Government Contracting - DFARS Part 249 - Termination of Contracts - Win Federal Contracts

DFARS - 2021
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DFARS – 2021 - Defense Federal Acquisition Regulation
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DFARS – 2021 - Defense Federal Acquisition Regulations
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DFARS – 2021 - Defense Federal Acquisition Regulations
About Our Speaker
Craig Stetson
Capital Edge Consulting
cstetson@capitaledgeconsulting.com
408-921-2128

DFARS Part #249
Termination of Contracts
Wednesday, 03 November 2021

DFARS Part #249
Agenda
 Termination for Convenience
 Historical Context
 Contractual Provisions and Principal Actors
 Prime Contractor Requirements
 Settlement Proposal
 Settlement Process for Commercial Items
 Successful Outcome and Risk Mitigation
 DFARS Part 249

DFARS Part #249
Historical Context
 Terminations for convenience are unique to government contracting
 Commonly referred to as a ”T for C”
 In a T for C, the government may terminate all or part of a contract for the
government’s convenience. Examples include:
 Requirements changes
 Bid protests
 Funding Issues
 Technology changes
 The government’s rationale for a T for C must be made in good faith
 A bad faith termination is a breach of contract

DFARS Part #249
Historical Context
 Termination for convenience clauses originated in federal government wartime
supply contracts following the Civil War
 Government needs the flexibility to unilaterally terminate supply contracts as its
needs change (i.e., “the war ended we don’t need that anymore”)
 Government may terminate in part or in whole when the termination is in the
government’s best interest
 Government agrees to pay reasonable, allocable costs plus profits on those
costs, subject to certain limitations

DFARS Part #249
Contractual Provisions
 FAR Part 49.502, Termination for Convenience
 Government must have reasonable reason for termination
 Government’s termination objective is to make contractor whole and to provide fair
compensation
 Contractor allowed to recover:
 Allowable costs incurred in the performance of the work up to the date of termination
 Profit or fee for work performed (but not anticipated profit or fee)
 Certain costs that continue after the date of termination (e.g., idle facilities or idle capacity costs,
severance pay, storage costs, etc.)
 So-called “termination settlement expenses” (i.e., contractor costs to terminate the contract and
submit a termination proposal to the government)
 Converts fixed price contract to cost-type contract – requires segregation and accounting of
costs

DFARS Part #249
TERMINATION REGULATIONS AND CLAUSES DESCRIPTION
FAR Part 49; DFARS Part 249 Termination of Contracts
FAR Clause 52.249-1 Termination for the Convenience of the Government
(Fixed Price) (Short Form)
(Fixed Price)
(Services) (Short Form)
FAR Clause 52.249-6 Termination (Cost Reimbursement)
FAR Clause 52.212-4(l) Termination for Convenience – Commercial Items

DFARS Part #249
Principal Actors
 Contracting Officer (CO)
 Issues the written notice of termination
 Termination Contracting Officer (TCO)
 Is responsible for negotiating any settlement with the terminated prime contractor
 Can request government audit of contractor’s settlement proposal
 Prime Contractor
 Negotiates settlement of terminated portions of subcontracts and supplier agreements
 Prepares termination settlement proposal for submission to the government
 Subcontractor(s)
 Have no privity of contract with government
 Terminated based on subcontract terms and conditions

DFARS Part #249
Prime Contractor Requirements
 Stop work immediately on the terminated portion of the prime contract
 Terminate all subcontracts related to the terminated portion of the prime contract
 Immediately advise the TCO of any special circumstances precluding the stoppage of work
 Perform the continued portion of the contract and promptly submit any request for an
equitable adjustment of price for the continued portion of the contract (supported by
evidence of any increase in the cost) if the termination is partial
 Take necessary or directed action to protect and preserve property in the contractor’s
possession in which the Government has or may acquire an interest and, and directed by
the TCO, deliver the property to the Government

DFARS Part #249
Prime Contractor Requirements
 Promptly notify the TCO in writing of any legal proceedings growing out of any subcontract
or other commitment related to the terminated portion of the prime contract
 Settle outstanding liabilities and proposals arising out of termination of subcontracts,
obtaining any approvals or ratifications required by the TCO
 Promptly submit the contractor’s own settlement proposal, supported by appropriate
schedules; must be completed within 365 days
 Dispose of termination inventory as directed or authorized by the TCO; must be completed
within 120 days

DFARS Part #249
Settlement Proposal
 Termination Settlement Proposal will be read and analyzed by multiple
government decision makers
 The Procuring Contracting Officer (PCO), if the termination administration was retained by
the office
 The Termination Contracting Officer (TCO) and staff, if assigned
 The Defense Contract Audit Agency (DCAA) or customer’s audit firm
 The Plant Clearance Office and the local administration office, if assigned

DFARS Part #249
Settlement Proposal – Documentation Requirements
 Background and Entitlement
 Describe the contract, how your company performed and tracked the work, and the
termination impact to the work, the company, and its subcontractors
 Contract Information
 Type of contract (Firm Fixed Price or Flexibly Priced)
 Commercial
 Negotiated
 Status at Termination
 What work was remaining?
 Partial vs. Complete?
 What resources affected?
 What property remains and needs to be disposed or dispersed

DFARS Part #249
Settlement Proposal – Documentation Requirements
 Cost Proposal Summary
 Introduction
 Settlement proposal (on appropriate Standard Form)
 Cost summary roadmap with supporting calculations
 Cost and pricing certification for non-exempt proposals over $2,000,000
 Other Direct Costs
 G&A
 Material Disposition
 Termination Inventory

