Over-the-Cliff: Advice to Contractors Facing Sequestration

by Smith Anderson


Automatic spending cuts caused by “sequestration” went into effect on March 1, 2013, after the federal Government could not avoid or further delay sequestration as Congress and the President had agreed during January of 2013. We discussed sequestration more extensively in a prior alert.

To implement the cuts, the federal Government is considering both long and short term steps, including lowering the number of new contracts awarded and eliminating or reducing spending on current government contracts.

Termination for Convenience

Cuts to existing Government contracts could take the form of a Termination for Convenience (“T4C”), an exercise of the Government’s contract right under the Federal Acquisition Regulations (“FAR”) to completely or partially terminate performance of work under a contract when it is in the Government’s interest. FAR 2.101. There is no duty for the Government to terminate for a contractor’s benefit.

T4C is included in various FAR clauses, including FAR 52.249-1 through 52.249-7. The relevant clause depends upon the type and dollar amount of the contract. The Government also could use T4C to delay or reduce the scope of current contracts. Other options are available to the Government that can result in a painful outcome for the contractor.* This alert focuses on the government T4C option.

Remedies for a Contractor if a T4C Occurs

Contractors facing a T4C are entitled to a monetary remedy as set out by the relevant FAR clause in your Government contract. These remedies could include:

1. The contract price for completed supplies or services accepted by the Government;
2. Reasonable costs incurred in the performance of the work terminated;
3. A fair and reasonable profit, if the contractor would not have sustained a loss over the contract’s period of performance; plus
4. Reasonable costs of settlement of the work terminated, including administrative, legal, clerical and other expenses reasonably necessary…. (see FAR 52.249-2(g) & FAR 52.249-6(h)).

These recoverable costs may be limited by other restrictions. After a T4C announcement, a contractor must submit a termination settlement proposal to the contracting officer within one year. If a contractor fails to submit its settlement proposal within the required time period, the contracting officer may unilaterally determine the amount due the contactor. FAR 49.109-7.

Don’t let the contracting officer make that decision without your input. The contractor has the burden of establishing its proposed settlement amount. FAR 49.109-7(c).

Subcontractors and the T4C

What about subcontractors? They are entitled to some form of settlement with their prime. FAR 49.108-1. These need to be handled expeditiously so the prime contractor can incorporate those subcontractor recovery amounts into the prime’s settlement proposal. Subcontractor claims are generally allowable. FAR 31.205-42(h). Subcontractor settlement agreements will be examined to ensure they were conducted at “arm’s-length” and reasonable. Moreover, it is important that prime contractors carefully consider the provisions in their subcontracts. Prime contractors should mirror or flowdown the T4C provisions to ensure that the subcontractor’s recovery also is limited.

Recoverable settlement expenses can be quite high so long as they are reasonably necessary for (1) the preparation and presentation, including supporting data, of settlement claims to the contracting officer; and (2) the termination and settlement of subcontracts. They could include indirect costs related to salary and wages incurred as settlement expenses related to (1) and (2) above, such as payroll taxes, fringe benefits, occupancy costs and immediate supervision costs. FAR 31.205-42(g).

What if T4C Might Happen

What can the contractor do if it believes a T4C might occur?

First, contractors should avoid having an attractive contract to cancel. If you are performing poorly, improve your performance. Termination for default can negate any recovery through an equitable adjustment.

Second, document all actions and related costs associated with responding to the T4C. Keep detailed records of all costs associated with T4C from notice forward, including all costs associated with settling the claim with the Government, including legal fees.

Third, review your contract to understand what your rights are in the event of a T4C.

Fourth, anticipate tight timelines to respond to adverse actions related to your contract.

Fifth, check with your experts on what costs are eligible for reimbursement.

Sixth, be diligent in resolving subcontractor claims to ensure they are reasonable and all associated costs are identified.

Finally, be mindful of the False Claims Act in your submissions to the Government. Outside auditors may be a good backstop to verify the accuracy of your claims.

What if the Government denies your termination settlement proposal? Once a contracting officer renders a final decision, and the parties are at an impasse, the proposal becomes a claim under the Contract Disputes Act.

Suspension of Work

The government can suspend, interrupt, or delay work for the convenience of the government as well. This may create a compensable claim. FAR 52.242-14. A contractor may be entitled to delay costs and/or performance period extension, although profit is not recoverable. FAR 52.242-14(b)(2). Note that a contractor may not recover delay costs for more than 20 days unless the contractor notifies the Government of the delay.

Changes to a contract issued by the contracting officer in writing may trigger a contractor’s right to an equitable adjustment. FAR 43.204 and FAR 52.243-1 through FAR 52.243-7. Generally, a contractor must assert its rights to an adjustment within 30 days after receipt of a written change order or notice.

Final Thoughts

The foregoing rules can vary depending on the type of contract, and this alert does not attempt to address every contingency. Remember that timelines can be critical to identifying what costs are recoverable. The burden of proof is generally on the contractor in these situations. Finally, there are many other Government contractors facing the same challenges; prepare to experience delays while you stand in line to interact with your contracting officer.

Remember the Boy Scout Motto: Be Prepared! Preparing with Government contracting specialists early, rather than later, can provide a greater chance of success when dealing with the Government.

[*]For example, the Government can, depending on the circumstances: (a) Cancel solicitations; (b) Decline to exercise options; (c) Use the Limitation of Funds clause (FAR 52.232-22); (d) Place minimum orders under ID/IQ contracts; (e) Increase the use of the contract changes clause; (f) Reduce the level of work under contracts (i.e., “down-scoping”); (g) Revise the contract period of performance; (h) Issue stop work/stop shipment orders (like down-scoping); (i) Accelerate completion of performance; (j) Terminate contracts for default; and (k) Cancel multi-year contracts. See “Government Procurement in Times of Fiscal Uncertainty,” Kate M. Manuel and Erika K. Lunder, Congressional Research Service, Report No. R42469, April 6, 2012.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Smith Anderson | Attorney Advertising

Written by:

Smith Anderson

Smith Anderson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.