Last month, the Armed Services Board of Contract Appeals issued two decisions involving terminations for convenience.  Both decisions are instructive regarding how contractors should anticipate contractual and regulatory requirements regarding termination for convenience, in order to maximize likelihood for a full recovery of incurred costs.

The first case, Black Bear Construction Co., ASBCA No. 61181, 2017 WL 5951381 (Nov. 14, 2017), reconfirms the rule that termination settlement proposals must be submitted to the Contracting Officer within one year from the effective date of the termination.  In this case, the Army issued a contract to Black Bear for runway improvement at a forward operating base in Kandahar Province, Afghanistan.  The Army issued its notice to proceed on June 28, 2012, and then issued a suspension of work notice on July 13, 2012.  This was followed by a letter terminating the contract for convenience on July 16, 2012, and then a modification terminating the contract for convenience on August 12, 2012.

The contractor, Black Bear, submitted a claim letter to the Contracting Officer on March 25, 2017, over four years after the contract was terminated, seeking $462,160.  The Contracting Officer denied the claim on the grounds that (1) the parties had agreed to a no cost termination, (2) the modification terminating the contract contained a release of claims, and (3) Black Bear did not submit its settlement proposal within 30 days of the termination notice.

On appeal, the Board ruled against Black Bear because it failed to submit its termination settlement proposal within one year of the effective date of the termination, as required by FAR 52.249-2, Alt I.  The Board noted that, per that clause, if the contractor does not submit its termination settlement proposal or request for equitable adjustment, or request a time extension “there is no right of appeal.”  FAR 52.249-2(j).  Black Bear did not dispute that it did not request an extension, and did not provide any rationale for why its claim was so late, arguing only that the Government was liable for Black Bear’s incurred costs.  The Board noted that the Contracting Officer was incorrect that the settlement proposal was due within 30 days, but explained that the “decision remains the same” and, further, because the Black Bear’s claim was so late, it was unnecessary to consider the Contracting Officer’s other reasons for denying the claim.

The second case, Atlas Sahil Construction Co., ASBCA No. 58951, 2017 WL 5633017 (Nov. 9, 2017) involved a design-build, firm fixed-price contract for approximately $10 million, for the construction of nine large “maintenance tents” and related work at a forward operating base in Mazar-e-Sharif, Afghanistan.  The contract was awarded to Atlas Sahil on September 27, 2010; the following month, Atlas Sahil entered into a joint venture partnership with another Afghan company, Sambros International, to purchase the tents and related equipment.

The Government issued a suspension of work notice to Atlas Sahil on April 10, 2011, which contained the usual language instructing the contractor to cease work.  Via email, the Contracting Officer underscored that Atlas Sahil “is not to incur any cost past the date of the notice,” and that “during this time of the suspension, there will be no allowance for any cost for this contract.”  Atlas Sahil nevertheless decided to retain a full complement of employees on staff at site after the notice of suspension.  Two weeks later, the suspension of work was partially lifted and, in December 2011, the Contracting officer issued a modification to descope the contract and add specified work, specifically, directing Atlas Sahil to install four maintenance tents instead of nine, with the remaining five tents to be delivered but not installed.

The Contracting Officer issued a notice terminating the contract for convenience on March 31, 2012 in accordance with FAR 52.249-2, Alt I.  Atlas Sahil delivered the nine tents, (although the Board would later note that some of the tents were damaged, and that Atlas Sahil did not deliver or install any of the tents’ electrical components).  On February 27, 2013, Atlas Sahil submitted a revised settlement proposal for approximately $4 million.  The Government determined that no settlement could be reached, noting that Atlas Sahil had not submitted a certificate of cost and pricing data, but that, upon submission of a valid certificate, the Government may agree to pay just over $1 million.  Subsequent negotiations failed.  The record showed that the Government approved Atlas Sahil’s 60% design, never approved the 95% submittal, and that Atlas Sahil never broke ground at the construction site.

