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Default and Dispute: Contract Termination Essay


Introduction

The Federal Acquisition Regulations (FAR) empowers the government to end a contract before the expiry period under two conditions. The two conditions give rise to two primary types of contract termination, namely termination for default and termination for the convenience of the government. According to the FAR, federal government contracts should include a default clause (General Services Administration [Administration] 2005). In addition to putting an end to the contract, as well as diminishing the hopes of the contractors to make a profit, the clause makes the contractor liable to the additional costs incurred by the government. It also affects the contractor’s performance record negatively, which may jeopardize their chances of winning contracts in the future.

The current paper analyzes the various justifications for a default termination of a contract. In addition, the paper analyzes dispute resolution mechanisms under the contract dispute act. The author also explains the remedies for termination for default and termination for convenience, as well as the consequences of the two forms of termination. The author distinguishes between government’s remedy for excess cost of reprocurement and remedy for liquidated damages. Finally, the author evaluates the importance of acquisition planning and provides two recommendations aimed at improving the government’s procurement process.

Justifications for Termination for Default

The termination defines the relationship between the government and the contractor. It addresses the right of the government to cancel a contract under particular circumstances. The contract may be cancelled if the contractor fails to adhere to the requirements set forth in the agreement. The government has the right to terminate a contract by default under several circumstances. The contract may be nullified if it is felt that the contractor is unable to meet their obligations within the specified time. It may also be cancelled if the contractor is not making any progress in delivering the contract. The government will terminate the project if it feels that the failure by the contractor endangers the output of the contract (Fieldman, 2012).

There are cases where the contractor is unable to meet their obligations as scheduled. In such cases, the government has the right to terminate that contract for default. The contractor’s failure to deliver within the specified period or failure to comply with the specifications set forth may also lead to the termination of the contract (Administration, 2005). Thus, contractors are expected to strictly adhere to the contract’s delivery schedule and specifications. Failure to do so may lead to termination for default. Failure to deliver on time, especially with regard to contracts with a fixed date, may lead to its immediate termination. In such a case, the government does not have to notify the contractor. The contractor risks termination by default if isolated cases of deviation from the contract’s specifications, no matter how minor, are detected (Fieldman, 2012). Such deviations include the delivery of a different brand of product, even though the brand delivered may be of a higher quality than the one specified in the contract.

Termination for default may occur if the government feels that the contractor is unable or unwilling to complete the project on time. In such cases, the government may terminate the contract before its expiry date (Findlaw, 2012). The contractor is, however, entitled to a 10 days’ notice to ‘cure’ the default before the government terminates the contract. A cure notice includes specific details of the progress failures to enable the contractor to effectively address them. If it is proved that the contractor has failed to assure the government of timely delivery of the project, then the contract may be terminated for failure to make progress (Administration, 2005).

If the contractor fails to meet other provisions of the contract, the government may terminate the contract. However, a cure notice must be given before a contract is terminated on these grounds. Default termination may occur if the contractor fails to provide records of costs incurred, submits fraudulent test reports, fails to meet the requirements set forth by public health inspection officers, or fails to obtain the necessary approvals from local authorities. In addition, the contract may be terminated if the contractor fails to provide the required documentation.

Although it is not explicitly stated, a contractor’s anticipatory breach of a contract may also lead to default termination. Such a breach is evident where the contractor makes it clear that they have no intention of rendering the specified services within the specified period. It occurs in cases of actual and unjustified ‘abandonment of performance’ or where the contractor states that they will not adhere to the provisions of the contract before its completion (Fieldman 2012). Examples of anticipatory breach include closing down of a plant by the contractor. In such a case, the contractor may make it known that they do not intend to carry on with the contract. Anticipatory breach may also occur when the contractor admits their inability to correct serious defects on the products delivered. Finally, the breach may occur when the contractor refuses to purchase additional materials or provide a schedule for the remaining work.

