Terminating Contracts for the Government’s
Convenience: Answers to Frequently Asked
Questions
Kate M. Manuel
Legislative Attorney
Erika K. Lunder
Legislative Attorney
Edward C. Liu
Legislative Attorney
February 3, 2015
Congressional Research Service
7-5700
www.crs.gov
R43055
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Terminating Contracts for the Government’s Convenience
Summary
“Termination for convenience” refers to the exercise of the government’s right to bring to an end
the performance of all or part of the work provided for under a contract prior to the expiration of
the contract “when it is in the Government’s interest” to do so. Federal agencies typically
incorporate clauses in their procurement contracts granting them the right to terminate for
convenience. However, the right to terminate procurement and other contracts for convenience
has also been “read into” contracts which do not expressly provide for it on the grounds that the
government has an inherent right to terminate for convenience, or on other related grounds.
Where termination for convenience is concerned, the “Government’s interest” is broadly
construed. Federal courts and agency boards of contract appeals have recognized the
government’s interest in terminating a contract when (1) the government no longer needs the
supplies or services covered by the contract; (2) the contractor refuses to accept a modification of
the contract; (3) questions have arisen regarding the propriety of the award or continued
performance of the contract; (4) the contractor ceases to be eligible for the contract awarded; (5)
the business relationship between the agency and the contractor has deteriorated; or (6) the
agency has decided to restructure its contractual arrangements or perform work in-house.
Terminations in other circumstances could also be found to be in the “Government’s interest.”
In contrast, terminations based on the contractor’s actual or anticipated failure to perform
substantially as required in the contract are known as “terminations for default.” Such
terminations are distinct from terminations for convenience in both their contractual basis and the
amount of any recovery by the contractor in the event of termination. However, an improper
termination for default will typically be treated as a constructive termination for convenience.
Terminations for convenience are similarly distinguishable from “de-scoping” pursuant to any
Changes clause incorporated in the contract. The Federal Acquisition Regulation (FAR) also
distinguishes between termination for convenience and cancellation of multiyear contracts.
As a rule, the government cannot be held liable for breach when it exercises its right to terminate
contracts for convenience because it has the contractual and/or inherent right to do so. This means
that contractors generally cannot recover anticipatory profits or consequential damages when the
government terminates a contract for convenience. The contractor is, however, entitled to a
termination settlement, which, in part, represents the government’s consideration for its right to
terminate. The composition of any termination settlement can vary depending upon which of the
“standard” Termination for Convenience clauses is incorporated into the contract, among other
factors. Such settlements typically include any costs incurred in anticipation of performing the
terminated work and profit thereon. Some settlements are “no cost”; others are sizable.
In certain cases, however, exercise of the right to terminate for convenience could result in breach
of contract (e.g., the agency entered the contract with the intent to terminate).
Congress is perennially interested in termination for convenience because it is part of the overall
framework of federal procurement. However, congressional interest has been particularly high in
recent Congresses due to sequestration and other efforts to constrain federal spending. Some
contracts were reportedly terminated, or considered for termination, for convenience in FY2013
as a result of sequestration. There has also been interest in ways to reduce the amount of funds
that must be obligated or otherwise “reserved” to cover potential termination liability.
Congressional Research Service
Terminating Contracts for the Government’s Convenience
Contents
Background ...................................................................................................................................... 2
What Is the Basis for the Government’s Right to Terminate for Convenience? ........................ 2
When Can the Government Terminate a Contract for Convenience?........................................ 5
Types of Terminations and Other Reductions .................................................................................. 6
How Is a Total Termination Different From a Partial One? ...................................................... 6
What Is a Constructive Termination? ........................................................................................ 7
How Does a Termination for Default Differ from a Termination for Convenience? ................. 8
How Does Cancellation Differ from Termination for Convenience? ........................................ 9
What Is the Difference Between Termination for Convenience and De-Scoping and
Other Reductions? ................................................................................................................ 10
Government Liability in the Event of Termination for Convenience ............................................ 12
How Is a Termination Settlement Arrived At?......................................................................... 12
What Could a Termination Settlement Include? ...................................................................... 13
How Much Can a Termination Settlement Cost? .................................................................... 15
Could the Government Ever Face Liability for Breach by Terminating for
Convenience? ....................................................................................................................... 16
Why Must Agencies Generally Obligate or Reserve Funds for Termination Liability? .......... 17
Contacts
Author Contact Information........................................................................................................... 19
Congressional Research Service
Terminating Contracts for the Government’s Convenience
ermination for convenience refers to the exercise of the government’s right to bring to an
end the performance of all or part of the work provided for under a contract prior to the
Texpiration of the contract “when it is in the Government’s interest” to do so.1 Federal
agencies typically incorporate clauses in their procurement contracts which grant them the right
to terminate for convenience.2 However, the right to terminate procurement and other contracts
for convenience has also been “read into” contracts which do not expressly provide for it on the
grounds that the government has an inherent right to terminate for convenience, or on other
related grounds.3
The right to terminate for convenience has historically been viewed as protecting the public
interest by ensuring that the government does not have to pay for something that it may no longer
need or want.4 However, the exercise of this right generally also entails some compensation for
the contractor because there arguably would not be a binding contract if one party were
unilaterally able to end the contract with no liability to the other.5 Failure to pay the contractor for
the government’s exercise of its right to terminate for convenience would also generally be
viewed as unfair to agencies’ contracting partners, and could diminish the willingness of vendors
to deal with the government. This, in turn, could potentially result in the government having to
pay higher prices for lower quality supplies and services, as the pool of potential vendors
decreases.
Termination for convenience is a topic of perennial congressional and public interest since any
government contract could potentially be so terminated. However, interest in termination for
convenience has recently been heightened by the implementation of sequestration under the
Budget Control Act (BCA) of 2011.6 Some contracts were reportedly terminated, or considered
for termination, for convenience in FY2013 as a result of sequestration.7 In addition, because of
1 48 C.F.R. §2.101.
2 See infra “What Is the Basis for the Government’s Right to Terminate for Convenience”.
3 See id. The focus of this report is generally upon procurement contracts. However, in at least one case, the
government’s right to terminate for convenience has been found to be an implied term of a non-procurement contract
that did not expressly include it. See, e.g., Aerolease Long Beach v. United States, 31 Fed. Cl. 342, aff’d, 39 F.3d 1198
(Fed. Cir. 1994) (finding that a Termination for Convenience clause is to be read into a lease of real property). Leases
of real property do not constitute “acquisitions” for purposes of the Federal Acquisition Regulation (FAR) and, thus, do
not include the standard Termination for Convenience clauses discussed below.
4 See, e.g., Russell Motor Car Co. v. United States, 261 U.S. 512, 521 (1923) (“With the termination of the war the
continued production of war supplies would become not only unnecessary but wasteful. Not to provide, therefore, for
the cessation of this production when the need for it has passed would have been a distinct neglect of the public
interest.”); United States v. Corliss Steam-Engine Co., 91 U.S. 321, 323 (1875) (“[I]t would be of serious detriment to
the public service if the power of the head[s] of [federal agencies] did not extend to providing for all … possible
contingencies by modification or suspension of the contracts and settlement with the contractors.”).
5 In order to constitute a binding contract, an agreement must impose cognizable burdens—known as “consideration”—
upon each party. A contract that purported to provide one party with the right to bring the contract to an end at any
time, without in any way performing as specified in the contract or otherwise compensating the other party, would be
found to be nonbinding due to lack of consideration. See, e.g., First Fed. S&L Ass’n of Rochester v. United States, 58
Fed. Cl. 139, 145 (2003).
6 P.L. 112-25, 125 Stat. 240 (Aug. 2, 2011). For more on the BCA, see generally CRS Report R41965, The Budget
Control Act of 2011, by Bill Heniff Jr., Elizabeth Rybicki, and Shannon M. Mahan. Sequestration under the BCA did
not operate in FY2014 or FY2015 in the same way it did in FY2013. Thus, discussions of the effects of sequestration
on government contracts often focus on events in FY2013.
7 See, e.g., Gov’t Accountability Office, 2013 Sequestration: Agencies Reduced Some Services and Investments, While
Taking Certain Actions to Mitigate Effects, GAO-14-244, Mar. 2014, at 182 (reporting that the Office of Personnel
Management “terminated a contract with a call center that handled customer inquiries regarding retirement”).