The Contracting Officer questioned many elements of Atlas Sahil’s claimed costs, such as the authenticity and reliability of invoices submitted on appellant’s company letterhead, without any additional evidence that another party had received payment.  The CO also questioned claimed labor costs.  Atlas Sahil claimed the cost for its entire workforce for the entire term of the project, including the period of the 8-month suspension from April to December 2011.  The Contracting Officer rejected this because Atlas Sahil had refused to lay off its work force, despite the Government’s instruction.  The CO also compared the initial proposal with the settlement proposal and determined that salaries were to and sometimes three times higher in the settlement proposal as compared what had been proposed under the contract.

On appeal, the Board made several noteworthy preliminary findings.  The Board first rejected Altas Sahil’s argument that the “standard” termination for convenience clause, FAR 52.249-2 (in addition to the alternate clause relating to construction) should be incorporated into the contract.  The Board noted that, while under the Christian Doctrine the Board may insert a clause into a government contract by operation of law if that clause is required by applicable regulations, the Christian Doctrine does not permit the automatic interpretation of every required clause.

The Board then rejected Atlas Sahil’s position that CLIN pricing provides the most reliable method for determining fair compensation and that, in the absence of CLIN pricing, the Board should resort to the CO’s price negotiation memorandum as the basis for a jury award verdict.   The Board explained that “CLIN prices are based on price, whereas termination settlements are based on cost,” and, further, that “CLIN prices are established for fully completed components of contract performance, not for terminated components.”

The Board then rejected Atlas Sahil’s argument that it had a “justifiable inability to present documentation of its cost,” because of a conflict between Atlas Sahil and Sambros, which had apparently denied Atlas Sahil access to cost records.  The Board explained that “a jury verdict was only available where the contractor has demonstrated a justifiable inability to substantiate the amounts of its injury by direct and specific proof,” and that here, “generalized claims about a ‘conflict’ between it and Sambros leading to Sambros’ denying appellant access to records” did not constitute a “justifiable inability” to substantiate the amount of its claim by direct and specified proof.  The Board noted that FAR 31.201-2(d) required the contractor to be responsible for accounting for costs and maintaining records.

The Board then turned to Atlas Sahil’s specific elements of claimed cost.  Regarding the Tent costs, Atlas Sahil claimed $1,647,000 based on CLIN pricing.  The Board rejected this (for the reasons noted above) and concluded a fair price based on reliable invoices was $747,000.  Regarding labor costs, Atlas Sahil proposed $331,520.  Again noting that Appellant never submitted a full design submittal and refused to lay off its work force during the suspension period, the Board agreed with the CO that $40,270 was a reasonable cost for labor.  Regarding office space, Appellant proposed $172,000.  The Board agreed with the Government that $12,000 was reasonable, noting that Appellant’s proposed cost covered periods in which there was no construction activity at the site.  Regarding the profit rate, Appellant proposed 25.3%.  The CO proposed 10%, and the Government, in its final brief, argued for a 5 % rate.  After considering FAR 49.202, which allows for profit on the terminated portion of the contract, and states further that relevant factors include the “extent and difficulty of the work done by the contractor as compared with the total work required by the contract,” the Board agreed that 5% was reasonable.  The Board noted that, although this was a construction contract, Atlas Sahil never broke ground, and that the effort was subsequently reduced to delivery of the tents, a “sharply reduced effort.”  Accounting for these adjustments, the Board concluded Atlas Sahil was entitled to only $1,503,695.45 of its nearly $4 million claim.

There are several key takeaways from these two cases.  First, contractors should submit termination settlement proposals on time and, if, for some reason, timely submission is not possible, contractors should request and confirm an extension from the Contracting Officer, in writing.  Second, when faced with a Government suspension, termination for convenience, or any event beyond the control of the contractor that affects the cost of performance, the contractor should document costs.  Atlas Sahil demonstrates that allowable termination costs will be denied in the absence of reliable, contemporaneous supporting documentation.  Third, contractors should not give the Contracting Officer or the Board (or Court) reason to doubt their credibility regarding claimed costs.  The lack of justification in the record regarding the decision to retain a full workforce through the suspension period, as well as the reason why salaries in the settlement proposal were three times higher than in the initial proposal, undoubtedly contributed to the Board’s significant cuts to Atlas Sahil’s claim.

We welcome your thoughts and comments.