Termination for Default: Consequences and Remedies

Termination of a contract has various consequences. Analysts have come up with various remedies for such consequences (Administration, 2005). A contractor or a subcontractor can use several strategies to secure payment after a contract is terminated. The strategies, which translate to ‘remedies for termination’, may be enforced when a contractor has gone without payment for a period of time. The contractor can reasonably declare that the other party has breached the contract, and as a result justify its termination. The options at the disposal of the contractor include lien rights, bond claims, stop notices, and writs of mandamus against a public entity (Findlaw, 2012). The remedies are applicable to both types of contract termination.

When a contract is terminated for default, there are various remedies available to the government. The government is entitled to take possession of the site, tools, and equipment of the defaulting contractor. In addition, the government has the right to charge the contractor for extra costs incurred during reprocurement. However, the contractor is entitled to payment for work done and proven loss of materials, equipment, and tools. The contractor is also entitled to compensation for reasonable overhead costs, lost profits, and damages incurred (Administration, 2005). When a contract is terminated for convenience, the contractor is entitled to payment for the work done along with compensation for reasonable overhead costs and profits lost from the uncompleted work (Findlaw, 2012).

The government is entitled to charge the contractor for the “excess costs” of reprocurement when a contract is duly terminated for default. In addition, the government may recover the actual damages, recoup un-liquidated progress procurements, or confiscate project-related inventory. In case of a contract with a Liquidated Damages clause, the government may assess liquidated damages as an alternative to termination if the contractor fails to meet the terms of the contract. Assessing liquidated damages is also used as a substitute for actual damages or losses incurred as a result of delayed or incomplete works (Administration, 2005).

Excess cost is the difference between the price of the terminated contract and the price the government is required to pay to the reprocurement contractor. However, the government should not charge reprocurement costs for work it prevented the contractor from carrying out (Fieldman, 2012). The determination of excess reprocurement costs may take into consideration additional costs incurred to complete the contract.

The default clause contained in a supply and service contract requires the reprocured items or services to be similar, but not necessarily identical, to those specified in the terminated contract. The clause bars the government from making changes with regard to the materials used in completing the contract. If the government makes any changes that affect the specifications of the terminated contract, the reprocurement contract cannot be used to determine excess cost (Fieldman, 2012). Reprocurement of goods and services that are in excess of the quantities specified in the terminated contract should be catered for by the government and not the defaulted contractor.

When reprocuring the contract, the clause requires the government to minimize the excess costs as much as possible. If the government incurs unreasonable delays in reprocuring the items, the defaulted contractor is not held fully liable to the resulting excess costs. Furthermore, if the government decides to complete the contract on its own (without re-contracting another agent) the excess costs incurred will be based on the expenses incurred by the government in completing the contract. However, the government retains the obligation to mitigate the expenses incurred (Administration, 2005).

When a contract terminated for default contains a Liquidated Damages clause, the contractor may be charged for the damages. The clause requires the contractor to pay the government a specified amount of money for each calendar day delayed. The amount is set at the time of formulating the contract. Liquidated damages are added to the excess costs of reprocurement (Findlaw, 2012).

The Dispute Process

In case of a claim, the concerned party is required to submit the details in writing to the contracting officer. The officer should reach a decision within a period of 6 years or less. The contracting officer will issue the decision in writing. For claims exceeding $100,000, the contractor must prove beyond reasonable doubt that it is made in good faith. In addition, the contractor must prove beyond reasonable doubt that the amount of money they are demanding is in line with what the government is required to pay by law. The certifier must be authorized by the contractor to submit the certification on their behalf. The government is required to pay the amount owed to the contractor, together with interests accrued, within the specified period (Bottleson, 2011).

