Overview
FAR Subpart 49.4 governs "Termination for Default," which is the Government’s contractual right to terminate a contract because of a contractor’s actual or anticipated failure to perform its obligations. This subpart establishes the rigorous procedures, notice requirements, and financial liabilities involved when a contractor fails to deliver, fails to make progress, or fails to comply with other contract provisions.
Key Rules
- Triggers for Default: The Government may terminate for default if the contractor fails to: (1) deliver supplies or perform services on time, (2) perform any other contract provision, or (3) make progress so as to endanger contract performance.
- Excusable Delays: If a contractor can prove their failure arose from causes beyond their control and without negligence (e.g., acts of God, strikes, freight embargoes), the termination is converted to a "Termination for Convenience" (T4C).
- Cure Notice vs. Show Cause:
- A Cure Notice (minimum 10 days) is required before terminating for "failure to make progress" or "failure to perform other provisions."
- A Show Cause notice is used when termination is imminent to allow the contractor to explain why they should not be terminated.
- Note: No notice is strictly required for failure to deliver on time, though the Government must be careful not to "waive" the delivery date.
- Financial Liabilities: Under fixed-price contracts, the defaulting contractor is liable for excess repurchase costs (the price difference if the Government has to buy the items elsewhere) and liquidated damages.
- Repurchase Rights: The Government can repurchase similar supplies or services against the contractor’s account and must seek competition for these requirements to the maximum extent practicable.
- Small Business Protection: If the contractor is a small business, the Contracting Officer (CO) must provide copies of any cure or show cause notices to the Small Business Administration (SBA).
Responsibilities
- Contracting Officer (CO): Responsible for making the final determination to terminate; must consult with technical and legal counsel; must prepare a memorandum for the file justifying the action; and must notify the surety and the SBA (if applicable).
- Counsel and Technical Personnel: Must review the proposed termination to ensure its "propriety" (legal and technical defensibility) before the CO proceeds.
- Administrative Contracting Officer (ACO): Restricted from issuing show cause or cure notices without the prior approval of the primary contracting office.
- Surety: Has the right to propose a "takeover agreement" to complete the work, especially in construction, to mitigate their liability under the performance bond.
- Disbursing Officer: Must be notified by the CO to withhold further payments to the contractor once a termination notice is issued to ensure funds are available to cover Government damages.
Practical Implications
- "The Death Penalty": In government contracting, a Termination for Default is often called the "death penalty." It is reported in past performance databases (CPARS) and can make it nearly impossible for a contractor to win future federal work for years.
- Waiver of Delivery Date: If the Government accepts late deliveries or remains silent for a long period after a missed deadline, they may "waive" the delivery date. To regain the right to terminate, the CO must issue a notice setting a new, reasonable delivery date.
- Cost vs. Fixed-Price Nuance: Contractors should note that while fixed-price defaults lead to "excess repurchase costs," cost-reimbursement defaults do not. However, in cost-reimbursement defaults, the contractor’s fee is reduced, and they cannot claim settlement proposal preparation costs.
- Mitigation of Damages: Contractors facing a T4D should immediately document every "excusable" cause for delay (e.g., supply chain issues out of their control) to attempt a conversion to a T4C, which allows for cost recovery rather than paying damages.