With the new administration in full swing now, we are all navigating a slew of changes from Executive Orders, to new regulations, and spending habits. One change we are seeing affecting contractors right away is the government terminating a specific task or delivery order through GSA Multiple Award Schedules (MAS) and other contract vehicles, as part of the Department of Government Efficiency's (DOGE) initiative to cut spending. Why does this happen and when could it happen to you? It’s important to plan for all different types of scenarios with your federal contracts so you aren’t caught off guard and know how to handle each situation. Here’s what you need to know about order terminations and settlements.
What is a Contract Order Termination?
The government can terminate a contract task or delivery order for commercial items either for the government’s convenience or for a specific cause. The official legal jargon is outlined in Federal Acquisition Regulation (FAR) 8.406-5 Termination for the Government’s Convenience.
It's important to note that terminations for convenience is different from a contract cancellation under the GSA MAS Program. Terminations for convenience are for specific task orders or delivery orders that can be under an MAS contract or another one.
While this sounds like the government can just terminate an order whenever they feel like it, it’s not necessarily a regular occurrence, although it's starting to happen more under the new administration.
There are some cases where it’s in the best interest for the government to terminate an order. Here’s what the FAR says about it:
(a) An ordering activity Contracting Officer may terminate individual orders for the government’s convenience. Terminations for the government’s convenience shall comply with FAR 12.403.
(b) Before terminating orders for the government’s convenience, the ordering activity Contracting Officer shall endeavor to enter into a “no cost” settlement agreement with the contractor.
(c) Only the Schedule Contracting Officer may modify the Schedule contract to terminate any, or all, supplies or services covered by the Schedule contract for the government’s convenience.
Costs are important for contractors especially in cases of termination. If a contractor has already started work or production for a project prior to termination and can provide proof confirming this, the government will be required to settle and pay for at least a portion of the work, which we'll dive into later in this article.
DOGE Plans to Terminate Contracts
As mentioned above, DOGE is performing an audit of the federal government to identify places where the government can avoid wasteful spending and cut costs. One of their first plans of action is to terminate contracts that the administration doesn't see a need for. So far, DOGE published a list of the nearly 2,300 contracts that agencies have terminated. A bulk of the contracts are centered around DEI, communications, Research & Development, etc.
What Should You Do If Your Task or Delivery Order is Terminated?
Have you gotten a recent stop work order or contract termination notice? Don't panic. You may still be entitled to receiving some payment out of a proposal settlement. The Contracting Officer (CO) on the task or delivery order will generally send your main POC an email noting the contract will be terminated with an effective date. You may even receive a notice a few days ahead of time with a stop work notice. The CO may have already attached the modification to sign, or it'll come in a few days. The CO has to initiate this mod, so there's nothing to do on your end until it's time to sign. But what you should ensure to send along with it (and it's sometimes a requirement) is a proposal settlement.
If you have already started or finished work for the project prior to termination, you may be eligible to receive compensation for those costs. FAR 31.205-42 lays out specifically what is required of the government when a contract or order is terminated, and how costs are handled on both ends.
Whether or not the full amount is paid will vary from order to order. In most cases, there will be negotiations between the government buyer, Contracting Officer, and the contractor as to what the specific costs paid will be. Either way, we suggest you initiate this proposal with any contract termination notice, even if it's not requested.
Determining Allowable Costs and Settlements After a GSA Contract Termination
Contract terminations bring up incurrence of costs or the need for special treatment of costs that wouldn’t have come up if the contract hadn’t been terminated. FAR 31.205-42 addresses specifically the allowable costs associated with termination. The following termination situations are used in conjunction with the other cost principles in FAR subpart 31.2:
- Common Items—the costs of items reasonably usable on the contractor's other work shall not be allowable unless the contractor submits evidence that the items could not be retained at cost without sustaining a loss. The Contracting Officer should consider the contractor's plans and orders for current and planned production when determining if items can reasonably be used on other work of the contractor.
- Costs continuing after termination—despite all reasonable efforts by the contractor, costs which cannot be discontinued immediately after the effective date of termination are generally allowable. However, any costs continuing after the effective date of the termination due to the negligent or willful failure of the contractor to discontinue the costs shall be unallowable.
- Initial costs—including starting load and preparatory costs, are allowable in certain situations.
- Loss of useful value—loss of useful value of special and special machinery and equipment is generally allowable. Reference FAR 31.205-42 for more specific allowances.
- Rental under expired leases—rental costs under unexpired leases, less the residual value of such leases, are generally allowable when shown to have been reasonably necessary for the performance of the terminated contract. Reference FAR 31.205-42 for more specific allowances.
- Alterations of leased property—the cost of alterations and reasonable restorations required by the lease may be allowed when the alterations were necessary for performing the contract.
- Settlement expenses—settlement expenses, including the following, are generally allowable: accounting, legal, clerical, preparation, and presentation of settlement claims to the contracting officer, termination, and settlement of subcontracts.
- Subcontractor claims—subcontractor claims, including the allocable portion of the claims common to the contract and to other work of the contractor, are generally allowable. An appropriate share of the contractor's indirect expense may be allocated to the amount of settlements with subcontractors, provided, that the amount allocated is reasonably proportionate to the relative benefits received.
Preparing for Contract Changes
You may never have to worry about a specific task or delivery order being terminated by a government buyer under your GSA Schedule or other contract vehicles, but you should know what to expect and what actions to follow-up on if you ever encounter a contract termination. Regardless of whether you're affected by contract terminations now, the new administration has been serious about making changes to the federal government, so it's important you're updated. Check out some of our latest blogs to learn more about recent changes under the Trump Administration:
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Top 10 Things Federal Contractors Should Do During a New Presidential Administration
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Key Executive Orders and their Implications for Federal Contractors
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How the Department of Government Efficiency (DOGE) Could Impact Government Contracting
If you want to learn more about other ways you can successfully manage and keep track of your GSA Schedule, check out our blog or subscribe to our monthly newsletter. If you have questions about a contract order termination or other things related to your GSA Schedule, feel free to reach out to one of our consultants.
