complete on time, and especially when the relationship between the parties is strained, can trigger a T4D. 

• Further, know that a KO can, for whatever reason they may have to do so, "cherry  pick" causes and rationalize a T4D justification that is not founded upon the full extent and context of causes, which causes may be the government's own fault.  It happens!

• The KO will typically issue a “Cure Notice” or “Show Cause Notice” to the contractor a few weeks before executing a T4D.  When that occurs, know that the government is already mostly convinced that it intends to terminate the contract.  

• Contractors must handle their response to these notices with great care.  Retain a knowledgeable consultant and legal counsel to assist.  This is your last chance to stop the T4D.  

• The response must be timely (usually within 10-days of issuance), and must not merely provide defensive arguments (e.g., that the causes for a T4D are also the fault of the government), but must provide supporting evidence, and must include a “recovery plan” on how the contractor will successfully complete the project and demonstrate that it is in “the best interests of the government” to allow it to complete the project.   Make and prove your case!

• Once your contract is terminated, it is too late.  You have already lost the battle, and are at the bottom of the slippery slope, and in consequence, you will suffer loss of payments, cost overruns, loss of bonding, legal fees, whatever materials you have on site, reputation and more.

• The T4D will be recorded in the government's past performance database (CPARS) for your company, and your future federal contract prospects will be harmed.

• You will need to pay attorney fees to overturn a T4D--but invariably, you should always fight to overturn a T4D.  However, know that going into Litigation Hell is a miserable experience unto itself, but at this juncture, it is all you’ve got.

 

Preventing a T4D

The lesson to be learned in all of this is simple:  DO NOT PUT YOUR COMPANY IN A

POSITION THAT COULD TRIGGER A TERMINATION FOR DEFAULT!

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Of course, this is much easier said than done.  Bad projects will arise; changes and impact issues and events will be mishandled; and contractors will be at risk.  Nonetheless, there are strategies and tactics contractors can employ to keep the "Terminator" at bay.   Obviously, demonstrating compliance with work specifications, making progress, keeping the project generally on schedule, and overall, not being incompetent, aggressive and/or stupid, are the biggest factors, but there are other conditions a KO can find against a contractor to justify a T4D.  First and foremost, always be professional, respectful, cooperative, honest and communicative with the KO and COR, whether they reciprocate in kind or not.  

 

Following are some considerations to help prevent a T4D:

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• Do not give the KO the belief that you have no "reasonable" likelihood of performing the remaining contract work within the remaining duration of the contract. That could be all it takes for the KO to execute a T4D.

• Find ways to get your project back on track, or convince the KO to at least provide a no-cost time extension sufficient to allow completion of the contract work.  It is almost always in the government's best interests to cooperate with and help a contractor complete the project rather than terminate that contract.

• Notify and document every defect, omission, constructive change condition to the KO in writing that arises, and submit an REA proposal for any escalation of costs and time extensions as apply.  (If the KO disagrees with or disputes your REA contentions, request an explanation.  Then, either resubmit a better REA or file as a Claim).

• Do not allow problems with your subcontractors or vendors to percolate up to the government contracting office.  Resolve them as quickly as you can.

• Even if your company is in financial trouble, do not reveal it to the government--not even in some side-bar, casual conversation. 

• Regardless of how righteous and justified you may be in any situation, never lose your temper with any government employee.   Stand your ground, but be professional about it. The government has the upper hand, and they know it, but a wise contractor knows how to compensate and protect itself.

• Pay your labor at least what the Davis-Bacon Wage Rates applicable to your contract require, and make sure your subcontractors do the same.  Submit "accurate" Certified Payrolls weekly and on time.

• Make certain you timely ordered all long-lead and specialty materials and equipment.  Any major deliverable under the contract that is delayed can be used to justify a T4D.

• Be careful of what you say.  A T4D can be executed for something called "Anticipatory Repudiation", which occurs when a contractor states or acts in a manner to indicate that it will not or cannot meet the requirements of the contract as required and/or timely.

• Document and notify the KO on any change issue or event immediately as it arises.  Do not be passive and acquiesce when you know, or should know, you are in the right.  

