Source: http://www.seidmanlaw.com/preparing-termination-convenience-settlement-proposals-fixed-price-contracts/
Timestamp: 2019-04-18 18:32:08+00:00

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Preparing Termination For Convenience Settlement Proposals For Fixed-Price Contracts - Seidman & Associates, P.C.
This basic formula for contractor recovery following a convenience termination was discussed in detail in an earlier BRIEFING PAPER by the authors entitled “Maximizing Termination for Convenience Settlements,” published in April 1995. 4 That PAPER presented general strategies you can follow if you are a contractor to maximize recovery following a termination for convenience, including claiming otherwise unallowable costs under the Federal Acquisition Regulation “fair compensation” principle, not allowing the Government improperly to disallow costs by substituting its after-the-fact business judgment for that of the contractor, not accepting cost disallowances based on impractical proof requirements imposed by the Government, claiming all allowable costs, charging normally indirect costs directly, avoiding loss adjustments, requesting a partial payment, and obtaining professional help. It also described steps you can take to recover costs that are frequently overlooked or are disallowed by the Government, such as the costs of contractor-caused delays and defective or nonconforming work, precontract costs, idle facilities and idle capacity costs, rental costs, facilities capital cost of money, costs of common items, costs under first article contracts, general and administrative expenses on subcontractor settlements, settlement expenses, and interest.
To protect your interests following a convenience termination, however, you must know not only what costs to claim but how to claim them. Focusing on fixed-price contracts, this BRIEFING PAPER, a companion to the previous PAPER, provides practical advice on how to prepare an effective termination for convenience settlement proposal. In addition to discussing the time limits for the submission of a termination settlement proposal and identifying the required components of a settlement proposal, the PAPER advises how to (1) choose between the inventory andtotal cost proposal bases, (2) prepare Standard Form 1435, “Settlement Proposal (Inventory Basis),” and SF 1436, “Settlement Proposal (Total Cost Basis),” (3) complete inventory schedules (SF 1426 to SF 1432), the “Schedule of Accounting Information” (SF 1439), and the “Application for Partial Payment” (SF 1440), (4)incorporate requests for equitable adjustments with the settlement proposal, and (5)recover interest on the amount of the settlement proposal under the Contract Disputes Act.
The deadline for a subcontractor to submit its proposal to a prime contractor (or higher-tier subcontractor) is set forth in the subcontract. The period is often six months or less than that allowed the prime contractor to submit its settlement proposal to the Government.
The period allowed for submitting a proposal can be extended by the Termination Contracting Officer, prime contractor, or higher-tier subcontractor. A prime contractor or subcontractor must request a time extension in writing before the deadline. 7Deadlines must be met at any cost even if the proposal needs to be revised at a later date. If a deadline is not met, a contractor forfeits its right to judicial review of the amount the CO determines is owed. In other words, if you fail to submit a timely “final” settlement proposal, the CO can pay whatever the CO decides, and you are without a remedy. 8 The same forfeiture rule is incorporated in most subcontracts.
If only part of the contract or subcontract is terminated, a contractor is entitled to anequitable adjustment of the price of the continued portion of the contract or subcontract to reflect the fact that there is less work over which to spread fixed costs. 9 The “Termination for Convenience” clause requires that a prime contractor submit any request for an equitable adjustment following a partial termination within 90 days unless this period is extended in writing by the CO. 10 A subcontractor should look to its subcontract to determine the deadline for submission of a request for an equitable adjustment.
Neither SF 1435, “Settlement Proposal (Inventory Basis),” nor SF 1436, “Settlement Proposal (Total Cost Basis),” provides sufficient space to describe adequately a contractor’s claimed costs. It is therefore good advocacy to provide a “Description of Cost Elements” setting forth the factual and legal bases of your claimed costs.
