When the Government exercises its right to terminate a contract for convenience (T4C), the resulting process can trigger a complex series of accounting, audit, and negotiation activities. These terminations, authorized under FAR Part 49 and related clauses, are a standard part of federal contracting and may occur even when performance is on track.
Recovering allowable costs after a T4C requires precision, as applicable regulations set strict expectations for documentation, timing, and cost classification. Contractors must rely on systems and service providers that can produce audit-ready data aligned with DCAA, DCMA, and FAR requirements.
Government’s Termination Right and Contract Clauses
The Government holds the authority to terminate contracts “for convenience” when doing so is in its interest, even if the contractor is meeting all performance expectations. This authority is embedded in standard Federal Acquisition Regulation (FAR) clauses such as FAR 52.249-2 for fixed-price contracts and FAR 52.249-6 for cost-reimbursement contracts.
FAR Part 49 establishes the overall policy framework, including the responsibilities of the Termination Contracting Officer (TCO), preferred settlement procedures, and general timing expectations.
In the defense acquisition context, DFARS Part 249 and its associated PGI guidance adapt these rules for Department of Defense (DOD) contracts, including consequences if a contractor fails to submit a timely settlement proposal. A missed deadline permits the TCO to proceed with a unilateral determination of costs, which may limit recoveries.
Regulatory Sources Drive Cost Classification
Successful cost recovery following a T4C begins with familiarity with the regulatory sources that define allowable termination costs and how they must be recorded. FAR 49 governs the overall termination process and prescribes the use of forms SF 1435 through SF 1439, depending on the contract type.
These forms create a structure for presenting claimed costs and must be backed by traceable job-cost records. FAR 31.205-42 lists cost elements that may be considered allowable in a termination context, such as unamortized tooling, reasonable settlement expenses, and severance pay.
DFARS 249.109-70 addresses pricing restrictions and sets expectations for the format and timing of proposals. Contractors relying on outsourced accounting must work with providers that understand the implications of these rules.
For instance, cost allowability hinges on the correct mapping of ledger accounts to FAR categories, and a lack of alignment can result in rejected claims or disallowed items during an audit.
Chapter 12 and the 17100 series of the DCAA’s Contract Audit Manual (CAM) serve as foundational references for building and evaluating audit readiness in regulated environments. These resources provide step-by-step guidance that auditors follow when reviewing termination settlements.
Accounting service providers must be able to deliver work papers that conform to these standards, including sampling documentation, reconciliations, and inventory tracking.
The Defense Contract Management Agency (DCMA) adds a negotiation perspective, following Manual 2501-06, which guides its personnel in evaluating profit claims, unabsorbed overhead, and incomplete subcontractor work.
Common Allowable and Disallowed Costs
Allowable costs generally include direct labor, material, and other direct charges incurred through the effective date of termination, as well as reasonable settlement expenses tied to accounting, legal, and consulting support.
Severance pay and associated fringe benefits may also be claimed when directly caused by the termination. In some cases, partial profit may be allowed for completed portions of work on cost-type contracts, as outlined in FAR 52.249-6(g).
Certain costs are commonly disallowed or subject to heavy scrutiny. Costs incurred after the termination date are typically unallowable unless directly tied to winding down the contract. Anticipated profits on unperformed work are not compensable.
Costs linked to penalties, fines, or misconduct are excluded under FAR 31.205-47. Claims for unabsorbed overhead require clear evidence of a significant reduction in workload. They must satisfy the conditions in FAR 31.205-42(e).
Building a Defensible Termination Proposal
The foundation of a strong settlement proposal lies in aligning job-cost accounting data with the format and categories found on SF 1435 through SF 1439. Each claim line must be supported by corresponding entries in the general ledger, with clear audit trails.
Before submission, the DCAA Termination Settlement Proposal Adequacy Checklist should be applied. This tool highlights missing elements that could result in automatic rejection.
Timing is also a central concern; proposals must be submitted within one year of the effective date of termination unless a formal extension is requested and granted in writing. DFARS emphasizes that missing this window grants the TCO the ability to impose a unilateral settlement.
Audit documentation should mirror the requirements that are found in DCAA Audit Program 17100. These include inventory roll-forwards, timesheet traceability, reconciliation of claimed costs to books, and proper classification under FAR Part 31.
Subcontractor coordination is another priority, as their certified cost claims must be incorporated into the prime contractor’s proposal before submission.
Best Practices for Outsourced Accounting Environments
Organizations that rely on outsourced, DCAA-compliant accounting providers must verify that systems and processes align with the specific demands of termination settlements.
Segregating cost objectives related to termination activity from regular contract performance supports faster reconciliation during audits. Automating the mapping of ledger accounts to FAR allowability categories reduces the likelihood of submitting disallowed costs.
Maintaining a rolling inventory valuation helps accelerate the completion of SF 1428 schedules and supports inventory-related cost claims. Document storage systems should retain all relevant artifacts, including subcontracts, modifications, timesheets, and prior billings, in formats that can be readily accessed by audit teams.
Conducting mock terminations annually provides early insight into any gaps in adequacy or documentation that could present challenges in a live scenario.
Moving From Termination to Resolution
Recovering costs after a Termination for Convenience demands more than compliance with forms and deadlines; it calls for accurate cost tracking, familiarity with federal audit standards, and coordination across accounting, legal, and subcontractor teams.
Diener & Associates brings decades of experience supporting contractors through the T4C process. To discuss how our consulting and accounting services can support upcoming or active terminations, schedule a consultation online or call 1-(703)-386-7864.