The contracting officers are charged with the responsibility of acting on all claims touching on the contract in accordance with the act. However, claims or disputes relating to penalties or forfeitures addressed in the statute, as well as claims involving frauds, are not included here (U.S. Government Accountability Office, n.d). The decision made by the contracting officer may be appealed by any of the two parties. The appeal should be lodged with the agency’s Board of Contracts’ Appeals within 90days. Alternatively, the offended party may raise the issue with the United States Court of Federal Claims within 12months. The parties can also resolve to use Alternative Dispute Resolution mechanisms and exploit the opportunity for a relatively inexpensive and expeditious resolution strategy (Fieldman, 2012).

Acquisition Planning

The purpose of acquisition planning is to provide the stakeholders with a mechanism to determine which among the various offers submitted in response to a solicitation request best meets the government’s requirements (Croom & Alistair, 2005). The acquisition plan provides the interested contractors with adequate information with regard to the factors that the government will take into consideration when reviewing the submitted proposals (Administration, 2005).

The goals of the acquisition plan as far as the cost of the contract is concerned, as well as the rationale supporting such goals, are set forth clearly for the benefit of the stakeholders. The related cost concepts are discussed in detail. The factors used to determine cost ‘reasonableness’ are set forth in the FAR. Such a development is important in assessing whether or not the costs proposed by interested contractors are realistic, and whether or not they reflect a clear understanding of the work. It is also important in determining whether or not the proposed costs are consistent with other parts of the proposal (Bottleson, 2011).

It is important to evaluate additional costs that may be incurred after awarding the contract to a particular contractor. Apart from the payments made to the contractor, the government may incur such other expenses as re-training costs and system or software conversion costs. It may also incur expenses as a result of power consumption, life cycle costs, and transportation costs. The acquisition plan should clearly identify these costs (Bottleson, 2011). Risk assessment is very important to any contract. The acquisition plan clearly outlines and discusses the technical, cost, and scheduled risks. The efforts made to reduce the impact of these risks, as well as the consequences of failure to achieve the set goals, are also outlined in the plan (Administration, 2005).

Recommendations

There are several strategies used to improve the government’s procurement process. One of them is by ensuring that the employees involved in acquisition planning are adequately trained and possess the necessary experience. The acquisition workforce should be supported by a human resource environment that recognizes the complexity of the acquisition mission. The workforce should also be large enough to operate efficiently and to meet the evolving demands (Bottleson, 2011).

The government should ensure that the necessary information is made available for future use and that those involved in the acquisition process are responsible for their actions. Accountability of employees and availability of information will promote financial discipline in the acquisition planning process. Clear baselines should be established for cost, schedule, and technical performance. In addition, clear lines of authority and accountability should be established (Bottleson, 2011).

Conclusion

In this paper, the author explained the various justifications for termination for default as provided for under the FAR. The remedies for termination for default and termination for convenience were compared. In addition, the author analyzed the consequences of the two forms of termination. The author explained the dispute process under the contract dispute act. Furthermore, the author outlined the importance of acquisition planning as far as cost containment in government contracting is concerned. Finally, the author gave recommendations to improve government’s procurement process.

References

Bottleson, J. D. (2011). Requirements and cost stability: A case study of the F/A-18 Hornet program. Web.

Croom, S. R., & Alistair, B. (2005). . Journal of Public Procurement, 5(3), 367-387. Web.

Fieldman, S. W. (2012). Government contract guidebook 2011 – 2012 (4th ed.). New York: Federal Publications.

Findlaw. (2012). General format. Web.

General Services Administration. (2005). . Web.

U.S. Government Accountability Office. (n.d.). General format. Retrieved from www.gao.gov

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IvyPanda. (2020, May 30). Default and Dispute: Contract Termination. Retrieved from https://ivypanda.com/essays/default-and-dispute-contract-termination/

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IvyPanda. "Default and Dispute: Contract Termination." May 30, 2020. https://ivypanda.com/essays/default-and-dispute-contract-termination/.

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IvyPanda. 2020. "Default and Dispute: Contract Termination." May 30, 2020. https://ivypanda.com/essays/default-and-dispute-contract-termination/.

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IvyPanda. (2020) 'Default and Dispute: Contract Termination'. 30 May.

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