Government projects always bring more regulation. Importantly, this includes the regulation of contracts and termination procedures. Contractor termination on federal projects requires that a specific procedure be followed. If the right factors aren’t taken into consideration, problems will arise.
Contractor termination, generally
There are basically two ways an owner can terminate their contractor: via termination for convenience or termination for default. There are a lot of considerations that go into each, which we’ll describe more below. Based on how and why the contract is being terminated, there may be extra costs associated with the termination of the contract.
For instance, if a contract is terminated for convenience, but if the construction contract doesn’t allow for that, there may be a wrongful termination in play – and that could mean breach of contract or lost profits come into play.
On the other end of the spectrum, if a contract is terminated for default, but if the issues on the project don’t justify terminating the contract or if the proper procedures aren’t followed, the termination might actually be a termination for convenience in disguise. That’s exactly what happened on a recent federal construction project.
Termination for default process for federal projects
A recent case, Alutiq Manufacturing Contractors v. The United States, does a great job of breaking down the process for making a termination for default on a federal project. We briefly review it below, but Davis Wright Tremaine LLP also does a great job of breaking down this case.
Alutiq Manufacturing Contractors (“AMC”) was hired to perform work on a United States Airforce base in Colorado. The job had a rocky start – almost immediately, there were clashes between AMC and Airforce representatives, plus AMC struggled to perform up to the construction schedule. On top of that, AMC’s documentation was poor – necessary reports weren’t made, and record-keeping was shoddy, at best.
Due to these issues, the Airforce provided AMC with a Notice to Cure. Essentially, the Airforce’s contracting officers requested that AMC clean up their act – otherwise, AMC’s contract might end up being terminated. After receiving this notice, AMC assured the Airforce that the problems would be fixed and that the project schedule wouldn’t be delayed. But, as issues persisted and as the project schedule fell further behind, the contracting officers sent a revised Notice to Cure as a second warning.
This time, apparently, AMC took action. AMC made important personnel changes, they improved their documentation through proper daily reports and photographs, and an acceleration plan was put in place in order to catch up with the schedule. AMC also made note that there were unanticipated issues slowing down the project – specifically, there were differing site conditions. The soil at the project property was unsuitable for performing as planned. Still, by all accounts, AMC had taken important steps toward righting the ship.
The contractor gets terminated
Apparently, the Airforce’s contracting officers didn’t feel like AMC’s efforts were enough to get the project back on track. They terminated AMC for defaulting on their contract and cited a list of reasons (13 bullet-points) why AMC would be replaced on the project. The main issue was that, according to the contracting officers, it would be impossible for AMC to get the project back on schedule. This was argued despite AMC’s accelerated project schedule which, if followed, would get the project back to the anticipated project schedule.
It’s important to note, here, that there was a lot of animosity between the contracting officers and AMC at this point. It’s also worth mentioning that the contractor AMC was replaced with faced many the same issues as AMC (including trouble with the soil). AMC sued, arguing that the contract wasn’t terminated for default, as the contracting officers argued. Rather, AMC contended, the contract was terminated for cause.
The court weighs in
Ultimately, the court sided with AMC. Apparently, the contracting officers had not taken the proper procedures when deciding to terminate the contract. Rather, they relied on questionable and outdated estimates about the project schedule and failed to really take AMC’s new accelerated schedule into consideration.
The biggest issue, though, was that the contracting officers failed to weigh the factors set out by FAR 49.402-3. That section of the Federal Acquisition Regulations specifies a procedure for default that must be followed when deciding whether to fire a contractor for defaulting on their contract. According to the court, even if it was absolutely impossible for AMC to perform as contracted, failure to follow the proper default procedures meant the contract couldn’t be terminated for default. The court found that AMC’s termination was for convenience because the requirements for termination for default were completely disregarded.
Why does it matter whether a contractor is terminated for default or convenience?
Who cares if it’s a termination for convenience or for default? We discuss that idea further below, but this article does an even better job: How a Termination Clause Works in a Construction Contract.
When a contract is terminated for convenience, there’s more of a winding-down process for the contract. A contractor who’s terminated for convenience won’t be left out to dry. Instead, there are often some damages that must be paid to the terminated contractor – like the cost of winding down relationships with subs and suppliers, sometimes liquidated damages will be in play, and lost profits could even be on the table. Plus, even though a contract can be terminated without a specific reason, it must still be done in good faith. Otherwise, additional damages will come into play.
When a contract is properly terminated for default (also called termination for cause), the termination is much less kind to the contractor. As a result, when there’s a termination for default, there’s usually some bickering as to whether there was actually a contractual default. Termination for default often comes with a legal dispute. But, when there’s obviously been a breach in the contract and when there’s really no way to move forward, as contracted – a termination for default might make for a clean break.
In the above case, it seems like there was quite a bit of bad blood between the contractor and the contracting officers by the time it was all said and done. That may explain why the contract was terminated for default rather than for convenience. But, now that the court has determined this was, in fact, a termination for convenience – good faith (or a lack thereof) may come into play.
Contractor termination on federal projects: factors to consider
The procedures for terminating a contractor for default on federal jobs can be found here, courtesy of Cornell Law School: § 49.402-3 – Procedure for default.
When considering contractor termination on a federal project, the contracting officer must consider the following factors before terminating for default:
- (1) The terms of the contract and applicable laws and regulations
- (2) The specific failure of the contractor and the excuses for the failure
- (3) The availability of the supplies or services from other sources (i.e. how hard it would be to replace the contractor)
- (4) The urgency of the need for the supplies and services plus the time it would take for someone else to provide them, compared against how quickly the defaulting contractor could perform
- (5) How essential the contractor is in the government acquisition program, compared to the effect the termination would have on the contractor’s ability to fulfill its other government contracts
- (6) The effect of termination on the contractor – specifically, their ability to liquidate guaranteed loans, progress payments, or advance payments
- (7) Any other pertinent facts and circumstances
All of these factors have to be taken into account in order to terminate the contract for default. This is true even when it seems obvious that the contractor should be terminated.
The biggest takeaway here is that contractor terminations on federal projects must be done by the book. When the federal government wants to fire a contractor because the contractor hasn’t been performing up to par, strict procedures must be followed. Otherwise, the termination will be deemed a termination for convenience.
It might not matter all that much. It’s common for public contracts to contain some type of termination for convenience clause written in. But, as mentioned above, determining whether a termination is for default or for convenience will have a big impact on how the contractual relationship will be broken up.