Congressional Research Service
1
Terminating Contracts for the Government’s Convenience
agencies’ diminished budget authority, questions have arisen as to how agencies might be able to
reduce the amount that they must generally obligate or otherwise “reserve” to cover potential
termination liability so that they can allot additional funds to performance of the contract,
particularly early in the course of the contract’s performance.8
This report provides answers to 12 questions regarding termination for convenience frequently
asked by congressional committees and staff. These questions and their answers address
everything from the contractual and other bases for the government’s right to terminate to post-
termination settlements between the government and the contractor. They also address differences
between termination for convenience and termination for default, cancellation, and certain other
actions that the government may take (e.g., “de-scoping” pursuant to a Changes clause). The
questions and answers are organized into three sections, one of which provides background
information. The other two address (1) differences between the various types of terminations and
other reductions that agencies could make in the work performed under a contract; and (2)
potential government liability in the event of a termination for convenience.
The report does not address the termination of agency programs or budget elements. Such
terminations could potentially result in the termination of contracts. However, they would not
necessarily do so. Similarly, language prohibiting an agency from terminating a “program, project
or activity” (PPA) would generally not be construed to bar the agency from terminating contracts
for that PPA.9
Background
The questions and answers in this section provide background information on termination for
convenience, including (1) the legal basis for the government’s right to terminate contracts for
convenience; and (2) the circumstances in which the government may so terminate.
What Is the Basis for the Government’s Right to Terminate for
Convenience?
The government’s right to terminate contracts for convenience generally arises from the terms of
its contracts.10 The Federal Acquisition Regulation (FAR)—which governs many (although not
8 See infra “Why Must Agencies Generally Obligate or Reserve Funds for Termination Liability?”
9 See, e.g., Gov’t Accountability Office, National Aeronautics and Space Administration—Constellation Program and
Appropriations Restrictions, Part II, B-320091, July 23, 2010 (noting that a PPA is an “element within a budget
account,” and that NASA did not violate language in an appropriations act prohibiting it from using funds to terminate
any PPA of the Constellation Program when it terminated contracts related to the program).
10 Termination for Convenience clauses are not unique to government contracts. They are also used in contracts
between private parties to give the parties some flexibility as to the quantity of supplies or services delivered under the
contract, as well as to limit the scope of potential liability under the contract. See, e.g., At Your Convenience: Courts
Are Generally Enforcing Termination for Convenience Clauses in Private Sector Contracts That Are Well Drafted and
Prudently Invoked, 21 Los Angeles Law. 42 (1998). The general rule is that, absent a clause allowing the contract to be
terminated, a buyer who informs a seller that he does not intend to purchase certain supplies and services provided for
in the contract has breached the contract and is liable for damages, potentially including anticipatory profits and
consequential damages. See, e.g., Davis Sewing Machine Co. v. United States, 60 Ct. Cl. 201, 217 (1925). However, a
termination for convenience clause avoids the operation of this general rule by granting one or both of the parties the
right to engage in conduct that would otherwise constitute breach of contract.
Congressional Research Service
2
Terminating Contracts for the Government’s Convenience
all) acquisitions by executive branch agencies11—requires agencies to incorporate in their
procurement contracts standard clauses granting the government the right to terminate the
contract for its convenience.12 The exact language of this clause varies depending upon the type
and value of the contract, among other things.13 However, such clauses typically provide that
[t]he Government may terminate performance of work under [the] contract in whole or, from
time to time, in part if the Contracting Officer determines that a termination is in the
Government’s interest.14
These clauses typically also specify the form and content of the government’s notice to the
contractor when it exercises its right to terminate; the contractor’s obligations upon receipt of this
notice; disposal of the “termination inventory”; procedures for arriving at a termination
settlement; items to be included in a termination settlement if the contractor and the agency fail to
agree upon the amount to be paid; and the contractor’s retention of records pertaining to the
terminated portion of a contract.15
However, even when the contract does not expressly provide for the government’s right to
terminate for convenience, the government is generally still able to exercise this right, although
the rationale for construing the right to terminate for convenience as an implied term of
government contracts has varied over time.16 The Supreme Court first articulated the theory that
the government could terminate contracts for its convenience in upholding the Secretary of the
Navy’s determination to “suspend” certain contracts for equipment which was no longer needed
because the Civil War had ended.17 The Navy proposed to pay the contractor a reduced amount as
“compensation for partial performance.”18 The contractor objected to both the suspension of its
11 For more on the FAR, see generally CRS Report R42826, The Federal Acquisition Regulation (FAR): Answers to
Frequently Asked Questions, by Kate M. Manuel et al..
12 48 C.F.R. §§49.501-49.505. Some government contracts have included mutual termination clauses, giving both
parties the right to terminate at their convenience. Such clauses may be found to be valid and binding. See, e.g., Appeal
of Coast Photo Finishers, ASBCA 19010, 74-2 B.C.A. ¶ 10,896.
13 See, e.g., 48 C.F.R. §52.249-1 (fixed-price contracts that are not expected to exceed the simplified acquisition
threshold); 48 C.F.R. §52.249-2 (fixed-price contracts that are expected to exceed the simplified acquisition threshold);
48 C.F.R. §52.249-3 (fixed-price contracts for dismantling, demolition, or removal of improvements that are expected
to exceed the simplified acquisition threshold); 48 C.F.R. §52.249-4 (fixed-price service contracts); 48 C.F.R. §52.249-
5 (contracts with educational and other nonprofit institutions); 48 C.F.R. §52.249-6 (cost-reimbursement contracts); 48
C.F.R. §52.249-7 (fixed-price contracts for architect-engineer services).
14 48 C.F.R. §52.249-2(a).
15 48 C.F.R. §52.249-2. The term “termination inventory” encompasses “any property purchased, supplied,
manufactured, furnished, or otherwise acquired for the performance of a contract subsequently terminated and properly
allocable to the terminated portion of the contract. It includes Government-furnished property. It does not include any
facilities, material, special test equipment, or special tooling that are subject to a separate contract or to a special
contract requirement governing their use or disposition.” 48 C.F.R. §2.101.
16 At least one case could be construed as suggesting that the government retains the right to terminate contracts for
convenience even if it expressly disclaims this right. See Dep’t of the Navy, B-86077 (July 21, 1949) (denying a
request for additional compensation when the government canceled orders under a Federal Supply Schedules (FSS)
contract that the government had promised not to “cancel” or “terminate”).
17 Corliss Steam-Engine, 91 U.S. at 323. The Court in Corliss did not use the phrase “termination for convenience.”
However, its references to “suspension of contracts” have been construed to mean termination for convenience and not
“suspension of work,” as is currently provided for in some federal contracts. See, e.g., Torncello v. United States, 681
F.2d 756, 764 (Ct. Cl. 1982) (“The case that first articulated this idea [i.e., termination for convenience], and which is
credited as providing the basic legal theory to support the modern termination for convenience clause, is United States
v. Corliss Steam-Engine Co.”).
18 Corliss Steam-Engine, 91 U.S. at 322-23.
Congressional Research Service
3
Terminating Contracts for the Government’s Convenience
contract and the reduced payment, arguing that the government had breached the contract since
the contract did not grant the government the right to take such action. However, the Court found
that the government had not breached and, thus, was not liable for anticipatory profits or
consequential damages because the right to terminate is a necessary adjunct of the government’s
authority to contract and an inherent right of the government.19 The Court based this conclusion,
in part, on its view that
it would be of serious detriment to the public service if the power of the head[s] of [federal
agencies] did not extend to providing for all … possible contingencies by modification or
suspension of the contracts and settlement with the contractors.20
Subsequent cases similarly emphasized the “public interest” when affirming the government’s
right to terminate for convenience contracts that do not expressly provide for this right,21 but
upheld this right for differing reasons. For example, immediately after World War I, when a
statute authorized the President to “cancel” contracts,22 the Supreme Court found that the
government’s right to terminate was, “by implication, one of the terms” of any government
contract, since the statute was “binding,”23 and the contractor “impliedly agree[d]” to the
government’s right to terminate by contracting with the government.24 Subsequently, when
federal regulations called for termination clauses to be incorporated into federal procurement
contracts,25 the U.S. Court of Claims (acting as the predecessor of today’s Court of Appeals for
the Federal Circuit) found that such clauses were “incorporated, as a matter of law ... [since] the
Regulations can fairly be read as permitting that interpretation.”26 Key to the court’s decision was
that it viewed termination for convenience as a “deeply ingrained strand of public procurement
policy.”27 The court also noted that the contractor is entitled to some recovery when the
government terminates contracts for convenience, although “[t]he termination clause limits profit
to work actually done, and prohibits the recovery of anticipated but unearned profits [on work not
yet performed].”28
19 Id. “Anticipatory profits” are profits that the non-breaching contractor could reasonably have realized had the
contract been performed. See, e.g., Elson v. Indianapolis, 204 N.E. 857, 861 (Ind. 1965). “Consequential damages” are
damages that, while not a direct result of the breach, are a consequence of it. See, e.g., Acker Constr., LLC v. Tran, 396
S.W.3d 279, 288 (Ark. App. 2012).
