Misuse of Termination for the Convenience of the Owner

Bruce Jervis, Editor
Construction Claims Advisor

A termination for convenience clause gives a project owner broad discretion to abandon all or a portion of a project, without breaching the contract, for almost any reason. The contractor, who is not in default, is supposed to be made whole. The contractor is entitled to payment for all work performed prior to termination, as well as termination costs such as subcontractor settlements and demobilization. But the contractor cannot recover breach of contract damages such as anticipated profit on the deleted work.

There are limits, however, to a project owner’s discretion in terminating for convenience. In a recent case, a federal agency constructively terminated a large portion of the contract work in order to get a better price from another source. This was ruled an abuse of discretion and a breach of contract. The contractor was entitled to the lost profit it could prove on the terminated work.

I'd like to hear your experiences with convenience terminations. Are contractors truly made whole in this situation or does it usually result in an actual loss? Do project owners exercise the right for legitimate reasons or is it a tool for manipulating the scope of work and the cost?

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Comments

[Quentin Blanchard]

I recently had two statement of work writers terminated for convenience with three months remaining on the contract. This is prior to the exerdise of the option. The government shall notify the contractor in writing of its intent to exercise an option (unilateral right). However, if the contractor does not receive the notification timely, the contractor can position its people to transfer to other opportunities which really afford the contractor options. In this case, the contract requires a 30 notice but never got close to the notice. The stop work notice came on Wednesday that stopped work that Friday. I actually lost two sought after skills to another company because the position came available. By the interpretation of the law, I cannot be made whole because I cannot count anticipated profit. Can you help. Thanks

[me.yahoo.com/a/VwKCEn18gsFETkTZjiAaNlqpfvrvvi2e3Eg-]

From a retail developer's perspective we need the termination for convenience clause. We have not used it, but require it in the situation where an anchor tenant pulls out of a project mid-stream. While the claims would start flying in that case, we cannot continue with the project.
From our view, a contractor's profit is not known until they close out the project. There is no guarantee half way through that a contractor could expect to make the profit they bid.
I am not surprised the Fed's misused this clause to shop for a better price. Integrity needs to be part of any agreement. In the future if our contractor has concerns about how that clause is executed, while we cannot list all the cases that might come up, it certainly would be fair to list the reasons that are not allowed, such as shopping for a better deal.

[Kay L. Kendall]

From my 15 years of preparing termination settlement proposals for contractors, my experience is that contractors are rarely "made whole". This is especially true if the contractor would have been in a loss position had the contract gone to completion. However, there are ways to maximize a contractor's recovery of allowable costs and even to avoid the loss forumula.

Contractors usually don't relaize that they are entitled to recover costs which they would not have incurred had the contract not been terminated.

Federal government contracts terminated for convenience can not recover anticipated profits unless the action is held to have been a breach, which is difficult to prove.

Under Federal Government Requirements Contracts terminated for convenience, the government can not simply terminate the contract for convenience and purchase the same product or service elsewhere. In this situation, the contractor may be entitled to the recovery of anticipated profits.

The termination settlement process is a long drawn out process that usually involves a government audit of the contractor's costs. If the process is new to a contractor, they would be wise to seek an experienced professional to assist in the process so the contractor can go on with new profitable business.

[Bill]

We have a project on military base.
FAR contract with LEEDS materials.
As the cabinet subcontractor we have submitted RFI for shop drawings to the Corp.
The RFI had us contact user for coordination and useage issues.
Now we have had two 14 day work suspensions due to soil contamination.
Odds are good that a cancelation of project will soon arrive.
This leaves a 12 week hole in our production schedule which was to start this coming month.
Not enough time to bid other work and fill the hole. It also leaves a six week hole in installation crew.
Any suggestions would be helpful.
Any suggestions

[Mike]

I was recently the low responsive, responsible bidder on a Federal Contract for HUD. I was about $90,000.00 difference between 1st and 2nd. I was just informed that they are awarding the contract to the 2nd low based on criteria that is baseless and unfounded on merits of work experience based on the value of a contract. Ex. 3 contracts of equal or more value preceding this contract. I was not allowed to submit my references and denied this opportunity. Now I will have to protest their decision in writing. Can they drop my bid based on this? Does it at all make sense?

[Eduardo Gandolfo]

We had our Contract terminated for convenience of the government and it took 16 months to recover our settlement money. According to the government my company was not entlied to interest for those 16 months. Which was entirely their responsibility.

[Dr. Marshall]

In response to Bill, HUD can do this if and only if the originally solicitation clearly stated that the agency intends to use the "Best Value - Trade Off" method of award. There should always be a section in the soliciation (usually Section M), that must clearly state the method of award. There are two types. Technically Acceptable, Low Price; and Best Value Trade-off.

[Rob]

I think a Termination for Convenience clause is an important "tool" for an owner, but it should only be used when the project needs to be shut down. I have seen these used to kick off a contractor in order to simply go with another contractor. That's wrong.

[Bruce P. Ogden, Esq.]

Recall that gov't term for convenience originated as a war measure, to allow cancellation of military procurement becoming unnecessary at war's end. Using it to get a better price is just another instance of taking something beyond its reason for being.

[Jessica]

I was wondering what recent case you refer to. I was doing some research on misuse of termination for the Convenience of the Owner, and couldnt find a recent case involving a federal agency.