Since its establishment, DOGE’s systematic review of federal spending has led to many actual and anticipated/speculated suspensions, stop-work orders, and terminations. For example, DOGE scrutiny has led to mass contract terminations at the Department of Education, US Agency for International Development (USAID), and Consumer Financial Protection Bureau (CFPB). In addition to mass contract terminations, the Trump administration and DOGE are directing the General Services Administration (GSA) to begin terminating leases for federal government buildings. Additionally, President Trump has instructed DOGE to review spending by the Department of Defense (DOD), which could lead to major weapon systems reprogramming or terminations.
This article provides federal government contractors and federal financial assistance recipients guidance on contract risk mitigation to preserve the ability to be made whole in the event that a federal executive agency terminates or freezes a procurement or grant agreement. Termination settlements often involve nuanced cost claims for recovery of valuable contractor and recipient investments, employee compensation or severance expenses, substantial subcontract and subrecipient settlements, and even the application of a so-called loss ratio to limit contractor and recipient recovery in some instances. Additionally, contractors and recipients should consider the impact termination has on costs that will continue after termination, such as leases, defined benefit pension plans, and intellectual property agreements. The aforementioned termination settlement issues can be complex, and all require important legal and accounting assessments. These uncertain times call for contractors and recipients to understand their rights and contractual obligations, to mitigate their risks, and to diligently pursue appropriate claims for cost recovery under procurement contracts and federal financial assistance awards with federal executive agencies, as allowed by law.
Overarching Guidance
- Carefully review the terms of current agreements with federal executive agencies. It is important to understand the type of agreement and specific terms that are included in any agreement with a federal executive agency. Understanding this information provides contractors and assistance recipients with the applicable regulatory regime and the agency’s right to freeze or terminate the agreement. Additionally, it provides contractors and assistance recipients with insight on how to properly dispute agency action or inaction regarding termination, a freeze in performance, or delays in payment.
- Document all costs associated with federal executive agency–issued terminations, stop-work orders, suspensions of work, and payment delays. Detailed cost documentation is essential to recovery in the event of a termination, stop-work order, suspension of work, or payment delay. Contractors and assistance recipients must demonstrate to the contracting officer (CO) that their incurred costs were caused by a termination, stop-work order, or suspension of work, and those costs were reasonable. Contractors and assistance recipients put themselves in the best position to recover costs when the costs are thoroughly documented in the contractors’ or assistance recipients’ cost accounting system with a narrative supporting why the costs were incurred.
- Provide timely notice that the action taken is considered a stop-work order or suspension of work. Contractors and assistance recipients should immediately notify the CO that they consider a stop-work order or suspension of work to have cost and/or time impacts to the agreement. This puts the CO on notice that the contractor or assistance recipient are going to seek costs in the form of a claim once the stop-work order or suspension of work is lifted or the agreement is terminated.
- Follow the required statutory, administrative, or judicial procedures to file a claim or appeal. Contractors and assistance recipients should analyze their agreements to determine the required claim submission process and appeals process. Contractors and assistance recipients should ensure that all required administrative remedies are exhausted or statutory requirements are met before filing a case in court or appealing a claim denial. This includes submitting a claim for a stop-work order within 30 days of cancelation or expiration of the order.
Procurement Contracts
- What is a procurement contract? Procurement contracts are subject to the Federal Acquisition Regulation (FAR) when a federal executive agency acquires supplies or services with funds appropriated by Congress. Procurement contracts may include several relevant standard clauses that would allow the agency to terminate or freeze the contract.
- Termination for convenience. Nearly every procurement contract has some kind of provision allowing federal executive agencies to terminate the agreement for the government’s convenience. The CO may terminate the entire contract or part of it if the CO determines that termination is within the government’s interest. Unless an extension is granted by the CO, the contractor must submit a termination settlement proposal within one year of the effective date of the termination. If the contractor does not submit within the one-year window, it loses the right to appeal under the Disputes clause the government’s failure to pay any termination-related costs. The contractor and CO negotiate the termination settlement, which may include reasonable profit for work completed; however, the agreed-upon amount cannot exceed the total contract price as reduced by the previous payments and contract price of the nonterminated work. Although COs have discretion to make appropriate fairness considerations and trade-offs regarding termination settlement negotiations, the costs claimed and agreed upon in a termination settlement agreement must adhere to the cost principles and procedures in FAR Part 31.