20 Corliss Steam-Engine, 91 U.S. at 323 (emphasis added).
21 Russell Motor Car, 261 U.S. at 521.
22 See An Act Making Appropriations to Supply Urgent Deficiencies in Appropriations for the Military and Naval
Establishments on Account of War Expenses for the Fiscal Year Ending June 13, 1917, and For Other Purposes, P.L.
65-23, 40 Stat. 182 (June 15, 1917). This statute and cases construing it have been construed as referring to termination
for convenience, even when they do not use this phrase. See, e.g., Torncello, 681 F.2d at 764.
23 College Point Boat Corp. v. United States, 284 U.S. 12, 15 (1925).
24 DeLaval Steam Turbine Co. v. United States, 284 U.S. 61, 61 (1931) (“In short, when the [contractor] entered into its
contract with the Government, it impliedly agreed, because of the statute, that the Government should have the right to
determine when the contract might be terminated.”).
25 See, e.g., Torncello, 681 F.2d at 765-66 (noting that legislation enacted during World War II entitled the government
to terminate “war contracts,” and that regulations promulgated beginning in the 1950s made Termination for
Convenience clauses standard features of procurement contracts for military and, later, civilian agencies).
26 G.L. Christian & Assocs. v. United States, 312 F.2d 418, 426 (Ct. Cl. 1963).
27 Id.
28 Id.
Congressional Research Service
4
Terminating Contracts for the Government’s Convenience
When Can the Government Terminate a Contract for Convenience?
The standard Termination for Convenience clauses prescribed by the Federal Acquisition
Regulation (FAR) all provide that a termination for convenience is based on the “Government’s
interest,” as opposed to the contractor’s actual or anticipated failure to perform.29 The FAR does
not define what constitutes the “Government’s interest.” However, the term has been broadly
construed to encompass many—although not all—interests that the government might assert. For
example, federal courts and agency boards of contract appeals30 have recognized the
government’s interest in terminating a contract when
• the government no longer needs the supplies or services covered by the
contract;31
• the contractor refuses to accept a modification of the contract;32
• questions have arisen regarding the propriety of the award, or about continued
performance of the contract;33
• the contractor ceases to be eligible for the contract awarded;34
• the business relationship between the agency and the contractor has
deteriorated;35
• the agency has decided to restructure its contractual arrangements or perform
work in-house;36
• the agency seeks to avoid a conflict with the Comptroller General, or a dispute
with Congress;37 or
• the work contemplated by the contract is proving impossible or too costly.38
29 See 48 C.F.R. §2.101 (defining “termination for default” and “termination for convenience”). For more on
terminations for default, see infra “How Does a Termination for Default Differ from a Termination for Convenience?”.
30 The boards of contract appeals are administrative tribunals established in procuring agencies to hear and decide
disputes under the Contract Disputes Act of 1978. See 41 U.S.C. §7105. There are currently four such boards: the
Armed Services Board of Contract Appeals; the Civilian Agency Board of Contract Appeals; the Postal Service board;
and the Tennessee Valley Authority board. Previously, there were additional boards.
31 Corliss Steam-Engine, 91 U.S. 321 (1876).
32 Saltwater, Inc., B-293335.3 (Apr. 26, 2004).
33 Nationwide Roofing & Sheet Metal Co., Inc. v. United States, 14 Cl. Ct. 733 (1988); Landmark Constr. B-281957.3
(Oct. 22, 1999).
34 Int’l Data Prods. Corp. v. United States, 64 Fed. Cl. 642 (2005) (contractor participating in the “8(a) Program” for
small businesses was sold to a large business).
35 Embrey v. United States, 17 Cl. Ct. 617 (1989).
36 Northrop Grumman Corp. v. United States, 46 Fed. Cl. 622 (2000); Corners & Edges, Inc., v. Dep’t of Health &
Human Servs., CBCA Nos. 693, 762, 2008-2 B.C.A. ¶ 33,961; Exec. Airlines, Inc., BSBCA 1452, 87-1 B.C.A. ¶
19,594. But see Dellew Corp. v. United States, 108 Fed. Cl. 357 (2012) (rejecting the government’s argument that a
challenge to an insourcing determination was moot because the contract whose functions were insourced had been
terminated for convenience). In reaching this conclusion, the Dellew court noted that the contract was terminated in the
middle of an option period and, but for the termination, the plaintiff could still have been performing the contract
months after the court’s decision.
37 Schlesinger v. United States, 390 F.2d 702 (Ct. Cl. 1968) (dispute with Congress); Reiner & Co. v. United States,
325 F.2d 438 (Ct. Cl. 1963) (conflict with Comptroller General).
38 Krygoski Constr. Co. v. United States, 94 F.3d 1537 (Fed. Cir. 1996); Nolan Bros., Inc. v. United States, 405 F.2d
(continued...)
Congressional Research Service
5
Terminating Contracts for the Government’s Convenience
Terminations in almost any other circumstances could also be found to be in the government’s
interest.
It is only in unusual circumstances—such as when the government entered the contract with no
intention of fulfilling its promises,39 or purports to terminate the contract for convenience after the
contract has expired40—that a termination for convenience could be found to be improper. In such
situations, the government could be liable for breach, as discussed below (“Could the
Government Ever Face Liability for Breach by Terminating for Convenience?”). On the other
hand, because the government has a duty to consider only its own best interests in terminating
contracts for convenience, it generally would not be found to have behaved improperly if it
declined to terminate a contract for convenience in order to assist the contractor.41
Types of Terminations and Other Reductions
The questions and answers in this section discuss the differences between the various types of
terminations, and between termination for convenience and other actions that the government
could take. It covers total and partial terminations for convenience, constructive terminations,
terminations for default, cancellation, and other reductions that agencies could make in the work
performed under a contract, such as “de-scoping.”
How Is a Total Termination Different From a Partial One?
A “total termination” encompasses all the work remaining to be performed under a contract,
while a “partial termination” encompasses only some of the work remaining to be performed
(e.g., deleting 50% of the work from a contract for cleaning, inspecting, and coating the roofs of
family housing units).42 When the termination is total, the contractor could be entitled to a
“termination settlement” covering the costs of work already performed, but not yet paid for;
certain costs incurred in anticipation of performance; and the costs of settling the terminated
work, among other things.43 (See “What Could a Termination Settlement Include?”) When the
(...continued)
1250 (Ct. Cl. 1969).
39 See, e.g., Tamp Corp., ASBCA 25692, 84-2 B.C.A. ¶ 17,460 (government agreed to extend the contract, but with the
intention to terminate the contract as soon as a contract could be awarded to another vendor). The board viewed the
government’s undisclosed intention to terminate as making of “mockery” of its assent to the extension and, thus, an
abuse of discretion.
40 See, e.g., Maxima Corp. v. United States, 847 F.2d 1549 (Fed. Cir. 1988), rev’g, IBCA 1828, 86-2 B.C.A. ¶ 18,888
(government asserted its right to terminate after the contract had expired in order to avoid liability for its failure to
make the minimum purchase guaranteed to the contractor under the contract).
41 John Massman Contracting Co. v. United States, 23 Cl. Ct. 24 (1991) (finding that the government did not act
improperly in declining to terminate the contract for convenience in order to assist the contractor, even though the
government caused the conditions impairing the contractor’s performance).
42 Kahaluu Constr. Co., ASBCA 33248, 90-2 B.C.A. ¶ 22,663.
43 See, e.g., 48 C.F.R. §52.249-2(g) (providing that, in the event the vendor and the contracting officer fail to agree on
the “whole amount” to be paid because of the termination, the contracting officer shall pay the contractor: (1) the
contract price for any completed work that has not already been paid for; (2) the total of (a) the costs incurred in
performing the work terminated; (b) the costs of settling termination settlement proposals under terminated
subcontracts; and (c) profit on costs incurred in performing terminated work; and (3) the reasonable costs of settling the
terminated work, including (a) accounting, legal, and other expenses incurred in preparing the termination settlement
(continued...)