• Do not get into arguments with the COR.  They are monitoring your work, work progress and specification compliance.  They also advise the KO of project status and make technical evaluations and assessments of the Project for the KO.  Contractor / COR disagreements are not uncommon.  That's OK.  Just know what you own under the Contract and deal timely and professionally with any COR comments.  The COR is a key factor to contractor success or failure on federal projects, and no contractor should alienate the COR assigned to their project. Learn how to professionally handle even the most difficult (and/or incompetent) COR's.

• COR's have a responsibility and right to their interpretation.  Your job is to ultimately convince them and especially the KO, through evidence and presentation, that your position is correct, and if not, letting it go.

• Always provide evidence to support your contention that for instance, you believe a given change issue at hand is not in your contract.  Have pricing and  duration impacts at the ready and timely submit to the KO.

• Never refuse to follow a KO's directive.  If the KO issues a "Unilateral Modification", you must comply.  However, you should immediately follow up with an REA (Request for Equitable Adjustment) if you believe it to constitute a change in cost, time, and/or contract interpretation.  Do not dilly dally on your own dime!

• Never sign a bilateral modification when you do not agree with the terms of the Mod.  If the KO refuses to change those terms, you are not legally compelled to agree and sign.  If the KO insists, it can issue it as a Unilateral Mod (which reserves your rights since you did not sign on the dotted line of the Mod).  However, once you sign a Mod, you own the consequences of doing so.

• A COR does not have the authority to bind the government, or authority to direct a contractor on any changes or contract issues not specifically stated in the "COR Delegation of Authority" letter the KO is supposed to provide the contractor at the beginning of the project.  Be careful in complying with any COR directive. Always seek direct and written clarification from the KO on all such matters.

• Know that on any project it is highly likely the government has something they are responsible for, or obligated to do, that they fail to fulfill; or actions or non-actions contrary to express or implied duties under the contract--regardless of how minor.  The government has a duty not to interfere with Contractor performance, to provide reasonable and timely response and direction as requested and required, etc.

• Always document any change, impact issues or events as they arise via written notification to the KO, regardless of how minor.  You do not necessarily need the KO to agree.  You merely need to document that on your view and interpretation the government owns some or all of the applicable responsibility and obligation.

• Know that "force majeure" events (“Acts of God”, or unforeseeable circumstances, beyond the control of either contract party) do arise (e.g., severe weather).  Such events support a time extension, but not additional compensation, and the legitimate impact duration of these events cannot later be applied against a contractor to justify liquidated damages or termination of contract for default. Make sure to submit written notice to the KO on any "force majeure" event. 

• Timely submit REA’s and/or Claims as conditions merit. These equitable recovery efforts do not necessarily prevent a T4D, but they do make it harder for the KO to justify a T4D given the outstanding and unresolved requests for equitable adjustment and/or claims in the queue.

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Obviously, if contractors do the required work of their contracts to specifications

and on time, without ticking off the COR and KO in the process, most likely all will be

well.  And when the government is itself at fault for impacts to your project (as its frequently is), make certain you have timely notified the KO.  Failing to do so will not excuse you from 49.402-1 The Government’s Rights to default terminate your contract.  Always make timely written notification to the KO whenever anything the government is

responsible for under the contract goes awry, or for any change or differing condition that arises, or for any action or inaction that is contrary to your understanding and interpretation of the contract.   Do it immediately, and do it repeatedly, and keep records of everything. 

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When any impact issue or event arises that you believe is the responsibility of the government, address it immediately, prepare a Request for Equitable Adjustment and submit as soon as possible.   That simple approach will help mitigate and leverage against the KO's justification for a T4D later on. 

 

Beware the Terminator!  Incompetence and ignorance are hardly a defense. Although

contracting with the federal government does mean you will get paid when all is right--it

also means you can suffer dire consequences when things go wrong.  Do not give the KO

cause, and always notify and document to the KO on any deviation from the “Plan” that, on your reasonable interpretation, arises.  Hold the government accountable to the same extent you hold your own company to account, for the allocable requirements and obligations of the contract—do it timely and respectfully and always on the basis of reasonable fact and evidence. Good luck!

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Alan Paquette / Construction Analytix, LLC

September 8, 2018

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Disclaimer: The information contained in this article is for general informational purposes only and reflects the opinions of the author. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice, or as advice applicable to specific situations.