A thorough explanation of your claimed costs is particularly important if your settlement proposal requests costs that would otherwise be unallowable under the FAR Part 31 cost principles. Although the FAR cost principles are used to determine the allowability of costs in a termination settlement, they are not applied strictly. Instead, when a contract is terminated for convenience, the cost principles are applied “subject to” the overriding general rule that the terminated contractor is entitled to “fair compensation.” 15 The FAR states that a settlement “should compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract, including a reasonable allowance for profit,” and that the “use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.” 16 Absent an explanation why allowance of otherwise unallowable costs is necessary to provide “fair compensation,” however, the Government will perfunctorily disallow the costs. If you claim normally unallowable costs and the contract is subject to Cost Accounting Standards, you may be accused of violating CAS 405, “Accounting for Unallowable Costs.” 17 Even worse, you could be accused of violating the criminal or civil False Claims Acts. 18 Thus, it is essential that you provide an adequate explanation in the “Description of Cost Elements” when claiming normally unallowable costs under the “fair compensation” principle.
(ii) If, under the contractor’s accounting system, unit costs for work-in-process and finished products cannot readily be established.
In general, you should consider requesting permission to use the total cost basis if your contract is terminated before production commences or if your unit costs cannot be readily established.
SF 1435, “Settlement Proposal (Inventory Basis),” begins by requesting you to provide the following background information: (a) whether the settlement proposal is for a prime contract with the Government or for a subcontract or purchase order, (b) the name and address of the terminated contractor or subcontractor, (c) identification of the contractor or Government agency that sent the notice of termination, (d) the number of the terminated Government prime contract or of the subcontract or purchase order, (e) the name of any assignee, (f) the effective date of the termination, (g) whether this is an interim or final proposal, and (h) whether SF 1439, “Schedule of Accounting Information,” is attached or an explanation why it is not attached.
A few words about the last two items are in order. First, you should consider submitting an interim proposal and, as discussed in more detail later in this PAPER, an accompanying SF 1440, “Application for Partial Payment,” to facilitate a partial payment. 35 Second, the FAR requires that SF 1439, “Schedule of Accounting Information,” always be provided in support of a settlement proposal (unless the proposal is filed on SF 1438, “Settlement Proposal (Short Form),” used for proposals under $10,000). 36 However, contractors sometimes do not provide SF 1439. As discussed below, both SF 1435 and SF 1436 ask for an explanation if SF 1439 is not provided.
Section II of SF 1435, Items 1 through 20, provides a format for summarizing and computing claimed costs. Schedules A through H on pages 2 to 4 of the form provide space for a more detailed explanation of claimed costs, credits, and payments received to date. In addition to Schedules A through H, it is useful to include a separate “Description of Cost Elements” setting forth the legal and factual bases for claimed costs.
Each Item (1-20) in Section II of SF 1435 is discussed in the paragraphs that follow.
(a) Item 1, “Metals”–Item 1 should set forth the amount claimed for metals at cost,including any freight charges, as listed in SF 1426, “Inventory Schedule A (Metals in Mill Product Form).” An explanation should be provided in the “Description of Cost Elements” of any difference between the amount claimed at Item 1 and that claimed in SF 1426. The amount on SF 1426 is often less due to losses during production.
(b) Item 2, “Raw Materials (other than metals)”–Item 2 sets forth the amount claimed for raw materials at cost, including freight, as listed in SF 1428, “Inventory Schedule B.” Inventory Schedule B is for all raw materials other than the metals listed on SF 1426, “Inventory Schedule A.” You should use a separate Inventory Schedule B for raw materials (Item 2), purchased parts (Item 3), and finished components (Item 4). 39 An explanation should be provided in the “Description of Cost Elements” for any difference between the amount claimed for raw materials in Item 2 and the amount claimed in SF 1428, “Inventory Schedule B.” The amount on SF 1428 is often less due to losses during production.
(c) Item 3, “Purchased Parts”–Item 3 sets forth the amount claimed for purchased parts at cost, including any freight charges, as listed in SF 1428, “Inventory Schedule B” (which should be a form separate from the schedule forms used for raw materials (Item 2) and finished components (Item 4)). 40 The “Description of Cost Elements” should explain any difference between the amount claimed for purchased parts at Item 3 and SF 1428, “Inventory Schedule B.” As with raw materials, the amount on SF 1428 is often less due to losses during production.
(d) Item 4, “Finished Components”–Item 4 sets forth the amount claimed for finished components listed on SF 1428, “Inventory Schedule B” (on a form separate from those used for raw materials (Item 2) and purchased parts (Item 3)). 41 Finished components should not be confused with “acceptable finished product,” which is listed at Item 15. Finished components are parts of contract line items; acceptable finished products are the contract line items.