Congressional Research Service
6
Terminating Contracts for the Government’s Convenience
termination is partial, the contractor could be entitled to a similar settlement as to the terminated
work,44 plus an “equitable adjustment” granting it more money and/or time to perform the work
remaining to be performed on those portions of the contract that were not terminated.45 An
equitable adjustment granting the contractor more money in the event of a partial termination may
seem somewhat counter-intuitive, since terminations often reduce the overall price of the contract
by deleting work. However, situations could potentially arise where the contractor’s costs in
performing the remaining portions of the contract are increased by the deletion of work, and the
contractor could be entitled to an equitable adjustment to cover those increases.46
A partial termination is not the only means by which the government could delete some—but not
all—of the work remaining to be performed under a contract. So long as the reduction is within
the scope of the contract, agencies could potentially also rely upon any Changes clause
incorporated into the contract to delete work covered by that clause.47 (See below “What Is the
Difference Between Termination for Convenience and De-Scoping and Other Reductions?”)
What Is a Constructive Termination?
The FAR and some of the standard Termination for Convenience clauses used in government
contracts require the government to give the contractor written notice of its intent to terminate.48
This notice is to include, among other things, the effective date of the termination; the extent of
the termination; and any steps that the contractor should take to minimize the impact of the
termination on personnel, if the termination will result in a “significant reduction” in the
contractor’s workforce.49 The notice also directs the contractor to cease work; furnish notice of
(...continued)
proposal; (b) the termination and settlement of subcontracts; and (c) storage and other costs related to the termination
inventory). It is important to note, however, the certain Termination for Convenience clauses may provide for more
limited recovery. See, e.g., 48 C.F.R. §52.249-4 (“If this contract is terminated, the Government shall be liable only for
payment under the payment provisions of this contract for services rendered before the effective date of termination.”).
44 See, e.g., 48 C.F.R. §52.249-2(g).
45 See, e.g., 48 C.F.R. §52.249-2 (l) (“If the termination is partial, the Contractor may file a proposal with the
Contracting Officer for an equitable adjustment of the price(s) of the continued portion of the contract.”); Drain-A-Way
Sys., Inc., GSBCA No. 7022, 84-1 B.C.A. ¶ 16,929 (“The customary Termination For Convenience clause permits
repricing the continued portion of a contract where performance is made more costly, or less profitable, as a result of a
partial termination.”). An “equitable adjustment” is “fair adjustment” intended to cover the contractor’s costs, as well
as profit on the work performed. See, e.g., United States v. Callahan Walker Constr. Co., 317 U.S. 56, 61 (1942). The
amount of the adjustment is determined by the “difference between what it would have reasonably cost to perform the
work as originally required and what it reasonably cost to perform the work as changed.” Modern Foods, Inc., ASBCA
2090, 57-1 B.C.A. ¶ 1,229.
46 Henry Spen & Co., Inc., ASBCA 20766, 77-2 B.C.A. ¶ 12,784 (“We have recognized previously that a partial
termination necessarily requires the unterminated work to carry a heavier share of fixed overhead costs than
contemplated by the parties when the contract was entered into, and compensated the contractor therefor as part of an
equitable adjustment for the unterminated units ... Essentially, this [is] a repricing of the unterminated work to reflect
the added burden because of the smaller quantity, consistent with the provision[s] ... of the termination clause for an
equitable adjustment on the continued portion of the contract.”).
47 See, e.g., Ideker, Inc., Eng. BCA 4389, 87-3 B.C.A. ¶ 20,145 (“Historically, the contracting officer has been given
considerable ... discretion as to which clause should be used to delete work.”); Indus. Consultants, Inc., VABCA 3249,
91-3 B.C.A. ¶ 24,326 (“The Termination for Convenience clause must be used when major portions of the work are
deleted and no additional work is substituted. Otherwise, either clause may be used.”).
48 See, e.g., 48 C.F.R. §52.249-1 (“The Contracting Officer, by written notice, may terminate this contract, in whole or
in part, when it is in the Government’s interest.”) (emphasis added).
49 48 C.F.R. §49.102(a).
Congressional Research Service
7
Terminating Contracts for the Government’s Convenience
the termination to each immediate subcontractor and supplier affected by the termination; and
take certain other actions as to the termination inventory and the settlement of subcontracts.50
In practice, however, not all terminations for convenience result from such a written notice. In
some cases, a court or board of contract appeals finds that the agency has constructively
terminated a contract by its conduct even though no termination notice has been issued. The
concept of “constructive termination” is a “judge-made doctrine that allows an actual breach by
the government to be retroactively justified.”51 Courts and boards of contract appeals may invoke
this doctrine in order to avoid finding breach in “situations where the government stops or curtails
a contractor’s performance for reasons that are later found to be questionable or invalid.”52
Constructive termination for convenience is perhaps most commonly found when an improper
termination for default is “converted” into a constructive termination for convenience.53 (See
“How Does a Termination for Default Differ from a Termination for Convenience?”) However,
courts and boards of contract appeals have also found constructive termination for convenience in
other circumstances, including when (1) the parties fail to agree upon the terms of a definitive
contract after the work under a “letter contract” has been completed;54 (2) the contracting officer
improperly repudiates the contract;55 (3) the government improperly uses a “change order” to
delete work beyond the scope of the contract;56 and (4) the government fails to make any requisite
progress payments.57
How Does a Termination for Default Differ from a Termination for
Convenience?
Unlike a termination for convenience, which is based on the government’s interests, a
“termination for default” is based on the contractor’s anticipated or actual failure to perform
substantially as required by the contract.58 The standard terms of federal procurement contracts
grant the government the right to terminate contracts for default, as well as for convenience, by
providing that the government may, subject to certain conditions,
terminate this contract in whole or in part if the Contractor fails to (i) [d]eliver the supplies
or to perform the services within the time specified in this contract or any extension; (ii)
50 48 C.F.R. §49.601-2.
51 Erwin v. United States, 19 Cl. Ct. 47, 53 (1989). Courts developed this doctrine based upon general principles of
contract law articulated by the Supreme Court in College Point Boat Corp. v. United States. See College Point Boat
Corp., 267 U.S. at 15 (“A party to a contract who is sued for its breach may ordinarily defend on the ground that there
existed, at the time, a legal excuse for nonperformance by him, although he was then ignorant of the fact.”).
52 Erwin, 19 Cl. Ct. at 53.
53 See, e.g., United Partition Sys., Inc. v. United States, 90 Fed. Cl. 74, 94 (2009); Keeter Trading Co. v. United States,
79 Fed. Cl. 243 (2007); Casebolt Co. v. United States, 421 F.2d 710 (Ct. Cl. 1970).
54 Mite Corp., ASBCA 10021, 66-2 B.C.A. ¶ 6,052. A “letter contract” is a “written preliminary contractual instrument
that authorizes the contractor to begin immediately manufacturing supplies or performing services.” 48 C.F.R. §16.603-
1. Federal regulations require that such contracts be “definitized,” or reduced to final form, within a certain period. See
generally 48 C.F.R. §16.603-2(c).
55 Best Foam Fabricators, Inc. v. United States, 38 Fed. Cl. 627, 638 (1997); Albano Cleaners, Inc. v. United States,
455 F.2d 556 (Ct. Cl. 1972).
56 Kahaluu Constr. Co., ASBCA 33248, 90-2 B.C.A. ¶ 22,663.
57 Delta Eng. Servs., ASBCA 24787, 84-3 B.C.A. ¶ 17,590.
58 See 48 C.F.R. §2.101.
Congressional Research Service
8
Terminating Contracts for the Government’s Convenience
[m]ake progress, so as to endanger performance of this contract ...; or (iii) [p]erform any of
the other provisions of this contract ....59
The standard terms further provide that “[i]f, after termination, it is determined that the
Contractor was not in default, or that the default was excusable, the rights and obligations of the
parties shall be the same as if the termination had been issued for the convenience of the
Government.”60 In other words, if the government exercises its right to terminate for default, and
is later found to have exercised this right improperly, the default termination will be treated as a
constructive termination for convenience, as previously discussed (see “What Is a Constructive
Termination?”).61 Thus, the government would generally be liable to the contractor for only a
termination settlement, not damages for breach.62
When a contract is terminated for default, the contractor may be entitled to payment for any work
it has already performed for which it has not been paid.63 However, it is generally not entitled to
profit on costs incurred in anticipation of performance,64 and it could potentially be liable to the
government for liquidated damages, any excess costs of re-procurement, or certain other costs.65
How Does Cancellation Differ from Termination for Convenience?
Commentators sometimes use the terms “termination” and “cancellation” as if they were
synonymous. The Federal Acquisition Regulation (FAR), however, distinguishes between
59 48 C.F.R. §52.249-8(a)(1).
