### TERMINATIONS FOR CONVENIENCE AND THE 

**TERMINATION COSTS CLAUSE**

[Major Graeme S. Henderson]{.smallcaps}[^1]

**I. Introduction**

You are a first or second assignment Assistant Staff Judge Advocate
assigned to a base or even an air logistics center. When you arrive at
the base your boss, the Staff Judge Advocate (SJA), tells you that you
will be the new contracts attorney and you will advise the contracting
squadron on all contract matters. Somewhere in the back of your mind,
you can recall snippets of contract law from law school, from your bar
review a couple of years ago or maybe even from your two weeks at the
Army JAG School Contract Attorney's Course.

One bright, sunny day, you get a voice mail message from a civilian in
the contracting squadron who identifies himself as the termination
contracting officer for the Moab Industries (MI) termination. In the
message, he first congratulates you on your new assignment. He then
mentions that his ACO has sent notification to MI terminating the
contract, he has conducted the post termination conference, and DCAA has
finished auditing MI's termination settlement proposal. The audit has
questioned a number of termination settlement costs, and the TCO needs a
legal opinion about whether to disallow the questioned costs in the
termination settlement. He also wants you to go with him to the
termination settlement conference to advise him.

Not being a career contracts attorney, you wonder what he is talking
about: "This doesn't sound like Contracts 101," you say. What is a
termination contracting officer (TCO)? How, exactly does a termination
work? What is DCAA? What are termination costs? What does the TCO mean
by "questioned" and "disallow"?

This primer will provide guidance and be a reference for exactly this
type of situation. It will briefly outline the termination for
convenience process under FAR Part 49, explain who the participants are
and what they do, and describe the process they are trying to follow as
they finalize a convenience termination. Finally, it will analyze FAR
31.205-42, Termination Costs, and provide guidance on handling the types
of costs specific to a termination settlement.

# **II. Termination for Convenience**

**A. Generally**

Termination for Convenience is a unique right reserved by the Government
in its contracts, giving the Government the right to terminate a
contract without cause at any time after award.[^2] What the contractor
receives in compensation for such a termination are various "costs"
arising from the termination.[^3] In virtually every case, the
termination for convenience clause[^4] entitles the contractor to
recover costs incurred, profit on work done, and costs of preparing the
termination proposal[^5] no matter what type of contract it executed
with the Government.[^6]

The mechanics of getting to a termination for convenience are fairly
straightforward. The Government, in the form of the requiring activity,
determines that it no longer needs the goods or services required by the
contract and formulates a reason why it is "in the Government's
interest" to terminate the contract.[^7] The requiring activity informs
the Contracting Officer (CO) who has authority to terminate the
contract.[^8] At this point, the CO becomes a Termination Contracting
Officer ("TCO")[^9] or, if the command has sufficient contracting
staff,[^10] the CO transfers responsibility to a permanently appointed
TCO.[^11]

FAR Part 49 governs the TCO's actions and incorporates the FAR 52.249,
Termination of Contracts, clauses into the contract by reference.[^12]
The TCO must first notify the contractor in writing that the Government
is terminating the contract.[^13] The writing must include the effective
date of the termination, the extent of the termination, any special
instructions, and any special steps the contractor should take to
minimize the impact on personnel if the termination will result in a
significant reduction in the contractor's work force.[^14] Once
notified, the contractor must stop work immediately, terminate all
subcontracts, and begin preparing its termination settlement
proposal.[^15]

The TCO's primary objective in a termination for convenience is to
negotiate with the contractor to reach a bilateral agreement settling
the termination.[^16] The TCO's settlement authority is not unlimited,
however. The TCO must follow the cost principles associated with
reimbursement of cost type contracts found in FAR Part 31, Contract Cost
Principles and Procedures.[^17]

# **B. Termination Steps**

Termination procedures after notice to the contractor are set out by
each command and are based upon the FAR's requirements. A good example
of such procedures are those of the Defense Contract Management Agency
("DCMA").[^18] When a DCMA TCO receives the notice of a need to
terminate a contract, the TCO first prepares and reviews the termination
notification for completeness.[^19] It is at this stage that the TCO
might consider coming to the contracts attorney for assistance in
reviewing the notice of termination.[^20] After review, the TCO issues
the termination notice and conducts the post termination
conference.[^21] At this conference, the TCO advises the contractor on
the termination process[^22] including the requirement for submission of
the termination settlement proposal to the TCO.[^23]

As alluded to above, a termination for convenience essentially treats a
fixed-price contract as a cost-type contract, [^24] so the TCO (and the
contracts attorney) should be familiar with FAR Part 31 and
cost-reimbursement contracting. To work towards settlement, the TCO will
have to examine the termination settlement proposal to determine whether
the costs asserted by the contractor are "allowable"[^25] under the
terminated contract. Allowability is a term of art (defined at FAR
31.201-2) composed of several factors: reasonableness,[^26]
allocability,[^27] cost accounting standards,[^28] the terms of the
contract,[^29] and the limitations of FAR subpart 31.201.[^30]

Most of the time, the TCO is already familiar with Part 31 and, in the
case of settlement proposals under \$100,000,[^31] the TCO can and often
will decide allowability. If the termination settlement proposal is over
\$100,000, then the TCO must forward the contractor's termination
settlement proposal and all of the supporting accounting documentation
to the Defense Contract Audit Agency (DCAA) for an audit.[^32] The FAR
considers the DCAA audit part of a TCO's field review of the
contractor's settlement proposal.[^33]

# **C. The DCAA**

The DCAA is an agency of the Department of Defense that is separate from
the individual military services.[^34] The DCAA sets out its purpose on
the first page of its website:

> The Defense Contract Audit Agency is under the authority, direction,
> and control of the Under Secretary of Defense (Comptroller), and is
> responsible for performing all contract audits for the Department of
> Defense. It also provides accounting and financial advisory services
> regarding contracts and subcontracts to all DoD components involved in
> procurement and contract administration.[^35]

In a termination, the DCAA's responsibility is to audit the contractor's
termination settlement and help determine whether costs are allowable or
unallowable[^36] based upon the Cost Accounting Standards (CAS) and FAR
Part 31. What the DCAA field auditor generates in response to a
termination settlement audit request is called an "audit report." An
audit report will have a number of sections detailing the factors
considered and the accounting rules and assumptions applied. Since
audits are merely advisory,[^37] the DCAA auditors do not tell the TCO
that certain costs are unallowable: they "question" the costs. Thus,
having submitted a termination settlement proposal to DCAA for audit,
the TCO should expect to receive back a multi-page report that concludes
that certain of the contractor's proposed settlement costs are
"questioned as being unallowable costs."

Practice pointer: DCAA is independent from the military services and,
therefore, is not subject to service-specific pressure in auditing
terminations. The DCAA's independence is generally a blessing,
especially in situations where the command does not want to pay certain
termination costs and the TCO feels they are allowable, or where the
Government is using an auditor as an expert witness in a contract
appeal. However, its independence can also be a hindrance when the TCO
and DCAA auditor are at odds. When the TCO supports allowing a cost and
the DCAA auditor thinks the TCO should disallow the cost, a conflict can
create a situation in which the TCO asks the base-level contracts
attorney to disprove the conclusions of the DCAA auditor's attorney on
certain costs.[^38]

# **D.** **Termination Settlement Negotiation**

After the TCO has received all of the field review information including
a DCAA audit report, the TCO will prepare a prenegotiation
position.[^39] This is often the point at which a TCO will call the
contracts attorney and ask for an opinion. The TCO will want the base
contracts attorney to review the TCO's position on allowable and
unallowable costs and perhaps even attend the termination settlement
negotiation. If the TCO requests assistance, the contracts attorney
should carefully scrutinize any costs DCAA has questioned as
unallowable. The contracts attorney should also realize that after the
Government terminates its contract for convenience, a contractor is
likely to believe that it is entitled to *all* of its costs---as opposed
to just the *allowable* ones. When a contractor has this mindset, a
disallowance by the TCO easily becomes contentious in the negotiation.
Thus, it is important to fully understand DCAA's position in order to
advise the TCO.[^40] In addition, preparation for attending a
termination settlement negotiation includes discussing with the TCO both
the issues mentioned in the DCAA audit report and other foreseeable
issues. It is possible that a contractor may have additional
justifications for claimed costs and it may switch its argument
mid-negotiation, hoping to catch the TCO unprepared.[^41]

Once the termination settlement negotiation is complete, there are two
possible outcomes: a bilateral agreement in which the parties have
agreed on a termination settlement or a "settlement by
determination."[^42] A bilateral agreement on the termination settlement
requires a Settlement Negotiation Memorandum[^43] which the agency must
review according to its procedures.[^44] Neither the FAR nor DFARS
requires legal review of the Settlement Negotiation Memorandum, but such
review is advisable.[^45]

If the termination negotiation proves to be fruitless, the TCO will
issue a settlement by determination.[^46] A settlement by determination
not resulting from a contractor's failure to submit a termination
settlement proposal is an appealable final decision for purposes of the
Contract Disputes Act.[^47] Thus, a contracts attorney should, before
its issuance, review a settlement by determination for completeness[^48]
and fairness.[^49]

# **E.** **The Contractor Cost System**

The FAR determines the overall procedure for conducting a termination
for convenience. Thus, the TCO and the TCO's contracts attorney will be
dealing primarily with FAR Part 49, Termination of Contracts. When the
issue narrows to which costs are allowable in a convenience termination
settlement, FAR 49.113 directs the parties to use the cost principles of
FAR Part 31.[^50] In interpreting FAR Part 31, military contracts
attorneys have to look at precedent from the Armed Services Board of
Contract Appeals (ASBCA), the United States Court of Federal Claims
(COFC), and the Court of Appeals for the Federal Circuit (CAFC).[^51]
The ASBCA's position is that a termination for convenience effectively
converts a fixed-price type contract into cost-reimbursement type
contract.[^52] The COFC takes the same position.[^53] Therefore, the
most important part of the termination process is applying Parts 30 and
31 cost principles to different types of contractor costs regardless of
whether the terminated contract was fixed price or cost reimbursement

FAR Parts 30, Cost Accounting Standards Administration, and 31, Contract
Cost Principles and Procedures, contain a number of rules, including
Cost Accounting Standards (CAS), that govern how cost reimbursement
contracts are accounted for and managed. The CAS are general accounting
principles promulgated by the CAS Board,[^54] detailing how contractors
must maintain an accounting system and account for costs incurred on
Government contracts. The contract cost principles are the actual rules
describing the determination, negotiation, or allowance of costs when a
contract clause requires such accounting.[^55] It is the CAS and FAR
Part 31 that DCAA uses in auditing a termination settlement and writing
an audit report. Those rules are interpreted for DCAA in their internal
audit guidance document, the DCAA Contract Audit Manual (CAM).[^56]

# **III. Termination Costs (FAR Part 31.205-42)**

Having reviewed the basic procedures associated with convenience
terminations and the agencies and personnel involved, let us revisit the
original hypothetical about the Moab Industries termination. You go to
visit the TCO to talk and have a look at the contract. Along with a copy
of the proposed termination settlement, the TCO gives you a copy of the
DCAA audit report for the case. After going through several pages of
auditing assumptions made by the DCAA auditor, the audit concludes that
the costs proposed by MI appear generally allowable with the exception
of the following questioned costs:

> 1\) FAR 31.205-42(a): The salvage cost[^57] of titanium castings
> suitable for machining aircraft parts;
>
> 2\) FAR 31.205-42(b): The cost of the remaining four-month maintenance
> contract on the 5-axis machine tool used on the contract;
>
> 3\) FAR 31.205-42(c): Employee safety training specific to the 5-axis
> machine tool MI used that was conducted prior to the start date of the
> contract;
>
> 4\) FAR 31.205-42(d): The cost of an overhead rail system designed to
> transport the contract items throughout the plant;
>
> 5\) FAR 31.205-42(e): The cost of the remaining fourteen months of
> MI's lease on the building in which it is located;
>
> 6\) FAR 31.205-42(f): The cost of relocating floor anchors[^58] for
> the 5-axis machine tool;
>
> 7\) FAR 31.205-42(g): Attorney's fees for the preparation of the
> contractor's settlement proposal;
>
> 8\) FAR 31.205-42(h): The cost of terminating MI's electronics
> subcontractor for convenience.