- Stop-work order. A CO may use a stop-work order to freeze a contractor’s performance on a procurement contract. A stop-work order is a written order from the CO requiring the contractor to stop all or part of the work for 90 days, or longer if the parties agree to an extension. The order must specifically state that it is a stop-work order, and the contractor must immediately comply with the terms of the order and take reasonable steps to mitigate costs related to the work covered by the order. If the stop-work order is not canceled within 90 days, then the CO either cancels the stop work order or terminates the contract. After the stop-work order cancels or expires, the contractor has 30 days to request an equitable adjustment or submit a claim for payment for costs incurred based on the stop-work order. If the contract is terminated, the contractor is entitled to reasonable costs in the termination settlement agreement process described above.
- Suspension of work. A CO may use a suspension of work to freeze a contractor’s performance on certain procurement contracts. Unlike stop-work orders, suspensions of work may suspend, delay, or interrupt all or part of the work for a period of time determined by the CO. A suspension of work order may be in writing or may occur constructively if performance of the work is suspended, delayed, or interrupted for an unreasonable period without a written order. Contractors must exclude profit from equitable adjustments or claims for costs incurred due to suspension, delay, or interruption. If no suspension order is issued, the contractor may not seek costs incurred more than 20 days before providing notice of the suspension to the CO. Thus, it is in the contractor’s best interest to notify the CO as soon as possible when it believes the CO has actually or constructively suspended the work.
- Withheld payments. The Prompt Payment Act requires the government to pay its bills in a timely manner. An interest penalty at the rate set by the US Department of the Treasury is assessed and begins to accrue once an invoice goes unpaid for 30 days. The federal executive agency is not required to pay interest penalties if the delay in payment is due to a disagreement on payment amount or another contract compliance issue that needs to be resolved through the disputes process below. When a payment is a week or two late, contractors should notify the CO that payment for work performed is past due and that the amount owed will begin to accrue interest in accordance with the Prompt Payment Act if payment is not received 30 days from the invoice.
- Statutory claims process. The Contract Disputes Act includes a statutorily required process for resolving contract disputes with federal executive agencies. The statute requires contractors to submit a claim, in writing, to the CO demanding payment of a sum certain within six years after accrual of the claim. A claim exceeding $100,000 must be certified by an individual authorized to bind the contractor. The CO generally has 60 days to issue a final decision on the claim unless the CO has notified the contractor within the 60 days of the new time by which a decision will be issued. The CO’s decision is final and may be appealed to the applicable Agency Board within 90 days or the US Court of Federal Claims (COFC) within 12 months. If the CO fails to issue a final decision within 60 days or the notified time period, it is considered a “deemed denial” that the contractor may appeal to the Agency Board or COFC.
Federal Financial Assistance (Grants and Cooperative Agreements)
- What is federal financial assistance? Subparts A through F of 2 C.F.R. Part 200 apply to federal executive agencies making federal awards to nongovernmental entities. Federal financial assistance generally consists of grants and cooperative agreements. Grants and cooperative agreements are legal instruments between a federal executive agency and a recipient to carry out a public purpose authorized by law instead of acquiring supplies or services through a procurement contract. The difference between a grant and a cooperative agreement is that a grant does not anticipate substantial involvement of the agency to carry out the activity in the agreement while a cooperative agreement does anticipate agency involvement.
- Terminations and suspensions. The right of a federal executive agency to unilaterally terminate a grant or other award of federal financial assistance depends on the specific terms and conditions of the federal award. Grant officers may only terminate a federal financial assistance award for convenience if the terms and conditions of the award permit termination for convenience and the “award no longer effectuates the program goals or agency priorities.” Costs associated with a termination or suspension are only allowable if the federal executive agency expressly authorizes them in the notice of termination or notice of suspension. Notwithstanding the previous sentence, suspension costs or post-termination costs are allowable if: (a) The costs result from financial obligations which were properly incurred by the recipient or subrecipient before the effective date of suspension or termination, and not in anticipation of it; and (b) The costs would be allowable if the Federal award was not suspended or expired normally at the end of the period of performance in which the termination takes effect.Recipients are generally entitled to termination settlement costs that they could not discontinue after the termination date.
- Administrative appeals process. Federal executive agencies are required to maintain written objections, hearings, and appeals processes. Recipients should request the written process if it is not included within the federal financial assistance award. Based on a recent per curiam decision issued by the US Supreme Court, it appears that an appeal challenging a government denial of termination settlement costs must be filed at the COFC under the Tucker Act.
Termination Settlement Proposals
Partial or complete terminations may entitle contractors and assistance recipients to costs that would not have arisen had the termination not occurred. Specifically, the FAR includes termination-specific cost principles to be used in conjunction with the cost principles in FAR subpart 31.2. Additionally, the Uniform Administrative Requirements for Federal Financial Assistance at 2 C.F.R. Part 200 include similar termination-specific cost principles. These termination-specific cost principles outline the allowability of several broad cost categories for contractors and assistance recipients to include or exclude in termination settlement proposals. Importantly, the following termination-specific costs should be thoroughly tracked and documented to support a potential termination settlement proposal in the event that the government partially or completely terminates a contract or assistance award for convenience.