60 48 C.F.R. §52.249-8(a)(g). These provisions serve to avoid the operation of the general rule that a party which ceases
performance in the belief that the other party has anticipatorily repudiated or breached the contract does so at the risk of
being incorrect as to whether repudiation or a material breach occurred.
61 See supra note 53 and accompanying text.
62 See, e.g., Hedin Constr. Co., Inc. v. United States, 408 F.2d 424, 431 (Ct. Cl. 1969) (noting that, because of the
Termination for Convenience clause incorporated into the contract, the remedy in the case of an improper termination
for default is provided for in the contract); Green Constr. Co., Inc., GSBCA 2071, 68-1 B.C.A. ¶ 6,883 (claims of
improper termination for default are claims under a specific contractual provision).
63 48 C.F.R. §52.249-6(h) (Termination (Cost-Reimbursement)) (providing that, if the vendor and the contracting
officer fail to agree on the amount of costs to be paid, the contractor shall be paid: (1) all costs reimbursable under the
contract not previously paid; (2) the costs of settling and paying termination settlement proposals under terminated
subcontracts; (3) reasonable costs of settling the work terminated (e.g., accounting and legal costs); and (4) in the case
of contracts that provide for award or incentive fees, a fee proportionate to the total number of supplies or services
delivered to and accepted by the government under the contract); 48 C.F.R. §52.249-8(f) (Default (Fixed-Price Supply
and Service)) (“The Government shall pay contract price for completed supplies delivered and accepted.”); 48 C.F.R.
§52.249-9(f) (Default (Fixed-Price Research and Development)) (“The Government shall pay the contract price, if
separately stated, for completed work it has accepted and the amount agreed upon by the Contractor and the
Contracting Officer for (1) completed work for which no separate price is stated, (2) partially completed work, (3) other
property described above that it accepts, and (4) the protection and preservation of the property.”).
64 Compare 48 C.F.R. §52.249-2(g)(2)(iii) (expressly authorizing recovery of a “sum, as profit,” on costs incurred in
performing the work terminated) with 48 C.F.R. §52.249-6(h) (not allowing profit on costs incurred in anticipation of
performance, but allowing some recovery of any fee payable under the contract on work performed).
65 See, e.g., 48 C.F.R. §52.211-11(a) (“If the Contractor fails to deliver the supplies or perform the services within the
time specified in this contract, the Contractor shall, in place of actual damages, pay to the Government liquidated
damages of $__ per calendar day of delay.”); 48 C.F.R. §52.249-7(c) (“If the termination is for failure of the Contractor
to fulfill the contract obligations, the Government may complete the work by contract or otherwise and the Contractor
shall be liable for any additional cost incurred by the Government.”); 48 C.F.R. §52.249-10(a) (“The Contractor and its
sureties shall be liable for any damage to the Government resulting from the Contractor’s refusal or failure to complete
the work within the specified time, whether or not the Contractor’s right to proceed with the work is terminated.”).
Congressional Research Service
9
Terminating Contracts for the Government’s Convenience
termination and cancellation. The FAR defines “cancellation” as the bringing to an end of the
“total requirements of all remaining program years,”66 and contrasts cancellation with termination
on the grounds that
termination can be effected at any time during the life of the contract (cancellation is effected
between fiscal years) and can be for the total quantity or partial quantity (where as
cancellation must be for all subsequent fiscal years’ quantities).67
In other words, for purposes of the FAR, cancellation affects only multiyear contracts, and occurs
between fiscal years. Termination, in contrast, can affect multiyear contracts (at times other than
between years) or other contracts (at any time). A “multiyear contract” is one that extends over
more than one year without the government having to establish and exercise options for each
program year after the first.68
When a multiyear contract is canceled, the contractor is generally paid a “cancellation charge.”
This charge is like a termination settlement in that it covers
(1) costs (i) incurred by the Contractor and/or subcontractor, (ii) reasonably necessary for
performance of the contract, and (iii) that would have been equitably amortized over the
entire multiyear contract period but, because of the cancellation, are not so amortized, and
(2) a reasonable profit or fee on the costs.69
However, cancellation charges generally cannot exceed the “cancellation ceiling” specified in the
contract.70 This ceiling represents the maximum amount that the contractor may recover (although
the contractor will not necessarily recover this amount).71 The ceiling is lowered each year to
exclude amounts allocable to items included in the prior year’s program requirements.72
What Is the Difference Between Termination for Convenience and
De-Scoping and Other Reductions?
Termination for convenience is sometimes confused with “de-scoping” or other actions that the
government could take pursuant to a contract that would reduce or limit the work that might have
been originally contemplated by the parties to the contract. Partial terminations for convenience,
in particular, can resemble “de-scoping” pursuant to any Changes clause incorporated in the
contract. Many (although not all) federal procurement contracts include a Changes clause that
permits the government “at any time ... [to] make changes within the general scope of th[e]
66 48 C.F.R. §17.103.
67 48 C.F.R. §17.104(d).
68 In contrast, contracts that extend over more than one year because of the exercise of options are known as “multiple
year contracts.” 48 C.F.R. §17.103. An “option” is a “unilateral right in a contract by which, for a specified time, the
Government may elect to purchase additional supplies or services called for by the contract, or may elect to extend the
term of the contract.” 48 C.F.R. §2.101.
69 48 C.F.R. §52.217-2(d). The cancellation charge is computed and claimed as if it were a settlement proposal under
the Termination for Convenience clause. 48 C.F.R. §52.217-2(e).
70 48 C.F.R. §52.217-2(c) (“If cancellation under this clause occurs, the Contractor will be paid a cancellation charge
not over the cancellation ceiling specified in the Schedule as applicable at the time of cancellation.”).
71 Continental Elecs. Mfg. Co., ASBCA 14749, 71-2 B.C.A. ¶ 9,108.
72 Id.
Congressional Research Service
10
Terminating Contracts for the Government’s Convenience
contract” to certain terms of the contract,73 such as (1) the contract specifications; (2) the method
or manner of performing the work; (3) any government-furnished property or services to be used
in performing the contract; (4) the method of shipping or packing; (5) the place of delivery (for
supplies); and (6) the time and place of performance (for services).74 When the proposed
reductions are among those contemplated by any Changes clause and are “within the scope of the
contract,” the contracting officer generally may either “de-scope” the work pursuant to the
Changes clause or partially terminate it for convenience.75
Terminations should also be distinguished from determinations not to exercise options, or not to
order more than the minimum quantity under an indefinite-quantity/indefinite-delivery (ID/IQ)
contract.76 In both of the latter situations, the contractor ends up not obtaining work that the
contractor may have been counting on, or that the parties may have contemplated being
performed. However, in these situations, the contractor has no legal entitlement to the work that
the government determines not to have performed, which is not the case with terminations. An
option is a “a unilateral right in a contract by which, for a specified time, the Government may
elect to purchase additional supplies or services called for by the contract, or may elect to extend
the term of the contract.”77 If the government decides not to exercise the option, the contractor is
entitled to no recovery.78 Similarly, a contractor under an ID/IQ contract is entitled to only the
minimum purchase guaranteed in the contract,79 and cannot recover if the government fails to
73 See, e.g., 48 C.F.R. §52.243-1 (standard clause applicable to fixed-price contracts for supplies, as well as “alternate”
clauses for use in contracts for services, including architect-engineer and professional services); 48 C.F.R. §52.243-2
(standard clause applicable to cost-reimbursement contracts, as well as “alternate” clauses to be used in contracts for
services, for supplies and services, for construction, and for research and development); 48 C.F.R. §52.243-3 (standard
clause applicable to time-and-materials and labor-hour contracts); 48 C.F.R. §52.243-4 (standard clause applicable to
contracts for (1) dismantling, demolition, or removal of improvements, or (2) construction, when a fixed-price contract
is contemplated and the contract amount is expected to exceed the simplified acquisition threshold); 48 C.F.R. §52.243-
5 (standard clause used in contracts for construction, when the contract amount is not expected to exceed the simplified
acquisition threshold).
74 See, e.g., 48 C.F.R. §52.243-1(a). In some cases, the Changes clause applies only to changes to specifically
enumerated terms of the contract, while in other cases, it is drafted so as to apply to terms of the same general type as
those enumerated. Compare 48 C.F.R. §52.243-2 (permitting the contracting officer to “make changes within the
general scope of this contract in any one or more of the following: (1) [d]rawings, designs, or specifications when the
supplies to be furnished are to be specially manufactured for the Government in accordance with the drawings, designs,
or specifications[;] (2) [m]ethod of shipment or packing[;] (3) [p]lace of delivery”) with 48 C.F.R. §52.243-4
(permitting the contracting officer to “make changes in the work within the general scope of the contract, including
changes (1) [i]n the specifications (including drawings and designs); (2) [i]n the method or manner of performance of
the work; (3) [i]n the Government-furnished property or services; or (4) [d]irecting acceleration in the performance of
the work ”). However, “specifications” are included in all the standard clauses, and this term is generally understood to
encompass changes in quantity, as well as in certain other aspects of the work to be performed (e.g., product features).