DFARS Part #249
Settlement Proposal – Settlement Methods
 Inventory Basis – Government’s preferred method, Requires SF1435 Settlement
Proposal (Inventory Basis)
 Typically used in construction-type contracts, manufacturing-type contracts, and service
contracts with unit pricing
 Total Cost Basis – Requires SF1436 Settlement Proposal (Total Cost Basis)
 Typically used when start-up costs are not covered; contractor’s accounting system does not
account for unit costs; contract does not specify any “units”; or termination of a letter
contract
 Even in a total cost claim, segregate costs in the accounting system resulting from the termination
from other costs; failure to do so will impact the contractor’s ability to recover such costs

DFARS Part #249
FIXED PRICE CONTRACTS
COST TYPE CONTRACTS
Inventory Basis
Total Cost Basis
(with TCO
Permission Only)
Short Form (<
$10,000)
Proposal Form SF 1435 SF 1436 SF 1438 SF 1437
SF 1439 Schedule of Accounting Information X X X
SF 1440 Application for Partial Payment X X X
Inventory Schedules – PCARSS
SF 1428 Inventory Schedule B X X
SF 1429 Inventory Schedule B Continuation Sheet X X
SF 1434 Inventory Schedule E X
FAR 31.205-42 (Allowable termination costs) X X X X

DFARS Part #249
Settlement Proposal – Performance Costs
 Inventory Basis (SF1435)
 Metals, Raw Material, Purchased Parts, Finished Components
 Misc. Inventory, Work-in-Process, Special Tooling and Test Equipment
 Other Costs, G&A Expense
 Total Cost Basis (SF1436)
 Direct Material, Direct Labor, Indirect Factory Expense
 Special Tooling and Test Equipment, Other Costs, G&A Expense
 Common Items
 FAR Part 31 Cost Principles Apply
 Finished vs. Unfinished

DFARS Part #249
Settlement Proposal - Subcontractors
 Prime contractor is responsible for flowing down all applicable contractual
provisions and clauses to subcontractors
 Generally recommended to shorten the allowable time for submission of
settlement proposals to the prime contractor
 Failure to include appropriate clauses in subcontracts will not increase the
government’s obligation beyond what it would have been had the required
clauses been included
 Prime contractor responsible for settling with subcontractors
 Prior government approval or ratification of subcontractor settlements is
required when settlement proposal exceeds $100,000

DFARS Part #249
Settlement Proposal – Unique or Nonrecurring Items
 Generally allowable:
 Costs continuing after termination (directly related to the contract)
 Unexpired leases or idle facilities
 Rearrangement and restoration of facilities
 Obsolete equipment
 Unamortized initial costs
 Idle time or mass severance
 Special local labor employment requirements
 Reasonable and good faith attempts should be made to mitigate such costs and
adequately document the process
 Unabsorbed overhead may be allowable through the REA process under partially
terminated contracts

DFARS Part #249
Settlement Proposal – Settlement Expenses
 Generally allowable, if reasonable:
 Internal and external accounting, legal and consulting efforts related to the preparation,
submission and settlement of the terminated contract – including settlements with
subcontractors
 Storage, protection and disposition of applicable inventory and equipment affected by the
termination
 Normally indirect functions performing settlement activities are reimbursable as
direct settlement expenses (this is a perfect example of when circumstances can
change the treatment of cost)
 Limited or abated indirect expenses allocable to internal labor activities
 Recommended to establish appropriate charge number(s) to capture time and
expense related to settlement activities

DFARS Part #249
Settlement Proposal – Profit or Fee
 Profit (fixed-price contracts):
 Allowable based on the terminated portion of the contract
 Anticipatory profits or other damages not allowable
 Profit on undelivered subcontractor services or material not allowable
 Profit on settlement expenses not allowable
 An estimate-to-complete analysis likely will be required to determine potential loss position
had the contract not been terminated
 Several factors may be considered to determine profit amounts
 Fee (cost reimbursement contracts):
 Several factors may be considered to determine fee amounts
 A separate fee proposal may be submitted

DFARS Part #249
Settlement Process – Commercial Items
 Much simpler and accelerated settlement process
 Government audit rights to contractor records do not exist
 Commercial item contracts are exempt from all CAS requirements
 FAR Part 31 cost principles do not apply
 Settlement process generally will be based on the percent of completion at the
point of termination applied against the contract price
 Settlement expenses are recoverable outside the percent of completion analysis

DFARS Part #249
 Conduct initial meeting with the TCO or customer and communicate anticipated
settlement proposal plans, management of subcontractors and unique or
sensitive areas of cost due to the termination
 Effectively manage and review subcontractor settlements and obtain TCO
approval or ratification as required
 Document attempts and actions taken to reasonably mitigate costs during the
settlement process
 Establish internal charge numbers to effectively support quantum calculations
 Segregate and safeguard termination inventory, seek disposal opportunities,
exclude common items
 Maintain periodic communication with TCO re the overall settlement process
 Timely submit interim settlement proposal to facilitate discussions

DFARS Part #249
DFARS Part 249
 Special Termination Costs
 RDT&E greater than $25M or production greater than $100M
 Contract two years or more
 Contracts with the Canadian Commercial Corporation
 Congressional Notification
 Significant contract termination involving 100 or more employees
 Notification of Anticipated Termination
 Major defense programs

THANK YOU To Our Speaker
Craig Stetson
Capital Edge Consulting
cstetson@capitaledgeconsulting.com
408-921-2128

Thank You For Attending!
DFARS - 2021
Defense Federal Acquisition Regulation

Government Contracting - DFARS Part 249 - Termination of Contracts - Win Federal Contracts

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