What is a ‘termination for default’?

When a business owner enters into a procurement contract with the federal government for the provision of goods or services, he or she must be aware of the complex terms of such contracts. While many business owners are familiar with the Uniform Commercial Code and common law rules governing their business contracts, most are not familiar with the unique administrative rules governing federal government contracts.

Obtaining a Government Contract: Warnings for Vendors

Perhaps one of the most daunting provisions in a typical fixed-price supply and service contract with the federal government is the “termination for default” clause. This clause states that the government contracting officer may terminate a contract when he or she determines that the contractor has failed to adequately perform in accordance with the contract. The Federal Acquisition Regulation (FAR) section 52.249-8 states that the government may terminate a contract if the vendor fails to:

1. Deliver the supplies or perform the services within the time specified in the contract;
2. Make progress, so as to endanger performance of the contract; or,
3. Perform any of the other provisions of the contract.

The government’s right to terminate the contract may be exercised if the contractor does not cure the failure within 10 days (or more if authorized in writing by the contracting officer) after receipt of the notice from the contracting officer specifying the failure.

If the government terminates the contract in whole or in part, it may acquire supplies or services similar to those terminated, and the contractor will be liable to the government for any excess costs for those supplies or services.

This clause limits the government’s liability for unaccepted work. It also subjects the contractor to actual damages, and may subject the contractor to liability for the excess cost of re-procurement. Moreover, the default becomes part of the contractor’s past performance record, which will likely harm the contractor’s ability to compete on future contracts. Because the government is not liable for work not accepted, the termination for default has a greater adverse consequence on supply contracts than service and construction contracts.

When a Termination for Default Becomes a Termination “For the Convenience of the Government”

If a contractor succeeds in appealing the termination for default, the termination is usually converted from one of default to one of “convenience of the government”, which is yet another daunting clause in federal government contracts. A termination for the convenience of the government can be given at any time and without cause, although it must be in good faith. While the vendor will be compensated for work performed and other related costs, this unilateral action by the federal government can be very disruptive to a business.

For more information on contracting with the federal government, go to https://www.acquisition.gov/.

Case Studies: Federal Government Contract Challenges

Case Study 1: Missed Deadlines and Contract Termination

Government IT Solutions Inc. (GITSI) is a technology company specializing in providing software solutions to government agencies. GITSI secured a fixed-price contract to develop a complex system for a federal department. As the project progressed, GITSI faced unforeseen technical challenges that hindered the development process, leading to missed milestones and delayed deliveries.

Despite efforts to rectify the issues, GITSI was unable to meet the contractual deadlines. The government contracting officer invoked the “termination for default” clause, terminating the contract due to inadequate performance. This termination severely impacted GITSI’s reputation and resulted in financial losses, as they had invested significant resources into the project.

Case Study 2: Economic Downturn and Contract Suspension

National Defense Manufacturing Co. (NDMC) is a well-established defense contractor providing advanced equipment to the military. NDMC won a multi-million-dollar contract to supply armored vehicles to the armed forces. However, during the execution of the contract, a severe economic downturn hit the nation, causing a significant decline in defense spending.

As a consequence, the government decided to suspend some ongoing defense contracts, including NDMC’s armored vehicle project, under the “termination for convenience” clause. While NDMC was compensated for the work completed, the suspension caused financial strain, layoffs, and uncertainty about the company’s future.

Case Study 3: Supplier Quality Issues and Contract Termination

AeroTech Aerospace Solutions is an aerospace engineering company that won a contract to manufacture critical components for military aircraft. As the project advanced, the government discovered several quality issues with the delivered components, which jeopardized the safety and reliability of the aircraft.

After issuing warnings and opportunities for corrective actions, the government had to terminate the contract under the “termination for default” clause, as AeroTech failed to resolve the quality concerns adequately. The termination led to substantial financial penalties for AeroTech and a damaged reputation in the aerospace industry.