75 See, e.g., J.W. Bateson Co. v. United States, 308 F.2d 510, 513 (5th Cir. 1962) (“[T]he proper yardstick in judging
between a change and a termination in projects of this magnitude would best be found by thinking in terms of major
and minor variations in the plans.”). Changes are “within the general scope of the contract” when the parties should
have “fairly and reasonably” contemplated them at the time when they entered the contract. Reductions that would not
have been fairly and reasonably contemplated by the parties are generally treated not as changes, but as partial
terminations for convenience. See Freund v. United States, 260 U.S. 60, 63 (1922).
76 An “indefinite-quantity” contract is one that obligates the government to obtain an “indefinite quantity, within stated
limits, of supplies or services [from the contractor]” over the term of the contract. 48 C.F.R. §16.504(a). One that is
“indefinite-delivery” does not specify in advance the dates upon which supplies or services are to be supplied, but
rather authorizes the placement of orders for supplies or services as they are needed over the course of the contract.
77 48 C.F.R. §2.101.
78 See, e.g., Dixon Pest Control, Inc., ASBCA 41042, 92-1 BCA ¶ 24,609; D & S Mfg. Co., Inc., ASBCA 32865, 87-1
BCA ¶ 19,351.
79 48 C.F.R. §16.504(a)(1). The minimum quantity must be a “more than nominal amount.” See, e.g., Goldwasser v.
(continued...)
Congressional Research Service
11
Terminating Contracts for the Government’s Convenience
make purchases in excess of the minimum.80 In contrast, when the government wholly or partially
terminates a contract for convenience, the government is taking away work that the contractor is
legally entitled to perform, and the contractor is potentially entitled to a termination settlement or
other remedy.
Government Liability in the Event of Termination
for Convenience
The questions and answers in this section focus upon the government’s potential liability in the
event of a termination for convenience. It begins by addressing how termination settlements are
typically arrived at and what they may include before discussing the circumstances in which the
government could potentially face liability for breach as a result of the exercise of its contractual
and/or inherent right to terminate for convenience.
How Is a Termination Settlement Arrived At?
When the government exercises its right to terminate, it is typically obligated, pursuant to the
terms of the contract, to pay the contractor for certain costs, discussed below (see “What Could a
Termination Settlement Include?”). This payment is commonly referred to as a “termination
settlement,” and the contract generally also prescribes the procedures for arriving at the
termination settlement. The standard termination clauses prescribed by the Federal Acquisition
Regulation (FAR) generally require the contractor to submit a “final termination settlement
proposal” to the contracting officer within one year from the effective date of the termination (or
any longer period granted by the contracting officer).81 This proposal can form the basis for an
agreement between the contractor and the contracting officer regarding all or part of the amount
to be paid because of the termination.82 However, if the contractor fails to submit a proposal
within the requisite time period, the contracting officer may determine the amount, if any, due to
the contractor and pay it.83 Similarly, if the contractor and the contracting officer fail to agree on
the “whole amount” to be paid, the contracting officer may determine the amount based upon
certain factors specified in the contract (e.g., the price for any completed work that has not
already been paid for, costs incurred in performing the terminated work).84 Such determinations
constitute “final decisions” of the contracting officer, and may be appealed pursuant to the
(...continued)
United States, 325 F.2d 722 (Ct. Cl. 1963) (contract with a minimum quantity of $100 compared to estimated price of
$40,000 “would have been a one-sided bargain, bordering upon lack of mutuality”); Tennessee Soap Co. v. United
States, 126 F. Supp. 439 (Ct. Cl. 1954) (a $10 minimum order was nominal and thus insufficient).
80 See, e.g., Bliss Co. v. United States, 74 Ct. Cl. 14 (1932) (government not liable for losses due to the contractor’s
plant being idled for lack of orders); Alta Constr. Co., PSCBA 1395, 87-2 BCA ¶ 19,720 (government’s awarding
orders to a competitor of the contractor does not give rise to a breach of contract claim).
81 See, e.g., 48 C.F.R. §52.249-2(e). The one-year limitation has been found not to apply in cases of constructive
termination for convenience. See, e.g., Earth Property Servs., Inc., ASBCA 36764, 91-2 B.C.A. ¶ 23,753.
82 See, e.g., 48 C.F.R. §52.249-2(f).
83 See, e.g., 48 C.F.R. §52.249-2(e).
84 See, e.g., 48 C.F.R. §52.249-2(g).
Congressional Research Service
12
Terminating Contracts for the Government’s Convenience
contract’s Disputes clause, so long as the contractor submitted a final termination settlement
proposal within the requisite time period.85
Any settlement agreement reached by the parties modifies the contract,86 and is generally binding
upon them.87
What Could a Termination Settlement Include?
The standard Termination for Convenience clauses in federal procurement contracts also
generally address the specific components of any settlement between the government and the
contractor for claims arising from a total or partial termination. These components can vary
depending upon the terms of the contract, but generally include (1) payment for work already
performed, but not yet paid for; (2) costs incurred in anticipation of performance; (3) costs arising
from the termination and settling the termination; and (4) some recovery for profit, in the case of
fixed-price contracts, or recovery of award or incentive fees, in the case of cost-reimbursement
contracts.88 A “fixed-price contract” is a contract whereby the contractor agrees to supply certain
supplies or services to the government at a predetermined price, while a “cost-reimbursement
contract” is one that provides for the government to pay the contractor allowable costs incurred in
performing the contract up to a total cost specified in the contract.89
Because of this focus upon costs, termination has frequently been described as effectively
converting fixed-price contracts into cost-reimbursement contracts,90 and the cost principles and
procedures from Part 31 of the FAR—which typically apply only to cost-reimbursement
contracts—generally govern “all costs claimed, agreed to, or determined” under the standard
Termination for Convenience clauses.91 The application of Part 31 is, however, subject to the
85 See, e.g., 48 C.F.R. §52.249-2(l); R & D Mounts, Inc., ASBCA 17667, 74-2 B.C.A. ¶ 10,740 (contractor’s failure to
submit a settlement proposal within the requisite time period was fatal to its appeal). The Disputes clause establishes
procedures for handling claims by the parties to a government procurement contract. See 48 C.F.R. §52.233-1. A
“claim” is a “written demand or written assertion by one of the contracting parties seeking, as a matter of right, the
payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or
relating to th[e] contract.” 48 C.F.R. §52.233-1(c).
86 See, e.g., 48 C.F.R. §49.001 (“Settlement agreement means a written agreement in the form of a contract
modification settling all or a severable portion of a settlement proposal.”) (emphasis in original).
87 As with any contract, exceptions would be made for agreements procured by fraud, misrepresentation, coercion, or a
mistake that would make the agreement otherwise unenforceable. See, e.g., Narragansett Machine Co., WDBCA 1557,
4 CCF 60433 (1947). In addition, the parties could provide for certain exclusions or reservations as part of the
agreement. See, e.g., Bell Aircraft Corp., ASBCA 4736, 59-2 B.C.A. ¶ 2,349.
88 See supra notes 43 and 63.
89 See generally CRS Report R41168, Contract Types: Legal Overview, by Kate M. Manuel. Costs are “allowable” if
they are reasonable; allocable; comply with any applicable standards promulgated by the Cost Accounting Standards
Board or, alternatively, generally accepted accounting principles and practices appropriate to the circumstances; are
provided for by the terms of the contract; and meet any limitations set forth in Part 31 of the FAR. 48 C.F.R. §31.201-
2(a)(1)-(5). A cost is “reasonable” if, “in its nature and amount, it does not exceed that which would be incurred by a
prudent person in the conduct of competitive business.” 48 C.F.R. §31.201-3(a). Costs are “allocable” if they were
incurred specifically for the contract; benefit both the contract and other work, and can be distributed to them in
reasonable proportion to the benefits received; or are necessary to the overall operation of the business. 48 C.F.R.
§31.201-4(a)-(c).
90 White Buffalo Constr., Inc. v. United States, 52 Fed. Cl. 1, 4 (2002) (“When a fixed-price contract is terminated for
convenience, it is essentially converted into a cost reimbursement contract.”).