After reading the Audit Report, you scratch your head and wonder whom
you can get to take this from you. As far as you can tell, these
questioned costs are all specific to convenience terminations and it
looks like there is very little case law or authoritative guidance to
follow. Then you remember that you read a primer on "Termination Costs"
awhile back that may prove a useful starting point for your analysis.

Most of the FAR Part 31 rules deal with cost reimbursement contracts.
Because the general law surrounding cost accounting for cost
reimbursement contracts is well established, this primer will not go
into detail about those rules. Instead, the focus here will be on FAR
Part 31.205-42, Termination Costs, [^59] examining each type of
termination cost and giving guidance that a contracts attorney can use
to determine whether a particular cost is allowable.

**A. 31.205-42(a): Common Items**[^60]

As the name and the description suggest, common items are items the
contractor can use in the "contractor's other work." [^61] According to
both federal court and BCA case law, the key parts of FAR 31.205-42(a)
seem to be "reasonably usable on the contractor's other work,"[^62] and
"could not be retained at cost without sustaining a loss."[^63]

# 1. Reasonably Usable on the Contractor's Other Work

In order to determine what is reasonably usable on the contractor's
other work, the CAM recommends looking at the contractor's plans and
orders for current or scheduled production and for current purchases of
common items. It also recommends looking at the contractor's entire
stock and the ordering record of the item to see if the same item is
being used for other contracts.[^64] According to the ASBCA, a
reasonably usable determination is a subjective determination from the
contractor's perspective dependent on the particular factual
situation.[^65] For instance, in a contract to supply clocks to the
Government, the cost of clock bottom set rods procured for the
terminated contract and used on another contract were considered
reasonably usable, while the terminated contract's 24-inch power cords
were not because the current model clock designs used 36-inch
cords.[^66]

More often, "reasonably usable on the contractor's other work" applies
to items that are basic commodities used to perform a contract (e.g.,
the sand, cement, gravel, paint thinner, reflector paint and paint used
on a roadway repaving contract.)[^67] Common items can be finished items
such as uniforms and radios,[^68] shelves,[^69] or office
furniture.[^70] Common items can also be large, expensive items that
were either manufactured,[^71] or leased by the contractor.[^72] For
large, expensive items, one test used to determine "reasonably usable in
the contractor's other business" is whether the contractor could sell,
lease or operate the item when an opportunity arose.[^73] In at least
one other case, a large expensive item was not considered a common item
because it could not be sold or leased ("reasonably used") to defray the
contractor's expenses after termination.[^74]

# 2. Could Not be Retained at Cost Without Sustaining a Loss

The second part of an analysis of whether items claimed by a contractor
are, in fact, common ones examines whether the contractor could retain
the items at cost without sustaining a loss. This portion of the
analysis is not always considered in the Board opinions, but when the
Boards have considered it, they have looked at whether the contractor,
in fact, had other work on which it could use the claimed common
items.[^75] This analysis appears to be a snapshot of the contractor at
the time, not necessarily looking at whether, in the future, the
contractor would have contracts on which it could use the common items.
In most cases, "retained at cost without sustaining a loss" means that a
common item will not cost the contractor something to retain after the
termination. For instance, if the common item in question is a load of
steel that the contractor can immediately use on other contracts without
having to pay any storage fees, it may be a noncompensable common item.
However, if the contractor takes a loss on reuse or incurs costs for
storage of the steel, then it cannot be "retained at cost without
sustaining a loss" and the contractor may be able to claim the costs as
termination costs.

In the case of usable "items," (e.g., buses), the courts and boards have
established a different definition of "retained at cost without
sustaining a loss": even though certain contractor items continue to be
used by the contractor, if the allowable costs on the items (such as
lease expense) are less than the revenue generated by the other use
(such as rental fees from other companies), they are "retained at cost
without sustaining a loss."[^76] For items that have to be scrapped, the
"cost" of the items is the depreciated cost value, less the salvage
value.[^77] Diminution of profit is not a "loss" for common items that
are reused by a contractor.[^78]

# 3. Hypothetical Analysis

Let us return to the hypothetical about the titanium castings. If the
contractor has other contracts (Government or commercial) on which it
can use the castings, then that stock would likely be considered common
items and not be reimbursable through the termination settlement.
However, if the terminated contract was the contractor's only work and
the termination put it out of business, then the castings would not be
common items and would be reimbursable. How much would the contractor
get? Answer: purchase cost (or depreciated value, if the items
depreciated) less salvage value.

**B. 31.205-42(b): Costs Continuing After Termination**[^79]

This category of costs represents those costs a contractor has incurred
or agreed to pay in performance of the contract that could not
necessarily be stopped immediately upon notification that the Government
had terminated the contract. "Continuing costs," as they are called, are
often misunderstood and contractors consider the continuing costs
provision a catchall provision for costs that do not seem to fit in
other categories of termination costs.[^80] As such, FAR 31.205-42(b)
costs are frequently challenged by the DCAA auditors and litigated by
contractors.[^81]

At the most fundamental level, continuing costs are those a contractor
incurs as a result of performing terminated work or that flow from
termination.[^82] The DCAA's focus in evaluating allowability of
continuing costs is on the termination date: did the contractor continue
to incur the claimed cost after the effective date of the
termination?[^83] The CAM states "reasonable costs associated with
termination activities are allowable," for instance, the salary or wage
costs of contract personnel at a remote site, or of personnel in transit
that have to be diverted to other non-terminated work, can be
allowable.[^84] The CAM also provides the example that costs involving
items that are in the midst of a process (such as electroplating or
heat-treatment) may be allowable where stopping the process would make
these items significantly less valuable to the Government
post-termination.[^85]

Courts and boards consider the continuing costs provision a "vehicle by
which certain post-termination costs may be recovered absent specific
authority therefore . . .\[which\] furnishes a means by which the
Government can provide fair compensation on a case by case basis within
the regulatory scheme."[^86] Thus, they have not necessarily developed a
specific test to apply to continuing costs. Instead, the courts and
boards appear to look at the fairness and facts of each case
individually. Nonetheless, the cases can be divided into three basic
types: personnel, facilities, and unabsorbed overhead.

# 1. Personnel Cases

In performing a contract, there are invariably contractor personnel the
contractor hired for that contract or diverted from another Government
or commercial contract to work on the terminated contract. If a
contractor lays an employee off as a result of the contract termination,
the contractor may charge severance pay as continuing costs.[^87]
However, the contractor must be able to prove that the costs are
applicable to specific employees or the severance pay will not be
allowed.[^88] If the contractor did not lay off an employee but the
employee was validly working on the termination effort, his or her
salary will be allowable.[^89] The source of the obligation to pay an
employee does not seem to matter: it can be a contractual obligation or
an obligation required by local law.[^90] Finally, continuing costs do
not have to be direct payments of salary or severance pay, they can also
be reimbursement to the employee for incidental expenses such as
relocation.[^91] The bottom line on continuing costs for personnel is
that they must have been involved in the termination or the obligation
to pay them must have arisen from a contractual or legal obligation and
be properly documented. Otherwise, continuing costs for personnel will
not be allowable.

# 2. Facilities Cases

In contracts involving the delivery of goods or services, contractors
often seek to use FAR 31.205-42(b) to recover the continuing costs of
contractor-leased facilities or machinery and equipment. Because of the
fairly broad definition of continuing costs, termination costs that are
not recoverable under FAR 31.205-42(d), Loss of Useful Value, and FAR
31.205-42(e), Rental Costs, may be recoverable as continuing costs. An
example of a cost that is recoverable as a continuing cost is
depreciation. For example, the Department of Transportation Board of
Contract Appeals (DOTBCA) has held that, following the convenience
termination of an aircraft use requirements contract, the contractor was
entitled to depreciation, maintenance costs, the cost of facilities
capital, general and administrative expenses and advertising between the
termination date and the date the contract would have ended.[^92] The
DOTBCA supported this finding by reasoning that the costs could not have
reasonably been discontinued immediately despite the company's best
efforts to mitigate.[^93]

Mitigation by ceasing to incur costs appears to be a key factor to
allowability of continuing costs, because where a contractor fails to
make reasonable efforts to discontinue incurring costs related to the
terminated contract, the BCAs refuse to allow the costs. In a recent
case, the ASBCA sustained disallowance of four months' post-termination
costs for office rental, land rental, labor, and excavator rental after
the contractor failed to make efforts to discontinue the costs.[^94]

*3. Unabsorbed Overhead*

The sure way to have a cost claim disallowed is to call it, or have a
BCA call it, continuing overhead or unabsorbed overhead.[^95] Boards
have consistently sustained disallowance of continuing cost claims that
are for unabsorbed overhead for a period past the termination date.[^96]
Even where the contractor has argued that an improper convenience
termination prevented it from entering into any contracts by which to
absorb its indirect costs, the Boards still have not allowed unabsorbed
overhead.[^97] The only relief has been for a contractor to claim that
some costs, such as rental, utility and insurance, could not reasonably
have been shut off at the time a termination rendered the plant
completely useless.[^98]

*4. Hypothetical Analysis*

Looking at the hypothetical claimed cost for the remaining four-month
maintenance contract on the 5-axis machine tool used on the contract, a
contracts attorney must consider whether the cost had to be continued
past termination. If the contractor could have stopped incurring the
cost at the time of contract termination, then a claim for continuing
costs for maintenance will not be allowable. By contrast, if the cost
was necessary to maintain the value of the machine tool, was not
transferable or terminable by the contractor, and the contractor could
not otherwise have mitigated, then the cost is likely allowable.

