Recovery When the Government Terminates For Convenience
The termination for convenience clause arose at the end of the Civil War so the government could terminate construction contracts made during wartime once peace ensued, and not be liable for the contractor’s loss of anticipated profits. The War (now Defense) Department continued to use this clause throughout the 19th and 20th centuries. The clause allowed the government to enter into a 10-year contract to buy arms without worrying about the conflict ending in three years and being liable for seven years of the contractor’s anticipated profits.
Eventually, the termination for convenience clause became mandatory in all federal contracts, civilian and military, and then found its way into almost every construction contract, both public and private.
Damages that can be awarded when a contract is terminated for convenience or where a default termination is converted to a constructive termination are governed by both federal regulation and the contract at issue. See FAR 52.249-1 to 52.249-5; United Partition Systems, Inc. v. U.S., 90 Fed. Cl. 74 (2009). Contractors terminated for convenience are entitled to recover the amount of the cost of the contract work performed prior to termination, plus a fair and reasonable profit on that work. (See FAR § 52.249-2, (g)(2), see also Alternate I (SEP 1996) (g)(1), which is applicable to construction contracts.) In this scenario, the contractor has the burden of proving the actual value of the termination for convenience damages; and they must be proved with certainty so that the amount of damages will be more than mere speculation. Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 765 (Fed. Cir. 1987)
Proving damages with certainty does not necessarily mean providing accurate records of the costs of the contract and the reasonable profit on that work. Proving damages with certainty also entails demonstrating that there is a method through which the plaintiff can accurately calculate the damages it seeks. When a dispute arises about plaintiff’s ability to show an actual method for calculating the damages sought, the dispute often relates back to the general principle that the damages to be awarded are determined by both the regulations and the parties’ contract.
For example, an engineering contractor agreed to design and build a coal gasification facility in West Virginia for the Department of Energy under a cost share research and development contract in which the parties negotiated the cost sharing. Jacobs Engineering Group, Inc. v. U.S., 75 Fed.Cl. 752 (2007). Three years after entering into the contract, the Department of Energy terminated the contract for convenience. The Department and the engineering contractor agreed on the amount of reimbursable costs due ($919,672), but disputed whether the engineering contractor could recover an additional $565,450 for profit (or “fee” as the parties referred to it during the dispute). After an exhaustive analysis of the parties’ contract, the court found that the contract did not permit recovery of profit- even under a termination for convenience scenario.
According to the court, in lieu of profit for the design and construction of the gasification facility, the engineering contractor took on the risk of being granted patent rights related to the facility that would potentially equal or surpass the potential profit on the project. Because there was no method in the contract stating the method for calculating profit, nor was there clear language in the contract providing for profit, the engineering contractor was unable to recover anything beyond its reimbursable costs.
This type of situation serves as a reminder to examine how the termination for convenience language relates to the payment provisions of the contract. The applicable regulations generally provide a fair recovery for the contractor under termination for convenience.