Preparing for a federal termination for convenience

We’re in a time of disruption and uncertainty in government contracts and grants. A flurry of executive orders, shifting policy priorities and directives to freeze and reevaluate federal funding are transitioning into a wave of federal award terminations.

When faced with the termination of a government contract or grant, it’s important to understand the process, your rights and each party’s responsibilities, including submitting a termination settlement proposal (TSP) to maximize the recovery of costs owed.

Upon receipt of a termination notice, you will be required to take immediate action. Here are the key steps in the process:

• Stop work. Halt work immediately on terminated activities.
• Cost segregation. Separately track termination-related costs, including the costs of settling subagreements and other costs incurred as a direct result of the termination.
• Subcontractors and subrecipients. Proceed with the termination and settlement of subagreements. Subcontractors have no contractual rights against the government. They have rights only against the prime contractor if granted in the subcontract terms, so be sure to review the terms.
• Employee notice requirements. If you anticipate a significant reduction in your U.S. workforce, you may be required to provide advance notice and other forms of assistance in accordance with the Worker Adjustment and Retraining Notification Act (WARN Act)and any applicable state, local and foreign country labor law requirements.
• Property. Protect and preserve government property until disposition instructions are confirmed.
• Records. Maintain records relating to the termination for at least three years after the final settlement.

Grant or cooperative agreement terminations

The government can terminate assistance awards if the award no longer effectuates program goals or agency priorities (i.e., for convenience). In this case, the federal agency and the recipient must agree on termination conditions. After termination, the recipient and federal agency remain responsible for completing closeout and post-closeout responsibilities (e.g., final reporting, property disposition, audit). See 2 CFR 200.340 and any individual award termination provisions for more details.

Recipients should develop a TSP to recover their termination and closeout costs for prompt submission, ideally no later than the due date of the final financial report.

If you are unable to negotiate a settlement on your assistance award directly with the agreement officer or grants officer, discuss your options with legal counsel. It may be possible to pursue a monetary claim under the Tucker Act in the U.S. Court of Federal Claims.

Termination settlement proposals

TSPs allow you to claim the costs of in-progress work and costs incurred because of the termination. It is essential to provide accurate accounting and records to put together a strong TSP and ensure maximum cost recovery.

TSPs may include the following:

• Costs of work performed up to the effective termination date. These costs may consist of preparation costs for work that was terminated.
• Protection and disposition of property, such as storage and transportation.
• Rental costs under unexpired leases if all reasonable efforts have been made to terminate or otherwise reduce the cost of the lease.
• Legal requirements for separating personnel, including salaries paid during required notice periods, required severance payments and the cost of legal counsel.
• Termination and settlement of subagreements and vendors.
• Costs that cannot be immediately discontinued after the termination date despite all reasonable efforts.
• Accounting, legal and professional fees to prepare TSPs and supporting data.
• Indirect costs allocable to allowable termination costs.
• Stop-work costs if the award was suspended prior to receiving a complete termination notice. These include the costs to pause activities responsibly, unavoidable costs incurred during the stop-work period and justifications for why those costs were necessary and reasonable. For partial terminations, submit a request for equitable adjustment under the remaining portion of the award.
• For contracts, profit on work done for the terminated portion of the contract. The contract type and terms will dictate the calculation methods. Profit is not allowed on termination expenses (except for subcontractor settlement costs).
• For assistance awards, administrative closeout costs may be incurred until the due date of the final report(s).

A TSP package should include the following:

• A cover letter with a well-supported cost narrative that explains how the settlement costs were calculated (e.g., inventory, total cost) and justifies why the proposed costs are allowable, allocable and reasonable.
• Supporting documentation as needed (e.g., budget file showing the buildup of termination costs).
• Contract TSP form(s). Include the appropriate TSP form prescribed at FAR 49.602-1 and a Schedule of Accounting Information (SF 1439).
• For contracts, provide accurate, complete and current cost or pricing data when the amount of a termination settlement agreement exceeds the threshold in FAR 15.403-4 (currently $2 million).

The takeaway

Understanding the termination process and your rights can make all the difference. The goal is to navigate terminations successfully and optimize your settlement cost recovery.