**C. 31.205-42(c): Initial Costs**[^99]

At its most fundamental level, FAR 31.205-42(c) allows a terminated
contractor to recover the early-on, preparatory costs it expended in
initiating performance that it will not recover entirely because the
termination prevented it from manufacturing or supplying the full
quantity of contract items. The need to compensate for initial costs is
best shown by an example:

The Government awards a contract to Aim High, Inc. for 500 widgets at
\$1000 each (\$500,000 for the whole contract). Widgets' cost per item
to produce the entire contract amount is \$800 per unit for a total
profit of \$100,000. Assume the total cost to set up machinery, train
the workers, and let them do a number of practice runs to learn how to
build the item quickly is \$50,000. When the Government terminates the
contract at 300 widgets, the contractor's profit would only be \$40,000,
not the \$60,000 that you would expect from a termination of the
contract at 300 units. The balance sheet looks something like this:

**[Full Performance]{.underline} [Termination at 300
Units]{.underline}**

### 

### *Contract Payment*

# [Units Price Total]{.underline} [Units Price Total\_\_\_]{.underline}

# 500 1000 500,000 300 1000 300,000

## *Manufacturing Cost* (with Initial Costs)

##  

## Units Price Total Units Price Total\_\_\_\_ 

500 700 \[350,000\] 300 700 \[210,000\]

Initial costs \[50,000\] Initial Costs \[50,000\]

## Cost Subtotal \[400,000\] Cost Subtotal \[260,000\]

Profit 100,000 Profit 40,000

Profit per unit **[200]{.underline}** Profit per unit
**[133]{.underline}**

Profit Rate (20%) Profit Rate (13%)

Clearly the inequity is that the startup costs, if not covered by the
termination, would cause the contractor profit margin to be lower
because of the termination. Thus, FAR 31.205-42(c) makes these costs
allowable. While allowability of these costs may be clear, the
contractor's and TCO's conflict is over how to calculate the initial
costs.

The DCAA states that contractors "rarely segregate initial costs in
their formal records of books of account . . ."[^100] Thus, the CAM
recommends looking at high unit costs at the outset of the
contract.[^101] Those high unit costs can be found in informal records,
cost reports, production data and other documents. [^102] The CAM also
says that an auditor can determine initial costs from the rate of
production loss at the outset of the contract as reflected in the scrap
reports, efficiency reports and spoilage tickets.[^103] Once an auditor
identifies costs, the hard part is assigning the initial costs to the
terminated and nonterminated parts of the contract.[^104] Needless to
say, this part of determining initial costs is very evidence intensive
and a contracts attorney without an accounting background should defer
to the DCAA auditor's position if well supported.

When initial costs are hard to calculate because a contractor has not
kept detailed records of costs incurred in training the workforce, the
BCAs have consistently used a learning curve analysis.[^105] The
learning curve analysis involves calculating an amount for learning
costs by applying a mathematical formula to the labor costs booked
during performance.[^106] The only twist to learning curve cases appears
to be this: where the contractor recovers initial costs associated with
learning on one terminated contract, the Government is not entitled to a
reduction in unit prices on a subsequent contract for the same items
that benefited from the learning.[^107] A smart contracts attorney will
often understand the process, but leave the calculations to DCAA,
remembering that because the calculation uses labor costs over the
course of performance, the initial cost calculation will appear to
involve labor costs up to the date of termination.[^108]

An issue frequently encountered in initial cost claims is first article
costs. A first article is a first item required by the Government in a
contract for testing to confirm that the contractor can produce the item
in accordance with contract requirements.[^109] The first article issue
comes into play when the contractor submits a first article, but the
Government terminates the contract before any further items are
manufactured. According to the Boards, the termination costs associated
with submission of first articles are allowable as initial costs if the
first articles pass the testing and the Government accepts them.[^110]

Further, costs attributable to contract quantities produced before first
article acceptance may also be allowable.[^111]

Beyond the costs of learning and first articles, contractors have
recovered initial costs, unabsorbed training costs,[^112] phone costs
associated with calling overseas suppliers,[^113] the cost of being put
on a buyers' waiting list,[^114] and the cost of painting a bus,
delivering the bus and installing new tires.[^115] Regarding when the
initial costs can commence, the factors appear to be the type of
contract and the contractor's intent. One BCA has allowed a
conscientious contractor's initial costs incurred prior to award of the
contract,[^116] while another BCA has disallowed initial costs incurred
by a contractor while awaiting a work order.[^117]

# Hypothetical Analysis

So is employee safety training specific to the MI's 5-axis machine tool
conducted prior to the start date of the contract allowable? Assuming
that the first article was approved prior to the termination, and
assuming that there are no other contracts that the employees worked on,
the costs of the safety training would be allowable as initial costs
incurred in preparation for performing the contract. If the first
article was not approved, or the contractor had not properly segregated
the costs, then they might not be allowable.

D.  **31.205-42(d): Loss of Useful Value**

Loss of useful value,[^118] like continuing costs, *supra*, is often a
hotly contested subcategory of termination costs.[^119] The language of
the rule is fairly clear, but one of the key terms, "special machinery
and equipment," is left undefined by the FAR.[^120] The lack of
definition leaves that phrase wide open to interpretation by contractors
seeking to recover the costs of equipment purchased for a
later-terminated contract.

On its face, this loss of useful value provision allows reimbursement
for costs of special tooling (ST)[^121] and special machinery and
equipment (SME) that was purchased or modified for the specific,
terminated contract. Simplifying and rephrasing FAR 31.205-42(d), the ST
or SME must: 1) not have been reasonably usable on the contractor's
other work; 2) have been given to the Government (through title
transfer); and, 3) if the ST or SME was used for non-terminated
contracts, have only the proportional lost value that relates to the
terminated contract claimed. This provision has the greatest effect on
terminated fixed-price contracts where the contractor has factored the
cost of ST and SME into the unit prices through the end of the
production. When the Government terminates the contract, this provision
allows the contractor to recoup the ST and SME costs that it could not
recoup through the prices on the full production run.

The CAM recognizes that loss of useful value determinations are often
challenged, noting that they are "usually a technical matter."[^122] It
then suggests that a legal opinion as to the intent of the parties
regarding the SME may be necessary.[^123] The manual also tells DCAA
auditors not to consider machinery or equipment SME when it is ordinary
equipment in the contractor's industry, it is similar to other
facilities owned by a contractor, or it is usable on the contractor's
other work without loss.[^124]

What is not considered by the FAR, but is clear from the case law, is
that the intent of the parties can be a key factor in determining the
allowability of SME. If the parties intended the contractor to purchase
the SME to perform the contract, the contractor likely can recover the
cost of the lost value upon termination.[^125] If the parties did not
intend the contractor to purchase a particular type of equipment, the
equipment will likely not be SME unless it truly is "special" in the
sense that it cannot be used in the contractor's other work and has no
use to any other contractors in the industry.

# 1. Standard Analysis Cases

The underlying principle for all situations where a convenience
termination deprives an item of its useful life is that the Government
should pay the full amount otherwise due for any items whose useful life
becomes zero upon termination.[^126] "Useful life" appears to be
contractor-specific, because equipment that could not be used by one
contractor on other work but could be used by other contractors has been
considered SME.[^127] Examples of items usable by others but allowed as
SME are washing machines,[^128] machine tools,[^129] and a wire-braiding
machine.[^130] Special Machinery and Equipment status has not generally
been extended to non-specialized types of machinery and equipment
because it is reasonably usable after termination of the contract. In
particular, the BCAs consistently refuse to find that computers[^131]
and furniture[^132] qualify as SME.[^133]

The distinction between many of these cases is hard to draw. The most
consistent analysis appears to be that the Boards look at the standard
factors of FAR 31.205-42(d): 1) reasonably capable of use in other work;
2) title offered to the Government; 3) cost proportional to use on
terminated contract; and then, if the equipment is *arguably* SME, the
Boards look at the reasonableness of the CO's decision. Where the CO's
decision is very unfair, the Board is more likely to find the loss of
useful value allowable.[^134]

# 2. Intent of the Parties

The most frequently cited case on loss of useful value is *American
Electric*.[^135] The case represents the broadest expansion of what FAR
31.205-42(d) allows to be compensated. In *American Electric*, the
Government issued a letter contract to American Electric, Inc. to
develop a munitions manufacturing capability quickly. The contractor
conducted a thorough search for facilities it could use, but having
found none, determined that it would have to purchase land and construct
facilities. The facilities it constructed were special facilities for
high-risk smelting and grinding of explosive materials, so the
contractor had to incorporate many safety features into the design of
the buildings at extra cost. All of the manufacturing equipment was
custom designed and built for this contract and the contractor discussed
the proposed actions regarding manufacturing equipment and facilities at
length with the contracting officer. Upon appeal of disallowance of the
costs, the ASBCA applied a straightforward analysis of the loss of
useful value factors. However, it held that loss of useful value applied
to the special machinery and equipment, *as well as* the buildings and
other facilities. Of course, buildings and other facilities are well
beyond the broadest definition of SME. However, the ASBCA seemed to
imply that the intent of the parties regarding their necessity justified
treating them as SME.[^136] In this way, FAR 31.205-42(d) seems to have
an added factor of "intent" that contractors have tried to apply.[^137]

# 

# 

# 

# 3. Hypothetical Analysis

So how does a contracts attorney analyze the allowability of the cost of
an overhead rail system designed to transport the contract items
throughout the plant? First, the contracting officer could argue that it
is not special machinery and equipment. The system as purchased was an
off-the-shelf modular system that bolted together before being installed
in the ceiling of the plant. As such, it did not appear to be "special
machinery and equipment" as the cases describe the term; it was not an
item peculiar to one contract that the contractor could not remove and
reuse on the contractor's other work.

Assuming it is special machinery, the next issue is title. Did the
contractor offer title to the Government? Here, the contractor did not
offer title, which militates against finding the special machinery
allowable.

Next, did the contractor appropriately apportion the loss of useful
value amount sought to the proportionate amount the equipment was used
for the terminated contract? Here, the contractor only used the
equipment on the terminated contract, so apportionment to the other work
of the contractor was not an issue.

Finally, in accordance with *American Electric*, what was the intent of
the parties regarding this equipment? Did they agree that this equipment
was going to be necessary to perform the contract? Unlike the situation
in *American Electric*, the Government here did not agree with the
contractor's election to create this custom item transport system. In
fact, the Government did all it could at contract inception to try to
get the contractor to use existing facilities and capabilities to
perform the contract, rather than purchasing a lot of expensive
equipment. Based on the foregoing, a BCA would likely disallow this
termination settlement claim for "special machinery and equipment."

