June 24, 2020

A Government Contractor's Guide to Termination Settlement Proposals During the COVID-19 Pandemic

5 min

In the second segment of a four-part webinar series, attorneys from Venable and consultants from BDO addressed the ways in which government contractors can develop and submit termination settlement proposals. Terminations for convenience arising from the COVID-19 pandemic should not adversely impact a contractor's rating. An Office of Management and Budget (OMB) memo dated March 20, 2020 acknowledges that COVID-19 will impact the ability of some contractors to perform on existing contracts, requiring that the government take its business elsewhere. A memo from the Office of the Under Secretary of Defense on March 30, 2020 confirms that contractors will not receive an adverse rating if a termination for convenience can be linked to coronavirus-related issues.

A termination settlement proposal (TSP) is a nonroutine request for payment following notice from the federal government that a contract has been terminated for convenience. The purpose of a TSP is to recover costs already spent by a contractor in relation to a terminated contract. Claimed costs cannot exceed the contract price, and payments already received will count against that total cost. Generally, the government has the right to unilaterally terminate a contract for convenience for any reason.

The Federal Acquisition Regulation (FAR) sets forth requirements for termination notification. The federal government has significant discretion in terminating contracts for convenience, with limited recourse for overturning terminations. Upon receiving a termination notice, a contractor has one year to submit its TSP in response. To maximize outcomes related to a TSP, contractors should develop a plan for due diligence and compile a response team, which may include contract administrators, project managers, accounting and finance representatives, in-house counsel, and property managers.

Who are the key stakeholders in the termination settlement process?

  • Agency contracting personnel
  • Agency supporting personnel
  • Contractor personnel
  • Reviewing parties (procuring contracting officer, termination contracting officer, DCAA or another auditor, plant clearance officer)

What are the types of T4C settlement proposals for partial or full termination?

  • Short form for under $10K
  • Inventory basis – government's preferred form in which costs are assigned to inventory
  • Total cost basis – requires prior approval from contacting officer

What is the timeline in a T4C process?

  • Proposal needs to be completed within a year
  • Submit inventory schedules (PCAR system) within 120 days; proposals can be rejected within the system for not adhering to timeline
  • Subcontractor portions will need to be completed sooner to roll into prime proposal

What will contractors be asked to provide as part of their TSP claim?

  • Termination inventory
    • Materials that can be diverted to other contracts cannot be claimed; materials that cannot be diverted can be included on claimed inventory. Materials can be sold and that cost credited, government can purchase them, etc.
    • Inventory can become a point of negotiation for settlement and recovery
  • Subcontractors
    • T4C provisions flow down to the subcontractors, including vendors and suppliers
    • Prime contracts with subcontractors should include language addressing T4C situations to mitigate potential breach of contract lawsuits brought by subcontractors to the prime
  • Profit potential
    • Entitled to recover profit on the work that's been completed
    • Lost profits are not recoverable
    • Losses cannot be recovered outside the terminated contract
    • For contracts that are not profitable, loss ratio dictates recoverable amounts.
  • Methods of settlement – can be a combination of these:
    • Negotiated agreement – this is how most terminations are resolved
    • Determination by contracting officer – most contracting officers try to be reasonable and are seeking resolution
    • Costing out under vouchers
    Settlement is an iterative process; once a proposal is submitted the government can respond with questions to provide additional clarification. Contractors should not assume those discussions will occur, however, and should submit as much information at the outset as possible. Settlement by determination is a unilateral decision if the contracting officer and the contractor cannot reach an agreement. Extensions may be submitted, however, to avoid a determination.
  • Price adjustments for remaining work
    • Partial terminations can impact the ability to be made whole
    • Price adjustments can address certain areas of recovery and not the whole contract

What elements of the TSP filing process should contractors give special consideration?

Standard forms for T4Cs may seem straightforward, but there is a certification element associated with standard forms, so being meticulous is important to avoid false claims allegations. A strong claim package is a combination of these forms, the contractor's story/narrative, and associated backup.

Contractors should assume their submissions will be reviewed and likely audited; claims over certified cost or the pricing data threshold will be audited. Supporting documentation is key; if the government claims that costs are not supported, there is opportunity to provide documentation.

Indirect cost claims require final rates, which are not always final at the time of filing. This element of cost can be reserved for later, but that will prolong payment of a claim.

Mitigating risk early in the contracting process is a best practice for any potential termination claims. Using the Q&A period when submitting Requests for Proposals to understand the terms and conditions of a contract is recommended.

Use T4C clauses in all contracts, including subcontracts.

What are common contractor pitfalls?

  • Not having good documentation outlining actions taken and key players
  • Being mindful of the timing of costs incurred and how those costs can be tied to claims (i.e., claiming pre-award costs)
  • Failing to tell the story as to why costs are recoverable and demonstrating that costs were incurred as a result of government action
  • Cost control and the overall tracking and justification of costs
  • Observing early notices to terminate costs, subcontracts, etc.

Courts and boards have identified timeline lapses, failure to observe contractual requirements around recordkeeping, and failure to minimize costs as ways in which claims can be denied.

Want to learn more? View the full webinar and register for upcoming installments on our series page, or visit our Government Contracts page to explore our services and professionals.