Termination for Convenience (T4C) presents distinct challenges for government contractors, particularly when it comes to recovering costs.
The Federal Acquisition Regulation (FAR) and DCAA audit protocols impose strict limits on what can be claimed and how those claims must be documented. Without precise compliance, disallowed costs can erode settlement value and delay resolution.
Cost Principles That Control Allowable T4C Charges
Termination for Convenience settlements fall under a narrow regulatory scope defined primarily by FAR 31.205-42 and FAR Part 49. These sections dictate the types of costs that may be recovered, how they must be supported, and where profit is strictly limited.
FAR 31.205-42 allows only reasonable and necessary continuing costs incurred after termination, and it explicitly prohibits profit on work that was not performed. Credits from scrap sales, material returns, or reuse must also be reflected and deducted.
FAR Part 49 grants contracting officers the authority to reject any cost item that lacks adequate support or falls outside allowable parameters. It also sets the ceiling for settlement-related expenses and prohibits any inclusion of profit tied to terminated efforts.
Contractors must reference the standard formats provided in FAR 49.603, particularly SF Forms 1435 through 1438, to present costs clearly by element and certify that all submitted data is current, accurate, and complete.
DFARS 252.249-7000 provides limited exceptions, permitting certain special termination costs, such as severance, loss on early lease terminations, or ongoing overhead allocations, but only when justified exactly as outlined in FAR 31.205-42.
Patterns in Disallowed Cost Categories
Several recurring categories of disallowed costs appear in DCAA audits and contracting officer rejections.
One of the most frequent issues involves labor or material purchases initiated after the effective date of termination without written contracting officer approval. Claims for such expenses often fail due to a lack of proper authorization or documentation that shows the purchases were unavoidable.
Unexpired lease costs are another common target for disallowance, especially when there is no evidence that early termination was impossible or that the lease was originally approved by the contracting officer. A general lease agreement without those supporting details does not meet the FAR standard.
Unabsorbed overhead often becomes a point of contention, particularly when presented as a lump sum rather than being tied to the indirect rate structures already accepted on current vouchers. DCAA Contract Audit Manual section 12-202f specifically flags this approach as unacceptable.
Legal and lobbying expenses incurred during the settlement preparation process are also non-recoverable. Any fees associated with advocacy, litigation strategy, or claim positioning must be excluded, as only factual data gathering qualifies under allowable cost principles. Profit for unperformed work is explicitly barred, regardless of any forward-looking estimates or assumptions.
Idle facilities and excess capacity extending longer than one year will generally be excluded unless extraordinary justification is provided, which is rare. Costs already deemed unallowable under other FAR subsections, such as alcohol, entertainment, or defense of fraud, remain barred, even when they appear in a T4C context.
Preventive Steps to Protect Settlement Integrity
Several process-level actions help contractors protect legitimate claims and avoid preventable disallowances. Activating a distinct termination-related job code immediately after the notice allows for clear segregation of continuing costs, preventing them from being mixed with standard contract activity.
New procurements should be frozen unless written direction is received from the contracting officer. Purchases made without that direction are typically unallowable. When continuing costs arise, they should be supported with internal memoranda documenting why those actions were unavoidable post-termination.
Use of the FAR 49.603 templates, SF 1435 through 1438, is essential. These forms guide contractors in presenting cost data by element and in the required format. A signed certificate of current cost and pricing data must accompany each form to comply with FAR requirements.
Before submitting a proposal, contractors benefit from running the DCAA adequacy tool to identify arithmetic errors or gaps in supporting schedules. Indirect cost claims should match the pools and bases used in previous billings to prevent disputes over unabsorbed overhead.
Unallowable cost accounts must remain active within the chart of accounts. Deactivating these accounts allows transactions to inadvertently shift into settlement-related categories, increasing the risk of disallowed costs.
Value of Outsourced Compliance Support
Outsourced DCAA-compliant accounting providers offer technical and procedural advantages in preparing T4C settlements.
Real-time job-costing tools can immediately isolate all post-termination activity and prevent charges from being allocated to unallowable categories. Then, once a termination flag is set, specific account codes can be locked to prevent misclassification.
Automation further reduces risk. SF 1435 and 1436 output can be generated directly from the ledger using booked actuals, provisional rates, and credits, which reduces manual effort and eliminates data transfer errors. Pre-submission mock audits, using CAM Chapter 12 standards, simulate actual review processes and help identify problems before the DCAA reviews the file.
Document management systems maintained by experienced compliance partners keep records of contracting officer approvals, lease terminations, and material disposition schedules ready for inspection.
These tools help shorten the review timeline and improve the likelihood that settlement proposals are accepted without protracted negotiation.
Getting It Right the First Time
Avoiding disallowed costs in a Termination for Convenience settlement requires more than knowing the rules; it demands disciplined processes, accurate documentation, and a firm grasp of how auditors and contracting officers apply federal cost principles. Missteps in classification, timing, or justification can lead to lengthy delays and lost recovery.
Diener & Associates has helped contractors across sectors prepare compliant, defensible T4C proposals with fewer revisions and stronger outcomes. To discuss how our DCAA-compliant accounting team can assist with settlement preparation, cost segregation, or audit support, schedule a consultation online or call 1-(703)-386-7864.