**E. 31.205-42(e): Rental Costs under Unexpired Leases**

Rental costs[^138] under unexpired leases is one provision of
termination costs that is seldom challenged.[^139] In dealing with these
costs, the CAM recommends looking at the length of the lease in relation
to the anticipated contract period and whether the lease expense is
comparable to the expenses at other facilities in the area. It notes
that where a leased facility supports several contracts, the portion
allocable to the terminated contract will be allowable if the facility
was leased in order to perform the now-terminated contract. If the
terminated contract was performed in a facility already leased for other
contracts, the lease cost will not be allowable.[^140]

The contract appeals involving disallowance of rental costs under
unexpired leases mostly revolve around whether the lease expense was for
a reasonable period of time after the termination and whether the
contractor made efforts to sublet or otherwise mitigate the lease
expense. For instance, in *Southland Manufacturing Corp.*,[^141] the
contractor was allowed to recover lease costs and incentive rental
credits from the wrongful default termination in December 1964 through
May 1967 because it had made efforts to sublease the premises and was
unable to execute a lease for the property.[^142]

It is unclear whether the absolute limit of rental costs under unexpired
leases is necessarily the contract completion date. The United States
Court of Claims (now the COFC) has held that the allowable period may
extend past the contract completion date if it is reasonable.[^143]
However, the DOTBCA has more recently held that lease costs for two
months past the termination date were unallowable where the contractor
had been unreasonable in executing a lease that extended two years
beyond the contract performance date.[^144] Further, in *Qualex*,[^145]
the ASBCA split the ruling on rental costs of unexpired leases. On one
hand it supported disallowing reimbursement for unexpired lease costs
past the termination because the contractor bore the risk of the
Government not continuing the contract past the initial performance
period. On the other, it allowed reimbursement for the long-lease
discount on lease costs that inured to the Government's benefit as a
result of the contractor's five-year lease.[^146]

All that is clear from the few cases on this issue is that " . . . a
reasonable period of time is a question of fact and is based upon the
reasonable efforts of the contractor to reduce the lease costs."[^147]
Lest one think that lease costs only apply to real property or
facilities leases, that is not the case. Rental costs for unexpired
leases have been allowed for computer hardware[^148] and have been
argued to apply to chartered tugboats.[^149]

# Hypothetical Analysis

What about the cost of the remaining fourteen months of MI's lease on
the building in which it is located? If the lease extends only out to
the projected contract completion date and the contractor cannot get out
of the lease, despite its best efforts, then the lease costs are likely
allowable. If the contract was scheduled to be completed twelve months
after the termination date, then under *TDC Management Corporation* and
*Qualex*, a contracts attorney should argue for the contracting officer
to disallow the costs because the contractor should not have counted on
continuing work from the Government. The only further question, under
*Qualex*, is whether the contractor would be entitled to recover the
amount of any long-lease discounts that might have inured to the
Government's benefit.

**F. 31.205-42(f): Alterations of Leased Property**[^150]

This section was new to the FAR when it was published in 1983.[^151]
This subsection permits recovery on termination of costs incurred by a
contractor to prepare, improve or alter leased facilities used for the
performance of a terminated contract. The CAM deals with alterations to
leased property in subparagraph 12-305.5, Rental Costs Under Unexpired
Leases.[^152] Subparagraph 12-305.5(b) says that cost of leased property
alterations is allowable and directs auditors to "\[a\]djust unexpired
lease costs by any residual value of the lease due to termination,
assignment or settlement of the lease agreement."[^153]

There is very little case law on this issue. The only cases clearly
addressing this issue are *Southland Manufacturing Corporation*,[^154]
and *Energy Compression Research Corporation*.[^155] In *Southland*, the
contractor claimed the depreciated value of leasehold improvements that
consisted of landscaping, partitions and electrical work. The ASBCA held
that recovery under Armed Services Procurement Regulation (ASPR)
15-205.42(e) was not allowable; however, the ASBCA did ultimately allow
recovery because the amount claimed was reasonable, allocable and within
general accounting principles and practices appropriate to the
circumstances.[^156] In *Energy Compression*, the contractor claimed the
costs of improving property that they had leased. The ASBCA held,
however, that since they had leased the property in anticipation of a
Government contract and not as a result of a Government contract, the
leasehold improvements were not allowable.[^157]

# Hypothetical Analysis

Based upon the rule and the above cases, it appears that the cost of
relocating floor anchors for the 5-axis machine tool would be allowable
because it was an improvement to the leased facilities that was required
for performance of the contract. However, if the work had been done in
anticipation of a government contract, the costs may not be allowable.

**G. 31.205-42(g): Settlement Expenses**

Settlement expenses[^158] are those expenses associated with the labor
costs and material costs that arise from personnel working on the
contract termination settlement effort (as opposed to the personnel
completing the last few uncompleted items the contractor may have been
directed to complete). Direct costs for personnel employed by the
terminated contractor (such as the property managers, accountants, and
clerical staff) and personnel hired as outside consultants (attorneys,
accountants, evaluators) are generally allowable.[^159] Indirect costs
such as payroll taxes, fringe benefits, occupancy costs, and immediate
supervision costs are also allowable.[^160]

In auditing settlement expenses, DCAA looks at whether the contractor
established a separate accounting code for work performed on the
termination settlement.[^161] An auditor will look for the costs of
direct labor and materials expended and an amount for related overhead
costs.[^162] Much of the auditor's guidance requires him or her to
second-guess the contractor and apply common sense. The auditor must
determine whether:

-The work done corresponds to the pay level of the employee doing the
work;[^163]

-The amount of time spent corresponds to the time required for the
termination activities;[^164]

-The cost of professional accounting services is reasonable;[^165]

-The cost of legal expenses is reasonable;[^166] and

-The cost of storage charged is reasonable.[^167]

The CAM also advises that when a settlement proposal becomes a Contract
Disputes Act claim, the legal and consultants' costs incurred in the
prosecution of the claim are unallowable.[^168] The case law indicates a
number of recurring issues that arise when considering 31.205(g)
settlement expenses. These issues can be grouped into two categories:
legal fees and salaried employees.

# 1. Legal Fees

As noted above, the DCAA looks for proper documentation of personnel
working, hours worked and some idea of what the personnel did. If a
contractor makes a claim for legal fees, but there is insufficient
documentation of the exact or the approximate amount of time devoted to
the termination settlement claim, legal fees will not be
allowable.[^169] When legal fees claimed are for work on a claim against
the Government, the legal fees are also not allowable.[^170] Claims for
legal and accounting fees incurred in termination settlement efforts are
generally allowable, but to the extent they were expended in preparation
of claims that are not compensable, such as claims for anticipatory
profits, they are unallowable.[^171] Finally, attorneys fees are not
allowable when they are based upon a contingency fee arrangement.[^172]
However, in a situation where legal fees appear both standard and
contingent, if the parties agreed to an hourly and daily charge that is
reasonable in amount and not contingent upon reimbursement by the
Government, then the legal fees will be allowable.[^173]

# 

# 2. Salaried Employees

The boards and courts generally do not question the rates paid by a
contractor for personnel that work on a termination settlement,
including regular contractor personnel. However, they do question
additional amounts paid to salaried employees. In particular, there must
be a showing by the contractor that a salaried employee's work on a
termination was over and above the work the employee did for his
salary.[^174] Perhaps by virtue of their positions of authority, company
presidents' rates of compensation seem to get very careful scrutiny by
the boards.[^175]

In addition to the above, recently the boards and courts have journeyed
into new areas of settlement expenses. In *McDonnell Douglas Corp. v.
United States*[^176] the COFC looked at whether retention bonuses could
be recovered under FAR 31.205-42(g) and agreed with the contractor that
such bonuses benefited both the contractor and the Government and the
Government should pay them. In *Energy Compression*, [^177] the Board
sustained denial of a claim for a consultant whose services consisted of
managing the work of the attorneys in the settlement of the vendor's
claims.

# 3. Hypothetical Analysis

So what about the attorney's fees for the preparation of the original
bid and the contractor's settlement proposal? Assuming that the fees are
not on a contingency fee basis and the contractor has properly
documented the time spent and work done, they will likely be allowable.
If the contractor claims fees for any work done on the contract appeal
then those fees will not be allowable.

**H. 31.205-42(h) Subcontractor Claims**

Far provision 31.205-42(h), Subcontractor Claims,[^178] makes allowable
virtually all of the termination costs a subcontractor bills to a
contractor.[^179] The key element to the allowability of subcontractor
settlements is that throughout the process the Government seeks to
maintain privity with the contractor and avoid privity with the
subcontractors. Thus, the FAR intends the subcontract settlement process
to permit the contractor to reach settlement with its subcontractors and
then submit a claim for reimbursement of the settlement amounts it paid
the subcontractors. Only in rare situations can the Government negotiate
settlement directly with subcontractors,[^180] and even then,
"\[d\]irect settlements with subcontractors are not encouraged."[^181]

The CAM advises that subcontractor settlements generally follow the
principles of prime contract settlements. The subcontractor's rights are
against the prime, not against the Government.[^182] Auditors are told
to look specifically at settlements that were made without contracting
officer approval or ratification using the authority granted under FAR
49.108-4.[^183]

The boards and courts review allowability of subcontract settlements for
reasonableness and prudence.[^184] This means the board or court will
look for the settlement to be a result of "arm's length" bargaining
between the contractor and the subcontractor.[^185] If the settlement
appears to be the result of collusion, then the ASBCA will disallow all
or a portion of the settlement.[^186] Once the contractor and
subcontractor reach a settlement, the amounts claimed are generally
allowable.[^187] As the COFC has recently stated, "\[w\]here sufficient
evidence of allowability, allocability and reasonableness of costs are
found, however, the court must sustain those \[subcontractor\] costs as
incurred."[^188]

# Hypothetical Analysis

Is the cost of terminating MI's electronics subcontractor for
convenience allowable? Assuming the parties arrived at a subcontract
settlement through arm's length bargaining, the costs will be allowable.
If, for instance, the electronics subcontractor is a wholly owned
subsidiary of MI and several of the MI board are on the subcontractor's
board, then there may be cause for the auditor and the TCO to question
the settlement costs after a careful review of the settlement documents.

# **IV. CONCLUSION**

As mentioned above, this primer helps to enlighten the average contracts
attorney about what goes on in a convenience termination, who the
players are, and where to find answers to the questions that typically
arise. The primer also gives the contracts attorney a feel for how to
analyze one of the most confusing areas that can come up in a
termination settlement negotiation: the allowability of termination
costs under FAR 31.205-42. Thus informed, it is up to the contracts
attorney to work with the TCO and the DCAA Auditor to arrive at the
right decision on the termination costs.

[^1]: ^^ *Major Graeme S. Henderson (B.A., University of California;
    J.D., University of Utah College of Law; LL.M., The Army Judge
    Advocate General School) is Chief, Surety Law Branch, Contracts Law
    Division, Air Force Legal Services Agency in Rosslyn, Virginia. He
    is a member of the State Bar of Utah.*

[^2]: [John Cibinic, Jr. & Ralph C. Nash, Jr.]{.smallcaps},
    [Administration of Government Contracts,]{.smallcaps} 1073 (3d ed.
    1992).

[^3]: [General servs. Admin. et al., Federal Acquisition Regulation
    31.001 (]{.smallcaps}June 1997[) \[]{.smallcaps}hereinafter FAR\].
    There are many different types of costs, defined in FAR 31.001,
    Definitions. *Id.* The easiest way to describe contract costs is
    that they are the expenses that a contractor pays to manufacture
    goods or deliver services. This includes everything from the cost of
    the raw materials, such as steel bars, to the costs associated with
    secretarial services supporting the president of the company.

[^4]: FAR, *supra* note 2, at 52.249-1 through 52.249-7 contains seven
    different versions of the Termination for Convenience clause that
    can be included by reference in a Government contract. Each clause
    is tailored to a different type of contract from Fixed-Price type
    contract to Fixed-Price Architect-Engineer type. *Id.* at 52.249-1
    through -7.

[^5]: [Cibinic & Nash,]{.smallcaps} *supra* note Error: Reference source
    not found, at 1073.

[^6]: The distinction being that for Firm Fixed Price contracts, a
    contractor would normally recover all of the costs incurred and
    profit in the unit price of the items purchased when they are
    completed. For cost reimbursement type contracts the contractor
    would already be entitled to costs incurred and profit on work done
    according to FAR Part 31.

[^7]: FAR, *supra* note Error: Reference source not found, at 49.101(b).

