Terminations For Default

government contracts

An Overview of Terminations For Default

The government has broad termination rights in public procurements. It can terminate a contract for convenience or for default. Terminations for convenience occur when the government determines it no longer needs the benefit of the contract. Here, the government must compensate the contractor for costs resulting from the termination. Default terminations on the other hand ensue when there is a performance failure on the part of the contractor. Termination for default is a severe remedy within government contracting with far-reaching consequences.

What Is A Termination For Default

Before discussing the ramifications of a default termination, an overview of what it is and the procedural elements will be helpful. Terminations for default are covered by Federal Acquisition Regulation Part 49 and Part 12 (Part 12 is for commercial item contracts and can refer to Part 49, although following Part 49 is not mandatory; the equivalent term used in Part 12 contracts is termination for cause). Generally, a termination for default is the exercise of the government’s right to terminate in whole or in part because of a contractor’s actual or anticipated failure to perform. The performance failure must relate to a material (i.e. significant) requirement of the contract and can include anticipatory repudiation (i.e contractor saying it will not or cannot perform).

What Happens In Terminations For Default

When the government believes the contractor is not performing in a way that ensures the contract is going to be completed, it will issue a cure notice. A contractor then has 10 days to correct the performance defect. A show cause notice may also be issued giving the contractor an opportunity to show the government why the contract should not be terminated for default. When responding to a cure notice, contractors should be timely, provide assurances of performance, present any defenses, and most importantly demonstrate to the government why it is in the best interests of the government not to terminate for default. Default terminations are not mandatory; the contracting officer has discretion in whether to take action on a default, so working diligently with the contracting officer for resolution prior to a termination is prudent. If a contractor is terminated for default, it should stop work on the contract immediately, cease any performance by its subcontractors, and complete any responsibilities it has under the contract for close out.

Consequences of a Termination For Default

Contractors that lose a contract based on default face significant ramifications. A termination for default is one of the most drastic and powerful remedies the government possesses. In addition to possibly having to pay back any money earned under the contract and pay liquidated damages, a contractor could face debarment, negative past performance history ratings, and re-procurement costs. Debarment precludes a contractor from participating in public procurements for a specified period of time and is usually referred to as a death sentence for government contractors. Past performance ratings are used in virtually every contract acquisition decision, either as a responsibility or evaluation factor, and negative history, particularly from a default termination, will heavily disadvantage a contractor’s ability to obtain future awards. Finally, re-procurement costs may be claimed against the contractor and include any excess cost incurred by the government to acquire the supplies or services the defaulting contractor failed to provide.

Conclusion

Contractors must meet their requirements under a government contract and take very seriously any occurrences that may inhibit performance. Communication with the contracting officer before a failure to perform occurs is critical, provided the contractor can present substantial assurances that the problems will be overcome and the contract performed. If a cure notice is issued, dialogue is even more important. Defenses are available to contractors, and with a successful challenge a contractor may be able to convert the termination for default into one for convenience or limit damages. Finally, contractors should clearly understand that even if a termination for default or convenience provision is not written or incorporated by reference into the contract, it is nevertheless considered to be a part thereof. The Christian Doctrine states that some provisions – like terminations – are so pivotal to procurements that they are an inherent part of every acquisition contract and whether they are actually in the contract is irrelevant because there is a presumption that all government contractors should know the law.

Kristi Morgan AronicaKristi Morgan Aronica, Government Contracts Attorney
kristi@weitzmorgan.com
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