6.5 Contract Terminations for Convenience & Default (FAR Part 49)

6.5 Contract Terminations for Convenience & Default (FAR Part 49)

Contract termination represents the complete or partial cancellation of contract performance prior to its scheduled expiration date. Because government needs change and contractor performance varies, FAR Part 49 (Termination of Contracts) establishes the legal rights, administrative protocols, cost settlement principles, and notice requirements governing contract terminations across the federal government.

Terminations fall into two major statutory categories: Termination for Convenience (T4C) and Termination for Default (T4D) (or Termination for Cause for commercial items).

1. Termination for Convenience (T4C - FAR Subparts 49.2 & 49.3)

A Termination for Convenience (T4C) is a unique sovereign right that permits the Government to terminate performance of a contract, in whole or in part, whenever the Contracting Officer determines that termination is in the best interest of the Government (FAR 49.101).

Core Principles of T4C Settlement

• No Anticipatory Profit: The contractor is NOT entitled to prospective, unearned, or anticipatory profits on unperformed work.
• Allowable Costs: Under FAR 49.201, the contractor is entitled to fair compensation comprising:
  1. Direct and indirect costs incurred in performing work up to the effective date of termination;
  2. A reasonable profit on work actually performed (unless the contract was operating at a loss);
  3. Reasonable settlement expenses (accounting, legal, clerical costs incurred preparing the settlement proposal);
  4. Acceptable subcontractor settlement costs.
• Settlement Proposal Window: The contractor must submit a final Termination Settlement Proposal within 1 year from the effective date of termination, unless extended by the Termination Contracting Officer (TCO).

2. Termination for Default (T4D - FAR Subpart 49.4)

Termination for Default (T4D) is a severe legal remedy exercised when a contractor fails to perform contractual obligations under a non-commercial fixed-price contract. Under FAR 49.402-1, the CO may terminate a contract for default if the contractor:

1. Fails to deliver supplies or perform services within the specified contract delivery schedule;
2. Fails to make progress so as to endanger performance of the contract;
3. Fails to perform any other provision of the contract.

Mandatory Notice Sequences: Cure Notice vs. Show Cause Notice (FAR 49.607)

+-----------------------------------------------------------------------------------+
|                          T4D MANDATORY NOTICE SEQUENCES                           |
+-----------------------------------------------------------------------------------+
| SCENARIO A: Failure to Make Progress OR Failure to Perform Provision              |
| Step 1: Issue CURE NOTICE providing at least 10 CALENDAR DAYS to cure defect.     |
| Step 2: If uncured after 10 days, issue SHOW CAUSE NOTICE or T4D notice.          |
|                                                                                   |
| SCENARIO B: Failure to Deliver on Schedule (Delivery Date Passed)                  |
| Step 1: NO Cure Notice required! Issue SHOW CAUSE NOTICE immediately.             |
| Step 2: Issue Notice of Termination for Default on SF 30.                         |
+-----------------------------------------------------------------------------------+

Exam Critical: A Cure Notice is legally required ONLY when the termination is based on failure to make progress or failure to perform another contract provision, and there must remain at least 10 calendar days in the performance schedule. If the delivery date has already passed, no Cure Notice is required!

3. Financial Consequences of Default & Excusable Delays

Liabilities of Defaulted Contractor

When a contract is terminated for default under FAR 52.249-8:

• The Government pays contract price only for completed and accepted items;
• The contractor forfeits all profit on unperformed work;
• Excess Re-procurement Costs: The Government may re-procure similar supplies or services from another source and charge the defaulted contractor for all excess re-procurement costs incurred (FAR 49.402-6).

Excusable Delays (FAR 52.249-14)

A contractor cannot be terminated for default if performance failure arises from causes beyond the control and without the fault or negligence of the contractor. Excusable delay grounds include:

• Acts of God or public enemy;
• Sovereign acts of the Government (civil or military);
• Fires, floods, epidemics, or quarantine restrictions;
• Strikes or freight embargoes;
• Unusually severe weather.

Default-to-Convenience Conversion Rule

Under FAR 52.249-8(g), if a contract is terminated for default and it is subsequently determined that the contractor was not in default, or that the delay was excusable, the rights and obligations of the parties automatically convert to a Termination for Convenience (T4C).

4. Commercial Item Terminations (FAR 12.403)

For commercial product and commercial service contracts governed by FAR Part 12, standard FAR Part 49 clauses do not apply. Instead, FAR 12.403 and clause FAR 52.212-4(l)/(m) govern terminations:

Summary Table: T4C vs. T4D Comparison Matrix