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Default and Dispute Term Paper

Default and Dispute


The Federal Acquisition Regulations (FAR) are subparts of the laws of the federal government pertaining to procurement and contracts (Feldman, 2008). They were outlined as an avenue for contractors to redress grievances subject to the award and performance of their contracts with the federal government. The United States government can be sued as a sovereign, only with its permission. The terms for this process are set forth in the regulations, administrative tribunal decisions and the amalgamation of executive orders that is collectively known as public procurement or government contracts law. In the context of federal contracts, the precise meaning of termination is based on the facts of a particular case, as well as, the nature of the termination clause used by the federal government. The federal termination clauses provide two distinct contingencies: termination for the convenience of the government and the termination for the default of the contractor. Termination for default means that the government has established that a contractor is not performing adequately while termination for convenience allows the government to partially or completely terminate a contract so as to protect its interest. Termination for convenience does not arise from the fault on the part of the contractor (Feldman, 2008). This paper highlights various aspects of government contracts including the bases for a termination for default, the consequences and remedies of termination for convenience and termination for default, excess cost of re-procurement, liquidated damages and the Contract Dispute Act in reference to Part 49 (Termination of Contracts) of FAR (FAR, Subpart 49.5-Contract Termination Clauses, 2013). The author also outlines the benefits of acquisition planning to cost containment in government contracting.

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Bases for Termination for Default

The fundamental principle under this type of termination is that the contractor bears the risk of his own failure, but with recognized exceptions (Feldman, 2008). For example, if a contractor fails to meet the completion or delivery date, fails to meet established or new social objectives and delivers non-standard or non-conforming supplies, the contractor may be placed in default by the government. In the Subpart 49.4 (Termination for Default) of FAR, the government has a right to legally terminate part or all of a contract for anything that portrays the contractor as incompetent or unreliable based on the government’s interest (FAR, 2013a). This also includes attempted fraud and failure to perform any provision of the contract. If a contractor does not make any progress and the failure endanger the performance of the contract, the government may terminate the contract. Moreover, the government may also terminate a contract for default if the contractor fails to perform the contracted services within the time stipulated in the contract (Feldman, 2008). This is also referred to as termination for time extension (Feldman, 2008).

Before the federal government terminates a contract for default, the contracting officer will issue a written notice, known as a cure notice to the contractor. The notice gives contractors at least ten working days to mend or cure the defects (FAR, 2013b). A show-cause notice directs a contractor to outline why a contract should not be terminated if there is no sufficient time to mend any defects. It is a means of ensuring that contractors understands their predicament and that their answers can be used to evaluate whether the scenario justify default action. The contractor’s failure to address the problem at hand leaves the contracting officer with no choice and may issue a notice of termination for default of the contractor (Feldman, 2008).

Consequences and Remedies for Termination for Default or Convenience

In the context of termination for convenience, the government must make a fair and timely settlement with the contractor (Feldman, 2008). A contractor is entitled to a monetary remedy under this circumstance. Some of the remedies recoverable include: the contract price for accomplished services or supplies accepted by the government, the costs incurred in the while carrying out the terminated work, such as profit allowance on work done and the costs of settlement of the work terminated. However, the contractor’s monetary remedies may not exceed the total contract price. Additionally, the contractor cannot recover consequential or anticipated profits and damages that may be recovered under the common law for breach of contract (Feldman, 2008). Normally, settlement is based on the negotiated agreement between the parties. Settlement of fixed-price contracts is somewhat complex that that of cost-reimbursement contracts because reimbursement is on a cost basis from the initiation of the contract. The government must notify a contractor if it terminates a contract for its convenience (FAR, 2013b). According to the termination clause, the contractor is required to stop working immediately on the terminated portion of the contract, as well as terminate all the associated subcontracts. In the event that contractors receive a termination notice for governments’ convenience, they must follow the received detailed instructions to protect and preserve all or part of the items that might become government-owned.

In reference to termination for default, the contractor is only entitled to the payment for items by the government. According to the default clause, the government has a right to repurchase the items elsewhere (Feldman, 2008). The government also has a right to charge any excess costs incurred in re-procurement to the contractor. If a contractor can clearly prove that failure to meet the contractual terms is excusable, then the government cannot terminate the contract for default. For a contract to be excusable, the failure must be beyond the contractor’s control and not a subject to negligence or fault. Some of the excusable failures include Acts of Government, Acts of God, Strikes, Freight Embargoes, Epidemics, Quarantine restrictions and Acts of Public Enemy. A contractor has a right to recover any acceptable costs incurred in the process of settling a termination for convenience. This may include presentation and preparation claims, and transportation, storage and protection of the property acquired for the contract.