[^8]: *Id.* at 49.101(a).

[^9]: *Id.* at 49.001. The FAR defines Termination Contracting Officer
    as "a contracting officer who is settling terminated contracts."
    *Id.*

[^10]: In the Air Force, some large bases and Air Logistics Centers
    (Wright-Patterson AFB, Hill AFB, Tinker AFB, Warner-Robins AFB) have
    permanently appointed TCOs. For instance, [U.S. Dep't of the Air
    Force, Air Force Materiel Command Federal Acquisition Reg.
    Supp.]{.smallcaps} 5349.101 (2000)\[hereinafter AFMCFARS\]
    *available at* <http://farsite.hill.af.mil/vfafmca.htm> (last
    visited July 19, 2002), requires each Air Logistics Center (ALC)
    Senior Center Contracting Officer to appoint at least one TCO for
    the ALC. *Id.* When the author was assigned to Defense Contract
    Management Agency, Defense Contract Management Command, Van Nuys,
    California, the Van Nuys area staff included five full-time TCOs.

[^11]: There are no formal requirements for the transfer of terminated
    contracts from a CO to a TCO in the FAR. In the author's experience,
    each command formulates its own criteria for the transfer of
    terminated contracts to TCOs.

[^12]: FAR 52.249 termination clauses are mandatory clauses for the
    contract types to which they apply. FAR, *supra* note Error:
    Reference source not found, at 52.301. *See* the solicitation
    provisions and contract clauses (Matrix) at FAR 52.301 for a quick
    reference for which clause is mandatory for each different type of
    contract. According to [W. Noel Keyes, Government Contracts Under
    the Federal Acquisition Regulation,]{.smallcaps} 40-42 (2d Ed.
    1997), the *Christian Doctrine*, (G.L. Christian and Assocs. v.
    United States, 160 Ct. Cl. 1, 60-61, 312 F.2d 418 (1963), *cert.
    denied*, 375 U.S. 954 (1963)) reads a termination clause into a
    government contract that is required by regulation by operation of
    law, even if the clause was not originally included in the contract.
    *Id.*

[^13]: FAR, *supra* note Error: Reference source not found, at
    49.102(a).

[^14]: *Id*. at 49.102(a)(1-5).

[^15]: *Id.* at 49.104(a-i).

[^16]: *Id.* at 49.201(b).

[^17]: *Id*. at 49.113.

[^18]: [U.S. Dep't of Defense, Defense Contract Management Agency
    Directive 1]{.smallcaps}, Section 10.1 (Aug. 1999)\[hereinafter
    [OneBook]{.smallcaps}\]; *available at*
    [http://www.dcma.mil/onebook/10.0/10.1/Termination.htm](http://www.dcmc.hq.dla.mil/onebook/10.0/10.1/Termination.htm)
    (last visited July 19, 2002). The [OneBook]{.smallcaps} is DCMA's
    regulatory guidebook for its Administrative Contracting Officers. It
    contains step-by-step processes for nearly all aspects of contract
    administration including terminations for convenience. *Id.*

[^19]: FAR, *supra* note Error: Reference source not found, at
    49.102(a); [OneBook]{.smallcaps}, *supra* note Error: Reference
    source not found, at 4.6.1.2.

[^20]: Telephone Interviews with Mr. Melvin Moe, Termination Contracting
    Officer, Defense Contract Management Agency, Defense Contract
    Management Command, Van Nuys, California (Jan 22, 2001 and Feb. 7,
    2001)(notes on file with author).

[^21]: [OneBook]{.smallcaps}, *supra* note Error: Reference source not
    found, § 10.1, at para.4.6.3.

[^22]: *Id.* (*implementing* FAR, *supra* note Error: Reference source
    not found, at 49.105(a)(1)).

[^23]: FAR, *supra* note Error: Reference source not found, at
    49.104(h).

[^24]: Best Foam Fabricators, Inc. v. United States, 38 Fed. Cl. 627,
    638 (1997).

[^25]: Allowable cost: "A cost that the Government will permit to be
    recovered (reimbursed by the Government) for the performance of a
    contract." [Ralph C. Nash, Jr. & Steven L. Schooner, The Government
    Contracts Reference Book]{.smallcaps} 19 (1992).

[^26]: "A cost is reasonable if, in its nature and amount, it does not
    exceed that which would be incurred by a prudent person in the
    conduct of competitive business." FAR, *supra* note Error: Reference
    source not found, at 31.201-3(a). This means that if a company spent
    money to pay to advertise on a bus bench, the cost would be
    reasonable if, for instance, the company's competitors also
    advertise on bus benches and that kind of advertising is necessary
    to bring in business that keeps the company going between Government
    contracts. Such a cost would fall within the definition of
    reasonable.

[^27]: FAR, *supra* note Error: Reference source not found, at 31.201-4.
    "A cost is allocable if it is assignable or chargeable to one or
    more cost objectives on the basis of relative benefits received or
    other equitable relationship." *Id.* This means that a cost is an
    amount spent to further the performance of a particular contract.
    For instance, the cost of a tank of gasoline in a company truck is
    allocable if that gas was burned to run errands exclusively for the
    contract to which the cost was "allocated."

[^28]: FAR, *supra* note Error: Reference source not found, at
    31.201-2(a)(3). The Cost Accounting Standards can also be thought of
    as, "A series of accounting standards originally issued by the Cost
    Accounting Standards Board to achieve uniformity and consistency in
    measuring, assigning, and allocating costs to contracts with the
    Federal Government." [Nash & Schooner]{.smallcaps}, *supra* note
    Error: Reference source not found, at 105.

[^29]: FAR, *supra* note Error: Reference source not found, at
    31.201-2(a)(4).

[^30]: *Id.* at 31.201-2(a)(5).

[^31]: *Id.* at 49.107.

[^32]: *Id*.

[^33]: [OneBook]{.smallcaps}, *supra* note Error: Reference source not
    found, § 10.1, at para.4.6.8.

[^34]: *See* *generally*, Defense Contract Audit Agency, *Internet
    site*, at http://www.dcaa.mil (last visited July 19, 2002)
    \[hereinafter *DCAA Website*\].

[^35]: *Id.*

[^36]: The FAR defines unallowable cost as, ". . . any cost which, under
    the provisions of any pertinent law, regulation, or contract, cannot
    be included in prices, cost-reimbursements, or settlements under a
    Government contract to which it is allocable." [FAR]{.smallcaps},
    *supra* note Error: Reference source not found, at 31.001. [Nash &
    Schooner]{.smallcaps}, *supra* note Error: Reference source not
    found, at 407, defines unallowable cost as "A cost incurred by a
    contractor that is not chargeable to Government contracts."

[^37]: *See* *DCAA Website*, *supra* note Error: Reference source not
    found. Though the DCAA maintains that audits are merely advisory, in
    the author's experience, TCOs consider the DCAA audit very
    convincing and rarely depart from their auditor's recommendations.

[^38]: Such a situation can damage the Government's case in a contract
    appeal, especially when the conflicting legal opinions look like the
    agency is arguing with itself. To prevent the internal conflict from
    surfacing in discovery, always make sure that attorney work product
    and attorney-client documents are properly labeled and segregated
    from the discoverable litigation documents. It is also a good idea
    to remind the DCAA attorney to do the same.

[^39]: [OneBook]{.smallcaps}, *supra* note Error: Reference source not
    found, § 10.1, at para. 4.6.9.

[^40]: Advising the TCO also requires the application of business sense
    in addition to legal acumen. Often, a position taken by the TCO may
    be legally tenable, but the attorney should be sure to consider
    whether advising the TCO to take such a position is in the best
    interests of the Government overall.

[^41]: This happened to the author in a termination settlement
    negotiation in 1996. In the termination of a contract for chemical
    storage tanks, the contractor first proposed to try to recover some
    of its personnel costs in overhead costs (basically the cost of
    running the main office). When the TCO said that the contractor was
    not properly allocating (assigning to the correct contract) the
    costs, the contractor switched its argument to claiming those same
    costs as "unabsorbed overhead." Luckily, the TCO and attorney
    anticipated this argument and were prepared to deal with the issue
    of unabsorbed overhead. Despite the preparation, the settlement
    negotiation with this company still encompassed several meetings
    over the course of a year.

[^42]: Settlement by determination is a unilateral modification stating
    that the TCO is settling the termination for the amount the TCO has
    decided properly compensates the contractor for the termination.

[^43]: FAR, *supra* note Error: Reference source not found, at 49.110.
    In the Department of Defense, the Settlement Negotiation Memorandum
    should be completed on a specific form prescribed in [U.S. Dep't of
    Defense, Defense Federal Acquisition Reg. Supp.]{.smallcaps} 249.110
    (1998)\[hereinafter DFARS\]; *available at*
    <http://farsite.hill.af.mil/Vfdfar.htm> (last visited July 19,
    2002).

[^44]: FAR, *supra* note Error: Reference source not found, at 49.111.

[^45]: The Air Force previously required all termination settlement
    agreements to have legal review per [U.S. Dep't of the Air Force,
    Air Force Federal Acquisition Reg. Supp.]{.smallcaps} 5349.109
    (1996)\[hereinafter AFFARS\]. However, that requirement was
    rescinded in the AFFARS 2002 edition. Neither the Army nor the Navy
    has a legal review requirement.

[^46]: FAR, *supra* note Error: Reference source not found, at
    49.107(a): "General. If the contractor and the TCO cannot agree on a
    termination settlement, or if a settlement proposal is not submitted
    within the period required by the termination clause, the TCO shall
    issue a determination of the amount due consistent with the
    termination clause, including any cost principles incorporated by
    reference."

[^47]: FAR, *supra* note Error: Reference source not found, at
    49.109-7(f). The Contract Disputes Act is made available at FAR,
    *supra* note Error: Reference source not found, Part 33, *et seq.*

[^48]: The contents of a proper final decision are listed in the FAR,
    *supra* note Error: Reference source not found, at 33.211. The Air
    Force requires all appealable proposed final decisions over
    \$100,000 to be forwarded to the ASBCA trial team, AFMCLO/JAB, for
    review before transmission. AFFARS, *supra* note Error: Reference
    source not found, at 5333.211. Neither the Army nor the Navy has a
    similar requirement.

[^49]: A review for fairness should consider the TCO's conduct in the
    termination settlement as well as the amount the TCO has determined.
    Did the TCO negotiate even-handedly with the contractor? Did the TCO
    respond promptly and accurately to contractor calls and submissions?
    Does the TCO have good reasons for how he or she arrived at the
    amount of the settlement? These factors can dramatically affect the
    likelihood of litigation.

[^50]: FAR 49.113, states:

    > The costs principles and procedures in the applicable subpart of
    > Part 31 shall, subject to the general principles in 49.201,
    >
    > \(a\) Be used in asserting, negotiating, or determining costs
    > relevant to termination settlements under contracts with other
    > than educational institutions, and
    >
    > \(b\) be a guide for the negotiation of settlements under
    > contracts for experimental, developmental, or research work with
    > educational institutions (*but see* FAR, supra note 2, at 31.104)

    FAR, *supra* note Error: Reference source not found, at 49.113.

