I am looking for someone that can give me insight regarding the effects of DFARS 252.249-7000, Special Termination Costs. Specifically, in the event of a termination for convenience what costs would be recoverable against the contract funding and what costs would be recoverable against the limits specified in DFARS 252.249-7000. My primary concern is the treatment of subcontract costs. An example may help clarify my question:

Assume the prime contract is T for C'd on January 1. I would assume that costs incurred by the Prime up to that point would be recovered against the contract funding; and costs incurred by the Prime after that point would be recovered against the termination limitation. Now, assume I flow down the T for C to my suppliers on January 3, 2 days later. Is it safe to assume that the costs incurred by the supplier up to January 1 are recoverable against the prime contract funding notwithstanding when these costs are billed to the prime? If so, are the costs incurred by the suppliers between Jan 1 and Jan 3 recovered against the contract funding or the termination limitation?

Any experience out there?

Thanks,

Brad

By Vern Edwards on Friday, November 17, 2000 - 08:07 pm:

Brad:

I believe that the answer to your question depends on whether or not the contract was fully funded before the termination.

According to DFARS 249.501-70, the Special Termination Costs clause is for use in incrementally funded contracts. The clause constitutes an advance agreement about the government's maximum liability for certain costs that a contractor may incur if the government terminates the contract; it does not apply to costs that are not incurred as a consequence of a termination.

The key paragraphs in the clause are (c) and (e). Paragraph (c) states the government's maximum liability for special termination costs. Paragraph (e) says that the clause is no longer applicable after the contract has been fully funded.

Thus, if the contract in your example was not fully funded before the termination, then the ceiling on special termination costs would apply to such costs incurred by the contractor and its subcontractors. If the contract was fully funded before the termination, then the ceiling on special termination costs would not apply to such costs.

By Brad Franklin on Monday, November 20, 2000 - 07:40 am:

Thank you Vern. The contract is not fully funded. Your question though, drove me to re-phrase my question. Assume the following: 1.I have a $100m contract that is incrementally funded to a level of $50m; 2. My Special Termination Cost clause has a ceiling of $5m; and 3. I receive a T for C when my costs incurred to date are $30M leaving me with $20M in contract funding.

Question: If my actual termination costs exceed $5m, can I recover the difference out of the $20m in excess contract funding?

My questions is driven by what I thought was the intent of the clause; i.e., to provide funding over and above "contract" funding to cover termination costs. If a contractor cannot dip into the remaining "contract" funding to cover termination costs, a contractor may be worse off having this provision then they would be without it.

Thanks in advance for any further insight you can give me.

Brad

By Vern Edwards on Monday, November 20, 2000 - 10:08 am:

Brad:

I think that in your scenario you would not be legally entitled to recover any special termination costs in excess of the $5 million ceiling. Your company has agreed to limit the government's liability to that amount prior to full funding of the contract. Since the contract has not been fully funded, the government is not obligated to reimburse you for any amount in excess of the ceiling, even though funds remain.

The purpose of the special termination costs clause is to cap the government's prospective termination liability and exclude it from the "amount then allotted to the contract" mentioned in paragraph (f)(2) of the Limitation of Funds clause. By doing this, the parties avoid the necessity for the contractor to stop working in order to protect itself when the incurred costs plus the government's termination liability reach the amount allotted.

The key to understanding the special termination costs clause is to take note of the parenthetical phrase in the first sentence in paragraph (f)(2) of the Limitation of Funds clause, which says: "including actions under the Termination clause of this contract... ." Because of that phrase, a contractor must anticipate the possibility that the government will terminate an incrementally funded contract rather than continue to fund it. If that were to happen, the contractor would not be able to recover any termination costs in excess of the amount allotted. Thus, were it not for the special termination costs clause, the contractor would have to stop working at the point at which the costs already incurred + the anticipated termination costs = "the amount then allotted to the contract." If it continued to work past that point it would be taking the risk that it could not recover the costs that it would incur due to the termination.

The special termination costs clause does not set up a separate funding pool for the special termination costs. It merely excludes such costs from the operation of the Limitation of Funds clause and limits the government's liability for such costs until the contract has been fully funded. The clause is inoperative once the contract has been fully funded, and the government's liability for special termination costs is no longer capped at that time.

I suppose that it may be possible for you to negotiate something with the contracting officer, depending on the circumstances. But absent any other facts, I think that the special termination clause pretty well deprives you of any contractual basis for demanding reimbursement of special termination costs in excess of the ceiling.

By Brad Franklin on Monday, November 20, 2000 - 11:29 am:

Vern,

Thank you.

Brad