July 08, 2017 Procurement Lawyer

Tear Down That Clause: The Inevitable Unworkability of the Commercial Items Termination for Convenience Clause

by Ioana Cristei

Ioana Cristei serves as an Honors Attorney for the Civilian Board of Contract Appeals (CBCA). This article was written by the author in her personal capacity. The opinions expressed in this article are her own and do not necessarily represent the views of the CBCA or the federal government. She would like to extend her sincere thanks to Judge Kyle Chadwick of the CBCA for his help and contributions to the article. His opinions and contributions are his own and do not necessarily represent
the views of the CBCA or the federal government.

On its face, the commercial items termination for convenience clause at Federal Acquisition Regulation (FAR) 52.212-4(l) affords contractors a fair recovery that includes a percentage of the contract price for the work performed, plus reasonable costs incurred as a result of the termination. In reality, no one knows what that second part really means. The clause does not mention profit, start-up costs (such as financing), pretermination costs, or indirect costs, such as overhead. It also does not say how to determine what costs result from a termination. And it tells contracting officers they may use the cost principles of FAR Part 31 — unless they decide not to.

The problems with the clause arise from a misguided theory and are compounded by poor contracting practices by both the government and contractors. The theory is that a termination for the government’s convenience is a “commercial” transaction. It is not. No arm’s-length commercial contract would contain such a one-sided termination clause, and one could only settle termination costs on a “commercial” basis by ignoring the FAR entirely. Agencies and contractors then make matters worse by soliciting and bidding on contracts for supposedly “commercial” items and services that are not strictly commercial and re- quire significant up-front investment by the contractor without the prospect of sales to alternative customers if the government changes its mind.

The clause can be an adequate basis for settlement discussions, but it provides no reliable guidance for litigation. As a result, decisions involving the clause are so inconsistent as to make litigation prospects little more than a gamble. The only real solution is to tear up the clause and start over. As this is probably unrealistic in the current political environment, a few patchwork solutions may suffice in the meantime.

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