Termination for Convenience: Critical Steps

Termination for convenience is a contract clause that should be in every contract. What do you do as a contractor when you are terminated for convenience?

First, read the contract immediately. The termination for convenience clause allows the buyer to terminate their contractor for convenience at any time without cause and liability for damages. In the event you have been given a termination for convenience notice, there are specific stipulations you must follow to file a claim. If you are in doubt about what to do, call me. When you receive a full termination, you must prepare a termination settlement proposal to recover your costs. When you get a partial termination, it may require an adjustment to the contract value of the portion of the contract that was not terminated – that seems obvious.

Second, stop working immediately. It seems obvious to stop work, but some generous contractors do not. The costs you incur if you do not stop working are on your nickel. You do need to take actions necessary to protect and preserve the work you have done. That includes giving notice to any subcontractors to terminate their work and close any open purchase orders.

Third, set up a separate set of accounting charge codes or accounts for termination costs for a settlement proposal. There are certain costs associated with termination for convenience that you are entitled to claim. In effect, the termination for convenience clause turns the termination portion of the contract into a cost-reimbursable contract. It provides for all reasonable costs incurred during the termination phase. The costs are recoverable up to the date of termination. However, there are costs associated with closing out the contract, and the actual termination is also recoverable. Take action to solicit settlement proposals from all subcontractorsThe proposal must be adequately supported.

The half step is not a small step – prepare the settlement proposal and inventory schedule.  The types of costs are very wide-ranging. They can include such items as costs of preparing the settlement claim, residual materials inventory, special tooling and test equipment, reclassification of indirect costs as direct (that are incurred specifically for the benefit of the terminated contract), insurances, taxes, bid and proposal costs, certain pre-contract costs, initial and termination management and personnel organization costs, severance costs, leased facilities, idle facilities, plant reconversion costs as well as other costs related specifically to the terminated contract. 

Receiving a termination for convenience may involve details you rarely see. Preparing a settlement proposal requires time, dedication, and diligence. Often, contractors think accounting, legal, clerical, consulting, and similar costs are not allowable in a termination situation. They are. Normal functions that are considered indirect are now regarded as direct in a termination for convenience situation. You must have full documentation to allow full recovery of those costs.

For help on your termination for convenience settlement proposal, give our good friend Marsha a call or send her an email to request assistance. Info below: