Termination for Default

One of the most challenging and potentially costly decisions facing a project owner or contractor is whether or not to terminate for default a contractor’s or subcontractor’s right to complete a construction contract. Even if the decision to terminate seems inevitable, the steps to be taken in carrying out that termination for default present many opportunities for costly mistakes. Malyszek & Malyszek is here to help you potentially avoid those costly mistakes.

In requesting the termination of a contract for default, the contracting office is to provide a paper copy of the contract and all documents that relate to it, set up in the form of a contract file, a completed Termination Authority template, and a Contracting Officer’s Statement. Note that electronic documents can’t be used for legal reviews or in litigation.

Termination for default is the exercise of a vowed right of the government or prime contractor to terminate the contract in whole or in part by reason of the contractor's failure to perform its duties under the contract.

Under termination for default a contractor may not recover its costs on undelivered work and must repay any progress or advance payments relevant to such work. The contractor is liable to the government for any excess costs for supplies and services procured similar to those terminated and for other damages. The government may elect to take all or any part of the completed supplies and manufacturing materials involved for which the contractor is paid.

Termination for default is a harsh penalty indeed so that all contractors should take every step possible to avoid such a situation. It will prove beneficial to the contractor to have completely documented files when dealing in government work, as these files may prove invaluable in contesting a termination for default. Frequently, it can be proved by the contractor that its failure to perform rose out of causes beyond its control and without its fault or carelessness, so that a termination for default should rather be a termination for convenience, in which case he may recover allowable costs.

Most terminations for default are based upon the contractor's failure to make timely deliveries, but they may also be for failure to perform services required within the time specified in the contract, failure to perform any other provision of the contract, or failure to make progress so as to endanger performance of the contract.

Normally the contracting officer will notify the contractor by letter of the possibility of such termination, at which time the contractor should make every effort to remedy the situation or to present his case as to why he is not at fault. If the contracting officer still determines that termination for default is proper, he will immediately issue a notice of termination where timely deliveries are in question.

If any other failure of the contractor is in question, the contractor is given written notice identifying such failure and providing a period of ten days in which to cure such failure, with the formal notice of termination following at the expiration of the ten day period if negotiations so command.

The Armed Services Board of Contract Appeals (ASBCA) ruled that the contract was properly terminated for default where the contractor, even though in disagreement with the government's interpretation of manufacturing and testing procedures, failed to maintain deliveries. Even if the contractor's interpretation were correct, it was still obligated to perform and to seek its relief in additional reparation under the Changes Article.

Call Malyszek & Malyszek today for a free consultation concerning information about termination for default.