The Trump Administration has undertaken a series of contract terminations to realign federal spending with the Administration’s goals.[1] The Federal Acquisition Regulations (“FAR”) outline the process for contract termination. If a contract is terminated, contractors must be aware of the steps they can take to maximize recovery of termination costs.
In a federal contract, there are two types of termination, termination for default and termination for convenience. A contract may be terminated for default when the contractor fails to perform its obligations, such as by failing to make adequate progress on the project.[2] In a termination for default, the government is generally required to give notice and provide the opportunity for the contractor to “cure” or correct the problem before a termination decision is made.
A federal contract can also be terminated for convenience, which is termination “in the absence of fault or breach by the other party,”[3] if the “Contracting Officer determines that termination is in the Government’s interest.”[4]
An Executive Order issued on February 26, 2025 orders federal agencies to “review all existing covered contracts…and, where appropriate and consistent with applicable law, terminate or modify…” contracts to “reduce overall Federal spending…to promote efficiency and advance the polices of [the Trump] Administration.”[5] Terminating a contract to advance the policies of the Administration – without a need to find default or breach by the contractor – would likely be a termination for convenience.
This article focuses on the termination for convenience process and some of the things contractors need to consider if their contract is terminated for convenience. Depending on the contract and project, termination for convenience can be a complicated process with a number of variables. Contractors should strongly consider professional representation if their contract is terminated so a recovery claim strategy can be built that maximizes the contractor’s payment.
How is a Contract Terminated for Convenience?
The termination for convenience process begins with a written notice, which can be in email, to the contractor that the contract is fully or partially terminated, the date of termination, and any special instructions.[6] The contracting officer cannot verbally terminate a contract. A written notice of termination can be effective immediately and contain special instructions, such as what material should be left at the project site. Understanding the notice is the first step to successfully navigating the termination process.
What does the Contractor do next?
Once the notice of termination is received, the contractor should stop work immediately or as otherwise directed, and terminate all subcontracts and purchase orders related to the terminated work. In practice, a contractor’s subcontracts and supply agreements should have a termination clause that works in conjunction with the termination clause in the prime contract (this is true for all projects, public and private).
Generally, the contractor must also protect any supplies or material that the government might own or intend to purchase, and deliver those supplies or materials to the government.[7]
Immediately upon receipt of the notice of termination, the contractor should track any costs and tasks associated with termination. If stockpiled material needs to be taken from the jobsite to a storage yard – track the costs and document the work. If a supplier charges a fee for a cancelled order – track the cost and document why it was incurred.
Termination Settlement Proposal?
If a contractor’s fixed price contract is terminated for convenience, the contractor may recover: (1) allowable costs incurred to perform the work; (2) reasonable profit for work performed; and (3) reasonable termination expenses. A contractor may claim these costs using either the “inventory basis” or the “total cost basis.”[8]
In both cases, the settlement should “compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract.”[9] In the process of reaching a fair settlement, “the use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.”[10]
To claim its costs, the contractor will submit a termination settlement proposal on a standardized form using either the “inventory basis” or “total cost basis” method. In either case – the same costs are allowable. Among other costs, the contractor may claim profit on work done for the terminated portion of the contract,[11] settlement expenses (including accounting, legal, and clerical), and reasonable costs for storage and disposition of termination inventory.[12]
The use of the inventory basis is the preferred method, and the total cost basis may only be used if approved in advance by the termination contracting officer.[13] Generally, the total cost basis is used when work has not begun or unit costs for completed work and work in progress cannot be readily established.[14]
When using the inventory basis method, the costs of direct material, direct labor, and indirect factory expenses are allocated to categories of inventory (i.e. raw materials, purchased parts, finished components…). When using the total cost basis method, direct material, direct labor, and indirect factory expenses are submitted as lump sums.[15]
To maximize its recovery, the terminated contractor should no longer view its terminated contract as a fixed price contract. Instead, the contractor should view the contract as a cost plus or cost reimbursement contract.[16]
The contractor should also include all of its incurred costs in the settlement proposal, including costs that are otherwise unallowable.[17] If the contractor takes too narrow a view of what costs can be claimed, some costs could be missed. For example, productivity on many projects improves as crews become more experienced throughout the project. If the “savings” from the increased efficiency had not been realized, this cost could be included in the termination settlement proposal as “starting load costs not fully absorbed…result[ing] from factors such as…lack of familiarity or experience with the product.”[18]
When is the Final Termination Settlement Proposal Due?