[^51]: The ASBCA and the COFC are the two different entities to which a
    contractor can appeal a contracting officer's final decision. Both
    avenues of appeal are set out in the Contract Disputes Act, 41
    U.S.C. § 601-613 (2002) and the process is applied to contractors
    through FAR Part 33 and the clauses of FAR 52.233. 41 U.S.C. § 606
    states that a contractor can appeal to an Agency Board of Contract
    Appeals (the ASBCA here) within 90 days of a contracting officer's
    final decision. *Id.* 41 U.S.C. § 609 states that a contractor also
    has the option of appealing a final decision to the COFC within
    twelve months after the contractor receives the final decision.
    *Id.* The CAFC has appellate jurisdiction for both the Boards of
    Contract Appeals (including the ASBCA - 41 U.S.C. § 607(g)(1)
    (2002)) and the Court of Federal Claims (28 U.S.C. § 1295(a)(3)
    (2002)).

[^52]: Mandocdoc Const. Co., Inc., ASBCA No. 43,701, 1995 WL 431141,
    95-2 B.C.A. (CCH) ¶ 27,800, (July 14, 1995) (citing Southland Mfg.
    Corp, ASBCA No. 16,830, 1974 WL 2026, 75-1 B.C.A. (CCH) ¶ 10,994 ,
    (Nov. 29, 1974), *recons. denied,* ASBCA No. 16,830, 1975 WL 1937,
    75-1 B.C.A. (CCH) ¶ 11,272 (1975)).

[^53]: *Best Foam Fabricators*, 38 Fed.Cl. at 638.

[^54]: The Office of Federal Procurement Policy (OFPP) administers the
    CAS Board. Its five members are the Administrator of the OFPP, two
    Government representatives (one from General Services Agency and one
    from Department of Defense), and two private sector representatives
    (one representing industry and one cost accounting specialist).
    [Nash & Schooner,]{.smallcaps} *supra* note Error: Reference source
    not found, at 106.

[^55]: FAR, *supra* note Error: Reference source not found, at 31.000.

[^56]: [U.S. Dep't of Defense, Defense Contract Audit Agency Contract
    Audit Manual, DCAAM]{.smallcaps} 7640.1, (Jan. 2001)\[hereinafter
    CAM\]; a*vailable at* <http://www.deskbook.osd.mil/> (last visited
    July 16, 2002).

[^57]: The FAR defines salvage as ". . . property that, because of its
    worn, damaged, deteriorated, or incomplete condition or specialized
    nature, has no reasonable prospect of sale or use as serviceable
    property without major repairs, but has some value in excess of its
    scrap value." Salvage cost is the cost of something sold as scrap,
    as opposed to its true market value or depreciated value at the time
    of sale. *See* FAR, *supra* note Error: Reference source not found,
    at 45.501.

[^58]: For purposes of this hypothetical, assume large machine tools
    must be bolted to the floor to improve the accuracy of the machining
    and to prevent the vibration and forces generated from moving the
    entire machine tool across the shop.

[^59]: FAR, *supra* note Error: Reference source not found, at 31.205.
    The subpart on termination costs states:

    > Contract terminations generally give rise to the incurrence of
    > costs or the need for special treatment of costs that would not
    > have arisen had the contract not been terminated. The following
    > cost principles peculiar to termination situations are to be used
    > in conjunction with the other cost principles in subpart 31.2.

    *Id.*

[^60]: *Id.* at 31.205-42(a). The section on common items reads:

    > *Common Items.* The costs of items reasonably usable on the
    > contractor's other work shall not be allowable unless the
    > contractor submits evidence that the items could not be retained
    > at cost without sustaining a loss. The contracting officer should
    > consider the contractor's plans and orders for current and planned
    > production when determining if items can reasonably be used on
    > other work of the contractor. Contemporaneous purchase of common
    > items by the contractor shall be regarded as evidence that such
    > items are reasonably usable on the contractor's other work. Any
    > acceptance of common items as allocable to the terminated portion
    > of the contract should be limited to the extent that the
    > quantities of such items on hand, in transit and on order are in
    > excess of the reasonable quantitative requirements of other work.
    > *Id.*

[^61]: *Id.*

[^62]: *Id.*

[^63]: *Id.*

[^64]: CAM, *supra* note Error: Reference source not found, at
    12-304.5(b).

[^65]: *Southland Mfg.*, ASCBA No. 16,830, ¶ 11,272 at 52,356 (holding
    items not "reasonably usable" in manufacturing contract where the
    contractor had no other work despite efforts to obtain other work).

[^66]: Franklin Instrument Co., Inc., GSBCA No. 7497, 1985 WL 16362,
    1985 GSBCA LEXIS 744, at 13 (Jan 11, 1985).

[^67]: Joint Venture G.C.D. *et al.,*, ASBCA No. 47,285, 1997 WL 217391,
    97-1 B.C.A. (CCH) ¶ 28,976 (1997).

[^68]: Mid-Atlantic Sec. Servs., Inc., ENGBCA No.6,302, 97-2 B.C.A.
    (CCH) ¶ 29,012 (1997).

[^69]: Hugo Auchter GmbH, ASBCA No. 39,642, 1991 WL 27067, 91-1 B.C.A.
    (CCH) ¶ 23,645, (Feb 15, 1991).

[^70]: McDonnell Douglas Corp. v. United States, 40 Fed.Cl. 529, 552
    (1998), *rev'd on other grounds*, 182 F.3d 1319 (Fed.Cir., 1999).

[^71]: Orbital Sciences Corp., ASBCA No. 49,250, 1997 WL 606986, 97-2
    B.C.A. (CCH) ¶ 29,265 (1997); *aff'd on recons.*, ASBCA No. 49,250,
    1998 WL 601096, 98-2 B.C.A. (CCH) ¶ 29,994 (1998) (finding that
    rocket motors manufactured by appellant were common items).

[^72]: Globe Air, Inc., AGBCA No. 76-119, 1978 WL 23536, 78-1 B.C.A.
    (CCH) ¶ 13,079 (Ag.B.C.A., Mar. 20, 1978)(finding that the
    helicopter procured as a replacement for contract aircraft that had
    crashed was a common item because the contractor could sell, lease
    or operate it when an opportunity arose).

[^73]: *Id.*

[^74]: *Fiesta Leasing and Sales, Inc.*, ASBCA No. 29,311, 1987 WL
    40637, 87-1 B.C.A. (CCH) ¶ 19,622 (1987).

[^75]: *See e.g. Southland*, ASBCA No. 16,830, ¶ 10,994 at 52,356
    (finding that the contractor could not retain the disputed common
    items at cost without sustaining a loss because it had no other
    contracts on which to use the items, and despite "major effort" was
    unable to obtain other work.); *Fiesta Leasing and Sales, Inc.*,
    ASBCA No. 29,311, ¶ 19,622 at 99,286-87.

[^76]: *Fiesta Leasing and Sales, Inc.*, ASBCA No. 29,311, ¶ 19,622 at
    99,287 (holding as allowable the costs for buses leased for a
    contract that exceeded the revenue generated by the buses during and
    after the terminated contract).

[^77]: *Id.* at 99,288.

[^78]: Symetrics Indus., Inc., ASBCA No. 48,529, 1996 WL 189675, 96-2
    B.C.A. (CCH) ¶ 28,285 (A.S.B.C.A., Apr. 8, 1996) (holding telemetry
    sets were common items and loss of quantity discount resulting from
    use on other contract not a "loss."); Orbital Sciences, ASBCA No.
    49,250, ¶ 29,265 at ¶49,804 (disallowing loss of profit on other
    contract resulting from having used common items (rocket motors)
    (citing *Symetrics Indus.,* ASBCA No. 48,529 and *Fiesta Leasing and
    Sales, Inc.*, ASBCA No. 29,311, ¶ 19,622).

[^79]: FAR, *supra* note Error: Reference source not found, at
    31.205-42(b) states:

    > Despite all reasonable efforts by the contractor, costs which
    > cannot be discontinued immediately after the effective date of
    > termination are generally allowable. However, any costs continuing
    > after the effective date of the termination due to the negligent
    > or willful failure of the contractor to discontinue the costs
    > shall be unallowable.

[^80]: *See* [Allan Joseph & Neil O'Donnell, Termination of Government
    Contracts, XII-1 (1991)]{.smallcaps}.

[^81]: Telephone Interviews with Mr. Mel Moe, *supra* note Error:
    Reference source not found.

[^82]: [Cibinic & Nash,]{.smallcaps} *supra* note Error: Reference
    source not found, at 1106 (citing Aviation Specialists, Inc., 1990
    WL198291, 02-1 B.C.A. (CCH) ¶ 31,788, 91-1 B.C.A. (CCH) ¶ 23,554
    (D.O.T.C.A.B., Dec 03, 1990)).

[^83]: CAM, *supra* note Error: Reference source not found, at
    12-305.7(a).

[^84]: *Id.* at 12-305.7(a)(1).

[^85]: *Id.*

[^86]: [Joseph & O'Donnell,]{.smallcaps} *supra* note Error: Reference
    source not found, at XII-1-2.

[^87]: *Globe Air, Inc.*, AGBCA No. 76-119, ¶ 13,079 (holding pilot's
    salary that continued for 2 weeks past termination was severance and
    was allowable).

[^88]: TDC Mgmt Corp., DOTBCA No. 1802, 1991 WL 105566, 91-3 B.C.A.
    (CCH) ¶ 24,091, 120,572 (D.O.T.C.A.B., 1991). (holding \$3905 in
    severance costs for 3 employees not allowable because there was no
    evidence regarding those employees); Mid-Atlantic Sec. Servs., Inc.,
    No. 6,302, 97-2 B.C.A. (CCH) ¶ 29,012 (E.N.G.B.C.A., 1997) (holding
    full payroll costs of supervisors that contractor retained but did
    not reassign to other work not recoverable absent proof they did
    work on termination).

[^89]: *TDC*, DOTBCA No. 1802 ¶ 24,061 at ¶ 120,572 (continuing costs
    claim for employee that expended 275 hours after termination was
    allowable).

[^90]: R&B Bewachungs GmbH, ASBCA No. 42214, 1992 WL 115141, 92-3 B.C.A.
    (CCH) ¶ 25,105, 125,156 (May 26, 1992) (holding employees' pay past
    termination date was allowable where German law required security
    guards to receive pay).

[^91]: In at least one case, the COFC has ruled that the cost of
    relocating employees because of a termination is allowable under FAR
    31.205-42(b). *See McDonnell Douglas*, 40 Fed.Cl. at 552.

[^92]: *Aviation Specialists*, DOTBCA No. 1967, ¶ 23,554 at 117,993.

[^93]: *Id. See also*, *Fiesta Leasing and Sales, Inc.*, ASBCA No.
    29,311, ¶ 19,622 at 99,289 (holding depreciation cost and
    advertising cost allowable as continuing costs of the termination).
    *But see, Southland*, ¶ 29,265 at ¶ 52,359 (holding contractor
    interest due on equipment loans not allowable as continuing cost of
    termination).

[^94]: *Joint Venture G.C.D.*, ASBCA No. 47,285, ¶ 28,976 at 144,310-11
    (holding that overhead costs such as office rental, land rental,
    labor and excavator rental were not allowable because the contractor
    failed to make an effort to discontinue the costs).