91 See, e.g., 48 C.F.R. §52.249-3 (Termination for Convenience of the Government (Dismantling, Demolition, or
Removal of Improvements)); 48 C.F.R. §52.249-5 (Termination for Convenience of the Government (Educational and
(continued...)
Congressional Research Service
13
Terminating Contracts for the Government’s Convenience
general principle that the purpose of a termination settlement is to “fairly compensate” the
contractor92 (i.e., the cost principles will not necessarily be strictly applied).93 Part 31 specifically
contemplates the following costs as potentially allowable (i.e., included in settlements under the
government contract to which it is allocable)94 when a contract is wholly or partially terminated:
• common items: the costs of items “reasonably usable on the contractor’s other
work” if these items could not be retained at cost without the contractor
sustaining a loss;95
• costs continuing after termination: costs which cannot be discontinued
immediately after the termination “[d]espite all reasonable efforts by the
contractor”;96
• initial costs: nonrecurring labor, material, and related overhead costs incurred in
the early part of production as a result of factors such as training, lack of
familiarity with the product, or excess spoilage due to inexperienced labor; and
preparatory costs incurred in preparing to perform the terminated work, such as
initial plant rearrangement and alterations and production planning;97
• loss of useful value of special tooling, machinery and equipment, provided that
the items are not “reasonably capable of use” in the contractor’s other work, and
the government’s interest is protected;98
• rental under unexpired leases, minus the residual value of such leases, provided
that the amount of rent claimed does not exceed the reasonable use value of the
property, and the contractor makes “all reasonable efforts” to terminate or
otherwise reduce the cost of the lease;99
• alterations of leased property: alterations and reasonable restorations required by
the lease, when the alterations were necessary for performing the contract;100
• settlement expenses: accounting, legal, clerical, and similar costs reasonably
necessary for preparing settlement claims and for termination and settlement of
subcontracts; reasonable costs for the storage, transportation, protection, and
disposition of property acquired or produced for the contract; and indirect costs
related to salary and wages incurred as settlement expenses in relation to the
foregoing;101 and
(...continued)
Other Nonprofit Institutions)); 48 C.F.R. §52.249-6 (Termination (Cost-Reimbursement)).
92 See 48 C.F.R. §49.113; 48 C.F.R. §49.201(a).
93 See 48 C.F.R. §49.201(a) (“The use of business judgment, as distinguished from strict accounting principles, is the
heart of a settlement.”).
94 48 C.F.R. §2.101.
95 48 C.F.R. §31.205-42(a).
96 48 C.F.R. §31.205-42(b). In contrast, costs that continue after the effective date of the termination due to the
contractor’s “willful or negligent failure to discontinue” are unallowable. Id.
97 48 C.F.R. §31.205-42(c).
98 48 C.F.R. §31.205-42(d).
99 48 C.F.R. §31.205-42(e).
100 48 C.F.R. §31.205-42(f).
101 48 C.F.R. §31.205-42(g).
Congressional Research Service
14
Terminating Contracts for the Government’s Convenience
• subcontractor claims, including the allocable portion of the claims common to
the contract and the contractor’s other work, as well as an “appropriate share” of
the contractor’s indirect expenses, provided that the amount allocated is
“reasonably proportionate” to the relative benefits received and is otherwise
consistent with Part 31 of the FAR.102
Other costs could potentially also be allowable, depending upon the circumstances, because “[t]he
purpose of a termination settlement is to compensate a contractor fairly, ... and to make [the
contractor] whole for costs incurred in performing the terminated work.”103
How Much Can a Termination Settlement Cost?
The amount of any termination settlement can vary considerably, depending upon when in the
course of the contract’s performance the termination occurs and the costs that the contractor
incurs as a result of the termination, among other factors. In some cases, contractors may be
entitled to—or agree to—a “no cost” settlement.104 In other cases, the amount of the settlement
can be in the billions of dollars.105 The settlement costs cannot, however, generally exceed the
“contract price less payments otherwise made or to be made under the contract,”106 and the
Government Accountability Office (GAO) has found that potential termination costs are generally
not, in themselves, so large as to justify continued performance of contracts which agencies might
otherwise consider terminating.107
Because the costs of any termination settlement could potentially be high, and agencies are
generally required to obligate or otherwise “reserve” funds to cover potential termination liability,
the possibility of termination for convenience can significant affect agencies’ financial
management practices and other operations, even though the likelihood of terminating any
particular contract is low.108 (See “Why Must Agencies Generally Obligate or Reserve Funds for
102 48 C.F.R. §31.205-42(h).
103 Freedom Elevator Corp., GSBCA 7259, 85-2 B.C.A. ¶ 17,964.
104 See, e.g., Marianas Stevedoring & Dev. Co., Inc., ASBCA 18264, 73-2 B.C.A. ¶ 10,272 (finding that the parties’
agreement, “whereby any costs generated by the termination would remain for the account of the party experiencing
them in the first instance and any liability of one party to the other generated by the termination would be
extinguished,” was binding on the parties).
105 See Gov’t Accountability Office, Defense Acquisitions: Termination Costs Are Generally Not a Compelling Reason
to Continue Programs or Contracts That Otherwise Warrant Ending, GAO-08-379, Mar. 2008 (noting that the total
settlement for the termination of the contract for the Crusader field artillery system was $1.66 billion, while that for the
Tri-Service standoff attack missile was $2.4 billion). These figures are given in current, not constant, dollars.
106 48 C.F.R. §49.207 (“The total amount payable to the contractor for a settlement, before deducting disposal or other
credits and exclusive of settlement costs, must not exceed the contract price less payments otherwise made or to be
made under the contract.”). See also Solar Turbines, Inc. v. United States, 23 Cl. Ct. 142, 149 (1999) (applying the
Limitation of Cost clause to preclude the contractor’s recovery on a termination claim involving amounts in excess of
the funds allotted to the contract on the grounds that the “ceiling is binding and is not linked in any way to the timing of
any termination for convenience); Pickard & Burns Electronics, ASBCA 12736, 68-2 B.C.A. ¶ 7,149 (finding that the
Limitation of Cost clause precluded recovery of termination costs in excess of the specified amount because the
Termination clause committed the government to pay costs and expenses “reimbursable in accordance with this
contract,” and the Limitation of Cost clause is part of those terms).
107 See Defense Acquisitions: Termination Costs Are Generally Not a Compelling Reason to Continue Programs or
Contracts, supra note 105.
108 See, e.g., Gov’t Accountability Office, NASA Needs To Better Assess Contract Termination Liability Risks and
Ensure Consistency in Its Practices, GAO-11-609R, at 1, July 12, 2011 (reporting that, in FY2010, the National
(continued...)
Congressional Research Service
15
Terminating Contracts for the Government’s Convenience
Termination Liability?”) However, in addition to generally being “capped” by the contract price,
the amount of any termination settlement could also be limited by the operation of certain
contract clauses, such as the Special Termination Cost clause included in certain Department of
Defense Contracts.109
Could the Government Ever Face Liability for Breach by
Terminating for Convenience?
As a general rule, the government does not face liability for breach of contract when it terminates
a contract for convenience because the government’s right to terminate for convenience is an
express or implied term of the contract. (See “What Is the Basis for the Government’s Right to
Terminate for Convenience?”) However, in certain narrow circumstances, the government could
potentially face liability for breach because the termination for convenience is found to have been
motivated by bad faith or to constitute an abuse of discretion.110 The number of such cases is
arguably limited by the difficulty of proving bad faith or an abuse of discretion on the
government’s part.111 Bad faith, in particular, “is an onerous charge that requires ‘well-nigh
irrefragable proof,’”112 and public officials are presumed to perform their duties correctly, fairly,
in good faith, and in accordance with the laws and regulations.113
In certain cases, though, courts and boards of contract appeals have found breach when the
government exercises its right to terminate for convenience. Such cases generally involve
situations where (1) the government entered the contract with the intent to terminate it,114 or (2)
the government purported to terminate the contract for convenience after the contract expired in
order to avoid liability under the contract.115 These findings impliedly or expressly reflect
fundamental principles of the common law of contracts. For example, in finding breach when the
government entered the contract with the intent to terminate it, courts and boards have described
the government’s undisclosed intent to terminate as making a “mockery” of its purported assent to
the contract.116 Mutual agreement by the parties is fundamental to any contract. Similarly, in
(...continued)
Aeronautics and Space Administration terminated 28 of 16,343 contracts and orders, for a termination rate of about
0.17%); Defense Acquisitions, supra note 105, at 8 (reporting that in FY2006, the Defense Contract Management
Agency’s Terminations Center processed about 600 terminations, only 10% of which involved terminated items valued
at more than $1 million).