The final settlement proposal must be submitted within one year of the effective date of termination.[19] If the final settlement proposal is not timely submitted, the contractor may waive the right to judicial review of the amount the contracting officer determines is owed.[20] In other words, the contracting officer can pay what they want and the decision is final.
When Should an Interim Settlement Proposal be Submitted?
Contractor’s should consider submitting an interim settlement proposal along with an “Application for Partial Payment”[21] if there are termination costs the government is unlikely to dispute. Partial payment can help a contractor with cash flow while a final termination claim is being developed or decided upon. The contracting officer is required to “promptly” process partial payment requests.[22] While approval of the contracting officer is needed, the FAR does not prohibit the contractor from submitting an interim proposal on a total cost basis and the final proposal on an inventory basis.
Conclusion
The goal of the termination process is to “compensate the contractor fairly.”[23] But the contractor can help itself by changing its mindset from only claiming allowable costs to claiming any cost that would be an “unfair” burden. Although the termination claim process can be challenging to navigate, the “contractor is not supposed to suffer as the result of a termination for convenience of the Government, nor to underwrite the Government’s decision to terminate.”[24]
[1] See Toby Cox, Trump’s DOGE cost-cutting hits Charleston Army Corps of Engineers office, The Post and Courier, Feb. 28, 2026 (https://www.postandcourier.com/rising-waters/army-corps-office-lease-termination-doge-gsa/article_696dae52-f5dc-11ef-9493-c37cea506e3c.html)
[2] FAR 52.249-8(a)(1)
[3] Davidson Oil Company v. City of Albuquerque, 545 F. Supp. 3d 1039, 104 (D.N.M. 2021).
[4] FAR 52.249-2(a)
[5] Implementing the Presidents “Department of Government Efficiency” Cost Efficiency Initiative (February 26, 2025) https://www.whitehouse.gov/presidential-actions/2025/02/implementing-the-presidents-department-of-government-efficiency-cost-efficiency-initiative/
[6] FAR 49.102(a)
[7] FAR 49.104(a)-(i)
[8] FAR 49.206-2
[9] FAR 49.201(a)
[10] FAR 49.201(a)
[11] FAR 49.202
[12] FAR 49.201(a)
[13] FAR 49.206-2(a)(2)
[14] FAR 49.206-2(b)
[15] Standard Form 1436 (Rev. 5/2004); Standard Form 1435 (Rev. 3/2016)
[16] Appeal of Durette, GmbH, A.S.B.C.A. No. 34072, 91-2, 91-2 B.C.A. (CCH) ¶ 23756, at 118,972, 1991 WL 17898 (Armed Serv. B.C.A. 1991) (“The convenience termination resulted in essentially converting the contract into a cost reimbursement type contract, and appellant is therefore entitled to recover its allowable costs in accordance with the standards of reasonableness, allocability, and cost principles set forth in the regulations, including profit”).
[17] See Codex Corp. v. United States, 226 Ct.Cl. 693, 698-699 (1981).
[18] FAR 31.205-42.
[19] FAR 49.206-1
[20] See Do-Well Machine Shop, Inc. v. United States, 870 F.2d 637 (Fed. Cir. 1989).
[21] Standard Form 1440; FAR 49.602-4
[22] FAR 49.112-1(a).
[23] FAR 49.201(a)
[24] Red River Holdings, LLC v. United States, 802 F. Supp. 2d 648, 653 (D. Md. 2011)