[^95]: "Unabsorbed overhead is overhead that cannot be charged to a
    contract as originally anticipated because the direct costs of
    performance have been stopped due to a delay." [Nash &
    Schooner,]{.smallcaps} *supra* note Error: Reference source not
    found, at 407.

[^96]: *Southland*, ASBCA No. 16,830, ¶ 10,994 at 52,360 (citing
    Chamberlain Mfg. Corp., ASBCA No. 16,877, 1973 WL 1882, 73-2 B.C.A.
    (CCH) ¶ 10,139, 47,679 (June 22, 1973)).

[^97]: Foremost Mechanical Sys., Inc., GSBCA Nos. 13250-C(12335),
    13251-C(12384), 13252-C(12527), 13584, 1998 WL 148412 (G.S.B.C.A.),
    98-1 B.C.A. (CCH) ¶ 29,652, 146,922 (Mar. 31, 1998).

[^98]: Baifield Indus., Div. of A-T-O, Inc. ASBCA No. 20,006, 1976 WL
    25,427, 76-2 B.C.A. (CCH) ¶ 12,096, 58,091 (1976) (holding
    continuing costs for rent, utilities and insurance allowable where
    contractor was making diligent efforts to dispose of the facility).

[^99]: FAR, *supra* note Error: Reference source not found, at
    31.205-42(c) states:

    > \(c\) Initial costs. Initial costs, including starting load and
    > preparatory costs, are allowable as follows:
    >
    > \(1\) Starting load costs not fully absorbed because of
    > termination are nonrecurring labor, material, and related overhead
    > costs incurred in the early part or production and result from
    > such factors as-
    >
    > \(i\) Excessive spoilage due to inexperienced labor;
    >
    > \(ii\) Idle time and subnormal production due to testing and
    > changing production methods;
    >
    > \(iii\) Training; and,
    >
    > \(iv\) Lack of familiarity or experience with the product,
    > materials, or manufacturing processes.
    >
    > \(2\) Preparatory costs incurred in preparing to perform the
    > terminated contract include such costs as those incurred for
    > initial plant rearrangement and alterations, management and
    > personnel organization, and production planning. They do not
    > include special machinery and equipment and starting load costs.
    >
    > \(3\) When initial costs are included in the settlement proposal
    > as a direct charge, such costs shall not also be included in
    > overhead. Initial costs attributable to only one contract shall
    > not be allocated to other contracts.
    >
    > \(4\) If initial costs are claimed and have not been segregated on
    > the contractor's books, they shall be segregated for settlement
    > purposes from cost reports and schedules reflecting that high unit
    > cost incurred during the early stages of the contract.
    >
    > \(5\) If the settlement proposal is on the inventory basis,
    > initial costs should normally be allocated on the basis of total
    > end items called for by the contract immediately before
    > termination; however, if the contract includes end items of a
    > diverse nature, some other equitable basis may be used, such as
    > machine or labor hours.

[^100]: CAM, *supra* note Error: Reference source not found, at
    12-305.1(b)(2).

[^101]: *Id.*

[^102]: *Id.*

[^103]: *Id.* at 12-305.1(c).

[^104]: *Id.* at 12-305.1(e).

[^105]: Sierracin/Sylmar, ASBCA Nos. 27,531, 30,380, 1985 WL 16,589,
    85-1 B.C.A. (CCH) ¶ 17,875, 89,549 (Jan. 22, 1985) explains the
    theory behind learning curve analysis:

    > The general theory of learning curves is that with repetitive
    > tasks involving a considerable amount of labor, the speed or
    > efficiency with which the task is performed increases as the
    > number of units of the work increases. In general theory, as
    > quantities double, learning is in the same ratio. Stated
    > mathematically and assuming an 80 percent learning curve, this
    > would mean that as the item quantities double the number of labor
    > hours necessary to produce a unit would be 80 percent of the labor
    > hours necessary to make the original unit; that if the first unit
    > took 100 hours, the second unit would take 80 hours, the fourth
    > unit would take 64 hours (80 percent of 80 hours), and the eighth
    > unit 51.2 hours (80 percent of 80 percent of 80 hours), and so on.

[^106]: Lockley Mfg. Co., ASBCA No. 21231, 1978 WL 2708, 78-1 B.C.A.
    (CCH) ¶ 12,987, 63,319 (Jan. 26, 1978).

[^107]: *Sierracin/Sylmar*, ASBCA Nos. 27,531, 30,380, ¶ 17,875 at
    89,551.

[^108]: *Lockley*, ASBCA No. 21,231, ¶ 12,987 at 63,319 (holding it was
    proper to use labor costs up to termination to calculate the labor
    learning allocable to terminated units).

[^109]: The Government will often not provide contractors with a
    production release until first article testing is successfully
    completed. Nonetheless, contractors often begin incurring costs in
    preparation of full-scale production even before the production
    release to be able to meet the required delivery schedule.

[^110]: Balimoy Mfg. of Venice, Inc., ASBCA Nos. 47,140, 48,165, 1998 WL
    655472, 98-2 B.C.A. (CCH) ¶ 30,017, 148,512 (Sep. 23, 1998) (holding
    first article costs allowable in termination of contract for
    ammunition but failure to segregate the costs specific to first
    article prevented recovery); Agrinautics, ASBCA Nos. 21,512, 21,608,
    21,609, 1980 WL 120474, 79-2 B.C.A. (CCH) ¶ 14,149, 69,649 (1980)
    (holding first article costs allowable for helicopter-mounted
    insecticide duster that had been given first article approval).

[^111]: *Agrinautics*, ASBCA Nos. 12,512, 21,608, 21,609, ¶14,149 at
    69,650.

[^112]: *R&B Bewachungs*, ASBCA No. 42,214, ¶ 25,105 at 125,157.

[^113]: *Hugo Auchter*, ASBCA No. 39,642, ¶ 23,645 at 118,442.

[^114]: *Fiesta Leasing and Sales, Inc.*, ASBCA No. 29311, ¶ 19,622 at
    99,289-90.

[^115]: *Id.* at 99,289-90.

[^116]: RHC Construction, IBCA No. 2083, 88-3 B.C.A. (CCH) ¶ 20,991,
    106,061 (1988).

[^117]: Air-Flo Cleaning Sys., ASBCA No. 39,608, 1990 WL 132887, 90-3
    B.C.A. (CCH) ¶ 23,071, 115,844 (June 22, 1990). *But see* Teague
    Indus. & Technical Servs Co., ASBCA Nos. 29,230, 29,642, 1986 WL
    19704, 86-2 B.C.A. (CCH) ¶ 18,790, 94,669 (Feb. 13, 1986) (holding
    cost of retaining employee to be ready for open orders allowable).

[^118]: FAR, *supra* note Error: Reference source not found, at
    31.205-42(d) states:

    > Loss of useful value. Loss of useful value of special tooling,
    > special machinery and equipment is generally allowable, provided-
    >
    > \(1\) The special tooling, or special machinery and equipment is
    > not reasonably capable of use in the other work of the contractor;
    >
    > \(2\) The Government's interest is protected by transfer of title
    > or by other means deemed appropriate by the contracting officer;
    > and
    >
    > \(3\) The loss of useful value for any one terminated contract is
    > limited to that portion of the acquisition cost which bears the
    > same ratio to the total acquisition cost as the terminated portion
    > of the contract bears to the entire terminated contract and other
    > Government contracts for which the special tooling or special
    > machinery and equipment was acquired.

[^119]: Claims for loss of useful value can reach into the hundreds of
    millions of dollars. One example is a major contract termination for
    which the author was contracts attorney in 1996-7: within the
    contractor's termination settlement proposal was a nearly \$200
    million claim for loss of useful value of a custom-built production
    facility in Georgia.

[^120]: [Cibinic & Nash,]{.smallcaps} *supra* note Error: Reference
    source not found, at 1111. The Defense Acquisition Regulation and
    Federal Procurement Regulation, predecessors to the FAR, each
    contained a definition of special machinery and equipment. According
    to the Defense Acquisition Regulation, "Special machinery and
    equipment means that part of plant equipment which was acquired or
    constructed solely for the performance of the terminated contract or
    the terminated contract and other Government contracts, and as to
    which the contractor claims loss of useful value. 32 CFR § 8-101.21
    (1981). The Federal Procurement Regulation used the same definition,
    "'Special machinery and equipment' means that part of plant
    equipment which was acquired or constructed solely for the
    performance of the terminated contract or the terminated contract
    and other Government contracts, and as to which the contractor
    claims loss of useful value." 41 CFR § 1-8.101(t) (1980).

[^121]: FAR, *supra* note Error: Reference source not found, at
    31.205-40.

[^122]: CAM, *supra* note Error: Reference source not found, at
    12-304.14(a).

[^123]: *Id*. at 12-304.14(a).

[^124]: *Id.* at 12-304.14(a)(1-3).

[^125]: *Id.* at 12-304.14(b).

[^126]: TERA Advanced Sys. Corp., GSBCA No. 6,713-NRC, 85-2 B.C.A. (CCH)
    ¶ 17,940 (1985) (holding cost of custom-designed document retrieval
    carousel system allowable once system was established as valueless
    upon termination) (citing American Elec., Inc., ASBCA No. 16,635,
    1976 WL 2409, 76-2 B.C.A. (CCH) ¶ 12,151 (1976) and Metered Laundry
    Servs., Inc., ASBCA No. 21,573, 1978 WL 2351, 78-1 B.C.A. (CCH) ¶
    13,206 (1978)).

[^127]: *American Elec.*, ASBCA No. 16,635 ¶ 12,151.

[^128]: *Metered Laundry*, ASBCA No. 21,573, ¶ 13,206.

[^129]: Ralcon, Inc., ASBCA No. 43,176, 1994 WL 228181, 94-2 B.C.A.
    (CCH) ¶ 26,935 (1994).

[^130]: Tubergen & Assocs., Inc., ASBCA Nos. 34,106, 34,107, 1990 WL
    85435, 90-3 B.C.A. (CCH) ¶ 23,058, 115,766 (June 11, 1990).

[^131]: Greer, ENGBCA No. 6,283, 1997 WL 305917, 97-2 B.C.A. (CCH) ¶
    29,013 (June 6, 1997); Qualex Int'l, ASBCA No. 41,962, 1992 WL
    319583, 93-1 B.C.A. (CCH) ¶ 25,517, 127,090 (Oct. 21, 1992); *Hugo
    Auchter*, ASBCA No. 39642, ¶ 23,645 at 118,444.

[^132]: *Greer*, ENGBCA No. 6,283, ¶ 29,013 at 144,548; *Qualex Int'l*,
    ASBCA No. 41,962, ¶ 25,517 at 127,090. *But see, McDonnell Douglas*,
    40 Fed.Cl. at 552 (holding allowable loss of useful value for
    furniture).

[^133]: Other equipment not considered allowable as special machinery
    and equipment under FAR 31.205-42(d) include: a lathe (Teems, Inc.,
    GSBCA No. 14,090, 1997 WL 687905, 98-1 B.C.A. (CCH) ¶ 29,357,
    145,962 (Oct. 31, 1997)); a wrapping machine (Dairy Sales Corp. v.
    U. S., 593 F.2d 1002, 1006 (Ct.Cl. 1979)); and commercial mowers
    (*Greer*, ENGBCA No. 6,283, ¶ 29,013 at 144,548).

