Termination For Convenience and Cost Recovery
It is well-settled that the federal government can terminate a contract for convenience. In fact, this principle is so ingrained in public contract law that even if the clause does not appear in full or by reference it will be read into the agreement by operation of law and enforceable against the contractor.
In exchange for this right, the government generally must pay the contractor for work performed prior to termination and for any reasonable charges related to the termination that the contractor can prove using a standard record keeping system. FAR 52.212-4. The question of what constitutes a standard record keeping system arose in a recent case before the Court of Federal Claims. And it requires more specificity than contractors may think.
The Case: ACLR, LLC v. U.S., 162 Fed. Cl. 610, 616 (Fed. Cl. 2022)
In ACLR, the court determined that in order to prove the reasonableness of termination for convenience costs, the record keeping system evidencing those costs must be more robust than the simple use of ordinary accounting, document retention, and communications platforms.
ACLR had sought recovery of its termination costs from the government. In order to prevail, it had to prove its damages via a standard record keeping system as prescribed by FAR 52.212-4. ACLR at 614. To meet this requirement, ACLR presented evidence that its system included:
“the use of Quickbooks, an accounting software package, to track costs; Microsoft File Explorer, which electronically stores vendor invoices, client work product, and archived communications data; Microsoft Outlook, which tracks company communications; external suppliers and various external file storage devices used to back up and secure company data to ensure against data loss; and paper files for employee and client contract information.” ACLR at 613.
The government moved for summary judgment on this point, claiming ACLR did not proffer sufficient proof. It argued the system was too broad, encompassed every document in ACLR’s possession, and therefore rendered the term “standard record keeping system” meaningless.
The court agreed, maintaining that such a system was effectively no system. It essentially took the position that a contractor must have a system in place that can track the costs associated with the procurement in order for that evidence to be valid proof of damages.
The Take Away
While the decision seems misaligned with the tenant (and language of FAR 52.212-4) that commercial item contractors do not need to have cost accounting systems, they will nevertheless want to evaluate their recordkeeping protocols and if needed increase the degree of particularity around cost accounting in light of this case.
Unfortunately, the extent of the court’s guidance is limited. But contractors can take away the following. A “standard system is a regularly used, carefully thought-out method that involves a set of organizing and orderly procedures.” ACLR at 615. And as indicated by the holding, only generally using a set of conventional recordkeeping software is insufficient to meet this definition.
Contractors should expect to see the government using this litigation approach in challenging requests for costs related to a termination for convenience. And with very little other precedent on this issue, the government will also likely be in a prevailing position. As a result, preemptive measures using the ACLR case to more definitively track and identify costs related to a project will help in ensuring the contractor meets its burden of proof and has a fighting chance at recovering its damages.