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Pre-Performance Costs Recoverable for Convenience Termination

A board of contract appeals' denial of costs under a commercial items termination for convenience clause was reversed and remanded by the District Court for the District of Maryland because the board improperly interpreted FAR 52.212-4 (l) as precluding recovery of costs incurred for the purpose of performing, or in anticipation of performing, the vessel charter contract. The Armed Services Board of Contract Appeals denied the contractor's claim for loan principal, interest, and insurance costs, modification costs, general and administrative costs, and profit under FAR 52.212-4 (l), which requires the government to pay the contractor the price of the percentage of work performed, plus "reasonable charges ... [that] have resulted from the termination [for convenience]." The board ruled the clause allows recovery only for costs incurred after a contract has been terminated, and not for costs incurred in preparation for contract performance that cannot be recouped as a result of termination (09-2 BCA 34,304).

Unduly Narrow Interpretation

On appeal, the government argued the clause contemplates recovery only of costs that directly flow from the act of contract termination itself, not costs incurred prior to termination in anticipation of full contract performance. According to the government, recovery was essentially limited to settlement expenses. However, the government's interpretation was "unduly narrow," inconsistent with the purposes of the Federal Acquisition Streamlining Act, and "would unjustifiably disavow the fairness principles that have long informed disputes involving government contracts."

ASBCA Reversed

In reversing the board, the court explained that FAR 52.212-4 (l) establishes a presumption that a terminated commercial items contractor will be adequately compensated by payment of "a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination." The clause also recognizes this formula may not make a contractor whole with respect to expenses reasonably incurred in anticipation of performing the entire contract, so it provides the contractor with an opportunity to demonstrate its entitlement to other "reasonable charges." As a result, under FAR 52.212-4 (l), a contractor whose contract is terminated for convenience is entitled to payment for the percentage of the work performed prior to the notice of termination, plus "a payment as compensation for settlement costs or costs reasonably incurred in anticipation of contract performance, provided such costs are not adequately reflected as a percentage of the work performed, and provided such costs could not have been reasonably avoided." On remand, the board was to make determinations of entitlement and quantum in light of the court's interpretation. (Red River Holdings, LLC v. U.S., DC Md, 55 CCF 79,590).




(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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