[^134]: *See e.g.,* *American Elec.*, ASBCA No. 16,635, ¶ 12,151.

[^135]: *Id.*

[^136]: *Id.* at 21,801.

[^137]: In the recent major termination, mentioned *supra* at note
    Error: Reference source not found, the intent argument resurfaced
    when the contractor argued that the Government should consider its
    entire plant SME because the Government concurred in its
    construction. The facts did not support their allegation that the
    Government discussed and approved the construction of the plant, so
    the TCO disallowed most of the facility's costs.

[^138]: FAR, *supra* note Error: Reference source not found, at
    31.205-42(e) states:

    > Rental costs under unexpired leases, less the residual value of
    > such leases, are generally allowable when shown to have been
    > reasonably necessary for the performance of the terminated
    > contract, if-
    >
    > \(1\) The amount of rental claimed does not exceed the reasonable
    > use value of the property leased for the period of the contract
    > and such further period as may be reasonable and;
    >
    > \(2\) The contractor makes all reasonable efforts to terminate,
    > assign, settle, or otherwise reduce the cost of such lease.

[^139]: This may be because Government contractors negotiate favorable
    leases including termination for convenience clauses, or more likely
    because TCO's allow reasonable lease expenses past the termination
    in order to give contractors an opportunity to wind-up operations
    and remove equipment. The phrase "reasonable use value of the
    property leased for the period of the contract and such further
    period as may be reasonable" gives the TCO broad latitude to allow
    post-termination lease costs.

[^140]: CAM, *supra* note Error: Reference source not found, at
    12-305.5.

[^141]: *Southland*, ASBCA No. 16,830, ¶ 10,994.

[^142]: *Id*. at 52,362.

[^143]: Sundstrand Turbo v. U.S., 389 F.2d 406, 415 (Ct.Cl., 1968).

[^144]: *TDC Mgmt*, DOTBCA No. 1802, ¶ 24,091 at 120,574.

[^145]: *Qualex Int'l*, ASBCA No. 41,962, ¶ 25,517 at 127,090.

[^146]: *Id.* at 127,088-9.

[^147]: [Cibinic & Nash]{.smallcaps}, *supra* note Error: Reference
    source not found, at 1113 (summarizing *Southland*, ASBCA No.
    16,830, ¶ 10,994.

[^148]: General Elec. Co., ASBCA No. 24,111, 1982 WL 7083, 82-1 B.C.A.
    (CCH) ¶ 15,725 (1982) (stating computer hardware rental costs
    continuing after termination were allowable where cancellation would
    have entailed substantial additional charges).

[^149]: Bos'n Towing and Salvage Co., ASBCA No. 41,357, 1992 WL 40,703,
    92-2 B.C.A. (CCH) ¶ 24,864 (Feb. 27, 1992)(holding that whether FAR
    31.205-42(e) or subcontract rules applied to rental costs of
    chartered tugboat, the principle of reasonableness in either is
    guiding principle in settlements).

[^150]: FAR, *supra* note Error: Reference source not found, at
    31.205-42(f): "Alterations of leased property. The cost of
    alterations and reasonable restoration required by the lease may be
    allowed when the alterations were necessary for performing the
    contract."

[^151]: Before being FAR 31.205-42(f), it was Defense Acquisition
    Regulation 15.205-42(E)(II) and before that it was Armed Services
    Procurement Regulation 15-205.42(E)(II). The language, however, has
    not changed substantially from one regulation to the next.

[^152]: CAM, *supra* note Error: Reference source not found, at
    12-305.5(b).

[^153]: *Id.* at 12-305.5(b).

[^154]: *Southland*, ASBCA No. 16,830, ¶ 10,994.

[^155]: Energy Compression Research Corporation, ASBCA No. 46,560, 1999
    WL 727949, 99-2 B.C.A. (CCH) ¶ 30,564 (A.S.B.C.A., 1999).

[^156]: *Southland*, ASBCA No. 16,830, ¶ 10,994 at 52359.

[^157]: *Energy Compression*, ASBCA No. 46,560, ¶ 30,564 at 150,944.

[^158]: FAR 31.205-42(g) defines settlement expenses as:

    > \(1\) Settlement expenses, including the following, are generally
    > allowable:

    \(i\) Accounting, legal, clerical, and similar costs reasonably
    necessary for-

    > \(A\) The preparation and presentation, including supporting data,
    > of settlement claims to the contracting officer; and
    >
    > \(B\) the termination and settlement of subcontracts.
    >
    > \(ii\) Reasonable costs for the storage, transportation,
    > protection, and disposition of property acquired or produced for
    > the contract.
    >
    > \(iii\) Indirect costs related to salary and wages incurred as
    > settlement expenses in (i) and (ii); normally, such indirect costs
    > shall be limited to payroll taxes, fringe benefits, occupancy
    > costs, and immediate supervision costs.
    >
    > \(2\) If settlement expenses are significant, a cost accountant or
    > work order shall be established to separately identify and
    > accumulate them.

    FAR, *supra* note Error: Reference source not found, at
    31.205-42(g).

[^159]: *Id*. at 31.205-6. *See also* CAM, *supra* note Error: Reference
    source not found, at 12.309(a)-(b).

[^160]: *Id.*

[^161]: CAM, *supra* note Error: Reference source not found, at
    12.309(a).

[^162]: *Id.* at 12.309(b).

[^163]: *Id*. at 12.309(c).

[^164]: *Id*. at 12.309(f).

[^165]: *Id*. at 12.309(i).

[^166]: *Id*. at 12.309(j).

[^167]: *Id*. at 12.309(k).

[^168]: *Id*. at 12.309(m). The distinction between a proposal and a
    claim is defined as follows:

    > A termination proposal submitted under a termination clause is not
    > a claim because it is submitted for the purpose of negotiation.
    > However, a termination proposal becomes a claim under the Contract
    > Disputes Act (CDA) upon the occurrence of one of three events: (1)
    > the contractor's submission indicates that the contractor desires
    > a final decision and the contracting officer does not accept its
    > proposed terms, (2) negotiations between the TCO and the
    > contractor are at an impasse, thus implicitly requiring the TCO to
    > issue a final decision, or (3) the TCO issues a final decision.

    *Id.* at 12.101(i).

[^169]: Nolan Bros. v. United States, 437 F.2d 1371, 1390-91 (Ct.Cl.,
    1971).

[^170]: *Metered Laundry*, ASBCA No. 21,573, ¶13,206 at 64,606 (allowing
    legal fees for work on ASBCA appeal); Information Systems and
    Networks Corp., ASBCA No. 42,659, 1999 WL 1049634, 00-1 B.C.A. (CCH)
    ¶ 30,665 (Nov. 18, 1999); *Qualex Int'l*, ASBCA No. 41,962, ¶ 25,517
    at 127,090 (holding legal fees for participating in ADR is
    participating in prosecution of claim against the Government). *But
    see* *Bos'n Towing and Salvage*, ASBCA No. 41,357, ¶ 24,864 at
    124,034 (holding GAO and SBA proceedings brought by contractor were
    not within the FAR 31.205-33(d) definition of "claims or appeals"
    against the Government, so legal fees allowable).

[^171]: *Dairy Sales, Corp.*, 593 F.2d (\$4100 claim for legal and
    accounting fees reduced to \$900 because bulk of fees spent pursuing
    anticipatory profits).

[^172]: *Hugo Auchter*, ASBCA No. 39,642, ¶ 23,645 at 118,444 (holding
    that evidence established that attorney would be paid the claimed
    fee only after appellant has been paid by the Government and
    appellant introduced no evidence of hours billed under other type of
    arrangement). *But see* *Fiesta Leasing and Sales, Inc.*, ASBCA No.
    29,311, ¶ 19,622 at 99,294 (allowing legal fees where Government
    alleged but did not prove a contingency fee arrangement).

[^173]: *Southland*, ASBCA No. 16,830, ¶ 10,994 at 52,365.

[^174]: *Fiesta Leasing and Sales, Inc.*, ASBCA No. 29,311, ¶ 19,622 at
    99,294 (stating salaried employee's compensation should be through
    overhead rates in absence of evidence that another employee was
    hired to cover his other work or he recorded overtime on the
    termination).

[^175]: *Hugo Auchter*, ASBCA No. 39,642, ¶ 23,645 at 118,444 (holding
    company president Auchter's DM 200/hr termination settlement rate
    should have been his DM 92/hr salary rate); *Tubergen*, ASBCA Nos.
    34,106, 34,107, ¶ 23,058 at 115,766-7 (holding Mr. Tubergen's
    claimed 150 hours was excessive and reducing it to 50 hours).

[^176]: *McDonnell Douglas*, 40 Fed.Cl. at 554.

[^177]: *Energy Compression*, ASBCA No. 46,560, ¶ 30,564 at 150,945.

[^178]: FAR, *supra* note Error: Reference source not found, at
    31.205-42(h):

    > Subcontractor claims. Subcontractor claims, including the
    > allocable portion of the claims common to the contract and to
    > other work of the contractor, are generally allowable. An
    > appropriate share of the contractor's indirect expense may be
    > allocated to the amount of settlements with subcontractors;
    > provided, that the amount allocated is reasonably proportionate to
    > the relative benefits received and is otherwise consistent with
    > 31.201-4 and 31.203(c). The indirect expense so allocated shall
    > exclude the same and similar costs claimed directly or indirectly
    > as settlement expenses.

[^179]: This primer will not go into the rules for submission of
    subcontractor settlements, as they are listed at FAR , *supra* note
    Error: Reference source not found, at 49.108.

[^180]: FAR, *supra* note Error: Reference source not found, at 49.108-7
    (discussing government assistance in settling subcontracts).

[^181]: *Id*. at 49.108-8, (discussing assignment of rights under
    subcontracts).

[^182]: CAM, *supra* note Error: Reference source not found, at
    12-310(a).

[^183]: *Id.* at 12-310(b).

[^184]: *Bos'n Towing and Salvage*, ASBCA No. 41,357, ¶ 24,864 at
    124,031.

[^185]: *General Electric*, ASBCA No. 24,111, ¶ 15,725 at 77,806
    (stating termination settlement with subcontractor arrived at after
    arm's length bargaining without collusion and reflected sound
    exercise of business judgment).

[^186]: *Bos'n Towing and Salvage*, ASBCA No. 41,357, ¶ 24,864 at
    124,032 (finding subcontractor was not truly independent from prime
    and disallowed substantial portion of termination settlement
    relating to tugboat improvements.); *See also,* *Joint Venture
    G.C.D.*, ASBCA No. 47,285, ¶ 28,976 at 144,310 (holding contractor's
    "Private Contract Agreement" amongst joint venture partners to
    reimburse for unperformed work not one that a prudent businessman
    would enter into, so settlement disallowed.)

[^187]: [Cibinic & Nash]{.smallcaps}, *supra* note Error: Reference
    source not found, at 1116 (citing McDonnell Douglas Corp., 1968 WL
    867, NASABCA 467-13, 68-2 B.C.A. (CCH) ¶ 7,316 (Oct. 7, 1968)).

[^188]: *McDonnell Douglas*, 40 Fed.Cl. at 536-542 (Numerous
    subcontractor settlement claims made before and after Government
    convenience termination found allowable.).