109 See generally 48 C.F.R. §249-7000(c) (“The Contractor agrees to perform this contract in such a manner that the
Contractor’s claim for special termination costs will not exceed $____. The Government shall have no obligation to pay
the Contractor any amount for the special termination costs in excess of this amount.”).
110 Krygoski Constr. Co., 94 F.3d at 1541 (“When tainted by bad faith, or an abuse of contracting discretion, a
termination for convenience causes a breach.”).
111 See, e.g., Kalvar Corp. v. United States, 543 F.2d 1298 (Ct. Cl. 1976).
112 Knotts v. United States, 121 F. Supp. 630 (Ct. Cl. 1954).
113 See, e.g., Librach v. United States, 147 Ct. Cl. 605 (1959).
114 See, e.g., Salsbury Indus. v. United States, 905 F.2d 1518, 1521 (Fed. Cir. 1990) (“When the government contracts
with a party knowing full well that it will not honor the contract, it cannot avoid a breach claim by adverting to the
termination for convenience clause.”); Caldwell & Santmyer, Inc. v. Glickman, 55 F.3d 1578 (Fed. Cir. 1995) (same);
Tamp Corp., ASBCA 25692, 84-2 B.C.A. ¶ 17,460 (same).
115 See, e.g., Maxima Corp., 847 F.2d 1549 (government asserted its right to terminate after the contract had expired in
order to avoid liability for its failure to make the minimum purchase required under the contract).
116 Tamp Corp., ASBCA 25692, 84-2 B.C.A. ¶ 17,460. See also Travel Centre v. Gen. Servs. Admin., GSBCA 14057,
(continued...)
Congressional Research Service
16
Terminating Contracts for the Government’s Convenience
finding that “retroactive terminations” constitute breach, courts and boards have emphasized that
the government “may not use the standard termination for convenience clause to dishonor, with
impunity, its contractual obligations.”117 In other words, the government’s express or implied
contractual right to terminate contracts for convenience expires with the contract, and cannot
thereafter be asserted to avoid liability for the government’s failure to perform as required during
the term of the contract.
Why Must Agencies Generally Obligate or Reserve Funds for
Termination Liability?
The Anti-Deficiency Act is a federal statute which generally prohibits the obligation of federal
funds in excess of amounts actually appropriated under law.118 As a result, when a federal agency
enters into a contract, the agency must generally have sufficient funds to cover the cost of the
contract, plus any liability that may arise if the agency chooses to terminate the contract before it
expires. In the case of a typical single-year contract, the total recovery by the contractor may not
exceed the contract price.119 Therefore, it is generally not necessary for a federal agency to set
aside funds for termination liability for single-year contracts, as the federal government’s liability
would always be within the amount required to pay for full performance under the contract.
However, where the contract gives the agency an option to renew, the contractor may have initial
outlays that would not be recouped if the government chooses not to renew beyond the base
period of the contract. In order to provide some security for the contractor in these situations,
renewable (i.e., multiple year) contracts frequently contain provisions requiring the government
to pay some form of “termination charge” in the event that a renewal option is not exercised.120
Notably, in contrast with a typical single-year contract, here the government may be liable for
more than the cost of performance under the contract from its inception up until the refusal to
renew. Therefore, the Anti-Deficiency Act generally requires that an agency have sufficient funds
(...continued)
98-1 B.C.A. ¶ 29,536 (1997), recon. denied, 98-1 B.C.A. ¶ 29,541 (finding that the government had breached the
contract, which it purported to terminate for convenience, because the government had withheld crucial information
demonstrating that the estimates of potential business on which the contractor based its proposal were vastly overstated,
and the contract was “doomed to failure from the beginning”).
117 Torncello, 681 F.2d at 772. In Torncello, the government had entered a requirements contract for “on call” pest-
control services at naval housing facilities. The court found that the government breached this contract by ordering
lower-priced services from another vendor who had competed for the contract awarded to Torncello because the
contract entitled Torncello to supply all the Navy’s requirements for pest-control services at these facilities. The
government attempted to avoid liability by asserting that it could have terminated the contract for convenience at any
time, but it had not, in fact, so terminated. Torncello is sometimes construed as precluding agencies from terminating
requirements contracts. However, this is arguably an over-expansive reading of the court’s decision, and Torncello’s
holding was subsequently limited by the decision of the U.S. Court of Appeals for the Federal Circuit in Krygoski
Construction Co. v. United States. While not addressing a requirements contract, the Krygoski court read Torncello as
holding only that the government cannot terminate a contract for convenience in bad faith. See supra note 114.
118 31 U.S.C. §1341.
119 48 C.F.R. §49.207 (“The total amount payable to the contractor for a settlement, before deducting disposal or other
credits and exclusive of settlement costs, must not exceed the contract price less payments otherwise made or to be
made under the contract”).
120 For more on the differences between multiyear and multiple year contracts, see supra note 68 and accompanying
text.
Congressional Research Service
17
Terminating Contracts for the Government’s Convenience
to cover any such termination charges, in addition to the price of one year of performance under
the contract, before entering into such a contract.121
The required obligation of termination costs also arises in the context of multiyear contracts
authorized under the Federal Acquisition Streamlining Act of 1994 (FASA),122 as amended, or
other authority. Multiyear contracts are defined under FASA as contracts of up to five years in
length.123 Multiyear contracts are an exception to the Anti-Deficiency Act, but FASA imposes its
own requirement to set aside termination costs. Specifically, FASA provides that civilian agencies
may only enter into multiyear contracts if they either obligate the full cost of the contract over the
entire term, or obligate the cost of the first year of the contract plus the estimated costs associated
with any termination of the contract.124
Termination costs are generally obligated from the same fund under which the underlying
contract would be funded. Consequently, if an agency were not required to obligate potential
termination liability when entering into a contract, the purchasing power of a particular
appropriation would be increased. To this end, exceptions to the general requirement to set aside
funds for termination liability have been enacted by Congress. For example, Congress has
previously specified that a particular federal agency “shall not be required to obligate funds for
potential termination liability in connection with” specific programs.125 Congress has also
specifically appropriated or designated additional funds to cover potential termination liability.126
In other cases, Congress has placed ceilings on the amount of termination liability that an agency
may negotiate with a contractor.127
121 B-174839, 62 Comp. Gen. 143 (Jan. 28, 1983) (finding that upon entering 5-year contract, with option to renew for
additional 5-year periods for up to 20 years, Navy is required to record obligation of funds for costs of the base 5-year
period plus any termination expenses for failure to renew).
122 P.L. 103-355, 108 Stat. 3243 (1994).
123 10 U.S.C. §§2306b-2306c (procurements of defense agencies); 41 U.S.C. §3903 (procurements of civilian
agencies).
124 41 U.S.C. §3903(b)(1). FASA’s provisions regarding the multiyear contracts of defense agencies differ somewhat.
See generally 10 U.S.C. 10 U.S.C. §§2306b-2306c.
125 E.g., Department of Defense Appropriations Act, 2001, P.L. 106-259, §8145, 114 Stat. 705 (Aug. 9, 2000)
(exempting B-2 Link 16/Center Instrument Display/In-Flight Planner Program).
126 E.g., Department of Defense Appropriations Act, 2000, P.L. 106-79, §8147, 113 Stat. 1271 (Oct. 25, 1999)
(appropriating $300 million for F-22 program termination liability); John Warner National Defense Authorization Act
for FY2007, P.L. 109-364, §812(f)(2)(A), 120 Stat. 2317 (Oct. 17, 2006) (authorizing Secretary of Defense to establish
special reserve account to cover termination costs of major weapon systems in pilot program); 10 U.S.C. §7233(h)
(authorizing termination liability for leases of vessels to be paid from amounts originally available for performance of
the contract, amounts available for operation and maintenance of such vessels, or funds appropriated for costs).
127 E.g., Oceans Act of 1992, P.L. 102-587, §5223, 106 Stat. 5081 (Nov. 4, 1992) (capping termination liability for
certain business services provided to the Coast Guard Support Center in Kodiak, Alaska, at $842,047).
Congressional Research Service
18
Terminating Contracts for the Government’s Convenience
Author Contact Information
Kate M. Manuel
Edward C. Liu
Legislative Attorney
Legislative Attorney
kmanuel@crs.loc.gov, 7-4477
eliu@crs.loc.gov, 7-9166
Erika K. Lunder
Legislative Attorney
elunder@crs.loc.gov, 7-4538
Congressional Research Service
19