- Common items. Costs of common items that contractors and assistance recipients can reasonably use on other work are generally unallowable unless evidence is submitted showing that the items could not be kept without sustaining a loss. COs should consider the contractor’s or assistance recipient’s current and planned need for the common item when determining whether keeping the items will result in a loss.
- Costs continuing after termination. Costs incurred by contractors and assistance recipients that cannot be reasonably discontinued immediately upon termination are generally allowable provided the continuing costs are not due to the contractor’s or assistance recipient’s negligence or willful failure to discontinue.
* Severance costs. Severance pay for employees involuntarily terminated because of the partial or complete termination of a contract or assistance award may be allowable and should be included in termination settlement proposals. Severance pay is allowable if it is required by (1) law, (2) employer-employee agreement, (3) established contractor or assistance recipient policy, or (4) circumstances of the particular employment.
* Idle facilities and idle capacity costs. Idle facilities costs incurred by contractors and assistance recipients are allowable for a reasonable period (generally one year) when the facilities were required to perform a contract or assistance award and are completely unused and unneeded due to termination. Facilities are defined as “plant or any portion thereof (including land integral to the operation), equipment, individually or collectively, or any other tangible capital asset, wherever located, and whether owned or leased[.]” Idle capacity occurs when only part of the facilities are idle and are also allowable provided that the contractor or assistance recipient cannot mitigate the capacity issue. Contractors and assistance recipients can recover idle facility or idle capacity costs, which broadly include maintenance, repair, rent, housing, and other costs (e.g., property taxes, insurance, and depreciation). Additionally, disposition of acquired facilities that no longer have usefulness but still have a net book value will trigger either Cost Accounting Standard (CAS) 409 or FAR 31.205-16. Losses on disposition of a facility under these circumstances may be allowable in a termination settlement proposal.
- Initial costs. Initial costs incurred by contractors are generally allowable for starting load and preparatory costs. Starting load costs are nonrecurring labor, material, and related overhead costs incurred during the early stages of production that have not been fully absorbed. Preparatory costs are costs incurred preparing to perform a contract or assistance award and include “initial plant rearrangement and alterations, management and personnel organization, and production planning.” Notably, initial costs must be excluded from overhead if included as a direct cost in a termination settlement proposal.
- Loss of useful value. Costs incurred related to special tooling, material, or equipment purchased by contractors or assistance recipients are generally allowable if the special tooling, machinery, or equipment cannot reasonably be used on other work. Additionally, the government’s interest in the special tooling, material, or equipment must be protected by transfer of title or other acceptable means.
- Rental costs under unexpired leases. Unexpired lease rental costs are generally allowable if contractors and assistance recipients demonstrate that the lease was reasonably necessary to perform the terminated contract or assistance award. These costs must not exceed the reasonable use value of the leased property during the period of performance and reasonable post-termination period. Additionally, contractors and assistance recipients must make “all reasonable efforts to terminate, assign, settle, or otherwise reduce the cost of such lease” and provide the government supporting documentation regarding these efforts.
- Alterations of leased property. Costs of alterations and reasonable restorations to leased property are generally allowable if required by the lease and necessary for contract or assistance award performance.
- Settlement expenses. Costs incurred by contractors and assistance recipients related to the settlement of a terminated contract or assistance award are generally allowable. These settlement costs include all necessary legal, accounting, and clerical costs related to (1) preparing and presenting termination settlement proposals to the government and (2) terminating and settling subcontracts. Additionally, settlement expenses include reasonable costs related to “the storage, transportation, protection, and disposition of property acquired or produced for the contract” and indirect costs related to the salary and wages incurred by personnel while incurring settlement expenses.
- Subcontractor claims. Subcontractor and subrecipient termination settlement proposals are allowable to the extent that the costs in the proposal are allowable.
Additionally, contractors should not forget to include a reasonable profit on the terminated portion of fixed-price contracts. Profit, however, may be applied to settlement expenses.
Conclusion
As evidenced above, there are many factors that contractors and assistance recipients should consider to put themselves in the best position possible to recover costs incurred due to the Trump administration’s direction to terminate or freeze federal executive agency spending. Although agency reactions to the Trump administration and DOGE cost-cutting directives may be unpredictable, contractors and assistance recipients should put themselves in the best position possible to be made whole by completely understanding their rights and requirements to recover costs under agreements with federal executive agencies.