Governments Remedy of Excess Cost of Re-Procurement and Liquidated Damages

In the event of termination of a contract for default, the government has a right to charge a contractor any excess costs incurred in acquiring services supplies. These include excess cost for re-procurement, common law damages, liquidated damages and un-liquidated damages. The termination of a contract for default does not necessarily mean that the government no long needs the services or supplies that were provided. As a general principle with certain prescribed exceptions, a contractor is liable to the government for the evaluation of the excess cost of re-procurement. Liquidated damages are cost incurred upon the agreed damages instead of the actual damages whereas un-liquidated damages are cost incurred subject to the contract’s advance or progress payments.

Contract Dispute Act

Termination of a contract leads to a liability of either the contractor or the government, and the parties involved are permitted assertion of the claim. According to FAR (2013), the Contract Dispute Act of 1978 is a legal framework that outlines the requirements and procedures for asserting and resolving claims subject to the Act (FAR, 2013a). In addition, the Contract Dispute Act provides for certification and the payment of a contractor’s claims. Furthermore, the Act also provides for a civil penalty in the event that a contractor claims are fraudulent or founded on a misrepresentation of facts. In the Subpart 33.2 (Dispute and Appeals), “misrepresentation of fact” refers to any conduct or false statement of substantive fact that results in a belief of a substantive fact to proper insight of the subject matter, orchestrated to mislead or deceive (FAR, 2013b).

In circumstances where a contract is terminated for convenience, a contractor and the contracting officer may fail to agree on the total amount to be paid due to the termination of a contract. In such a scenario, the contracting officer may determine the amount to be settled. As per the Act, a contractor is entitled to appeal, under the disputes clause, from such a determination made by the contracting officer. In other words, the Act gives the contracting parties the procedures to solve any dispute pertaining to contract termination. Therefore, a contractor has alternative in the event that the government makes a decision that is disputed. Additionally, contractors can use protests and other types of dispute resolution to settle the contested issue (Feldman, 2008).

Importance of Acquisition Planning to Cost Containment in Government Contracting

The government has to take several initiatives in order to successfully implement effective acquisition practices in its institutions. This is a subject to the fact that both the external and internal organizational environments are changing. Acquisition planning enables government contracting agencies to positively respond to the internal and external pressures. Consequently, government institutions have been able to streamline and improve their processes in the acquisition of systems essential to support their missions. The planning process ensures that the procured services and supplies meet the necessary requirements at an affordable cost. Planning also minimizes the costs that the government might incur in the event that it has to terminate a contract for convenience. Contract terminations are costly to the government in the aspects of money and time. Re-procurement is time costly and may be affected by the foreign currency instability leading to massive government losses (Feldman, 2008).

Acquisition planning is also associated with the implementation of electronic based centers that use integrated products teams of high skilled professionals. Such teams focus on leveraging strategic visions and business concerns. For example, the Department of Defense has experienced more cost reductions, high efficiencies and better technology through acquisition reforms, which emphasize on acquisition planning for cost containment in government contracting.

Conclusion and Recommendations

Contract terminations disputes are some of the most complex aspects of contract administration for both the contractor and the government. During the process of awarding and signing of a contract, neither party projects that the contract may be terminated prior to its planned close date. Furthermore, neither the government nor the contractor expects that any of the parties might file one or more claims against each other. In circumstances where such events do occur, parties that are well prepared carry the day.

Government contracting is a highly specialized area of law that is usually confusing, intimidating and overwhelming. One of the contributing factors to this confusion is the complex language of the government contracts, which include abbreviations, acronyms and special meanings given to ordinary phrases and word. Therefore, it is recommended that all the parties involved comprehend all the legal measures and loop holes in any contract. Contractors should engage competent and experienced contracting representatives to avoid misunderstandings. On the other hand, the government should also employ competent and experienced contract officers to ensure that terminations are fair for investor confidence. They should also ensure that they are less in number so that the government does not lose money through contractors’ appeals or disputes.

The government should also invest in extensive Human Resource Training and Development programs. Lastly, it should also implement the application of technology in its contracting processes. Web-based technologies will facilitate collaboration and minimize bottlenecks created by traditional document based acquisition systems. The use of technology will also improve the speed, accuracy, transparency and integrity in the contracting processes. To summarize, effective contracting translates to economical projects at the minimal expense of the taxpayers’ money.

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