(e) Item 5, “Miscellaneous Inventory”–Item 5 sets forth the amount claimed for miscellaneous inventory. This item will be blank if the inventory all falls into other categories.
(f) Item 6, “Work-in-Progress”–Item 6 sets forth the amount claimed for work-in-process as listed on SF 1430, “Inventory Schedule C (Work-in-Process).” For some inexplicable reason, Item 6 is for listing “Work-in-Progress,” while the “Inventory Schedule C” is for reporting “Work-in-Process.” These items are the same.
The amount claimed is composed of direct material costs, direct labor costs, and indirect factory expenses. An analysis of the amount of these costs included in the amount claimed for work-in-progress should be set forth in Schedule A of SF 1435, “Analysis of Inventory Cost (Items 4 and 6).” An explanation should also be provided in the “Description of Cost Elements” for any difference between the amount claimed for work-in-progress at Item 6 and the amount claimed in SF 1430, “Inventory Schedule C.” The amount on SF 1430 is often less due to losses during production.
Item 8 is for indicating the total of “Other Costs” detailed on Schedule B of SF 1435. As previously discussed, a contractor’s recovery is limited to the contract price at the time of termination. 45 This price is composed of the price of the contract as awarded plus any equitable adjustments to which the contractor is entitled.
“Other Costs” are of three varieties: (1) pure termination “other costs” that do not add to the contract price and are recoverable only up to the contract ceiling, including precontract costs, initial costs, and various costs continuing after termination (such as continuing facility costs), (2) equitable adjustment “other costs” that are not only recoverable but also add to the contract price against which a contractor may recover, including additional contract administration costs (in-house and outside professional fees) and research and development costs due to Government-directed changes, and (3) termination or equitable adjustment “other costs” that fall into either category (1) or (2), including facilities capital cost of money and delay costs.
A factor in determining allowability is whether the request for equitable adjustment contains a CDA claim certification and requests a final decision. These are indicia of prosecuting a claim. There are conflicting considerations regarding seeking recovery of costs for outside professionals since, as is discussed later, a contractor is entitled to interest from the time of submission of a CDA claim.
(a) Facilities Capital Cost of Money. A contractor may be entitled to recover facilities capital cost of money under the FAR “Cost of money” cost principle. 79 “Cost of money” is an imputed amount for the cost of capital for facilities devoted to contract performance. It is computed by multiplying the net book value of facilities committed to the contract by the interest rate set by the Secretary of the Treasury. 80 Cost of money may be either a pure termination “other cost” or an equitable adjustment “other cost.” The proper characterization depends on that of the underlying costs on which cost of money is calculated.
If there is a sufficient contract price ceiling, a terminated contractor can recover for all days of delay irrespective of responsibility. 85 Under such circumstances, the number of days of delay is the difference between (1) the number of days in the original contract schedule to reach the stage of performance at the time of termination and (2) the number of days between the time of award and the termination for convenience. If there is not sufficient contract price for such a recovery, the contractor can still recover for delays for which it is entitled to an equitable adjustment (delays caused solely by the Government in its contractual capacity).
You should use final G&A expense rates if they are available. Where final rates are not available, you should use estimates. Identify the rates by fiscal year and indicate which are actual and which are estimates under Schedule C of SF 1435.
(b) Item 10, “Total (Items 1 to 9 inclusive)”–Item 10 is a computational block. List here the sum of the amounts claimed in Items 1 through 9.
(1) Extent and difficulty of the work done by the contractor as compared with the total work required by the contract.
(2) Engineering work, production scheduling, planning, technical study and supervision, and other necessary services.
(3) Efficiency of the contractor.
(4) Amount and source of capital and extent of risk assumed.
(5) Inventive and developmental contributions and cooperation with the Government and other contractors in supplying technical assistance.
(6) Character of the business, including the source and nature of materials and the complexity of manufacturing techniques.
(7) Rate of profit that the contractor would have earned had the contract been completed.
(8) Rate of profit both parties contemplated at the time the contract was negotiated.
Often the Government will contend that a contractor’s profit is limited to the amount bid or negotiated for the contract when awarded. A termination for convenience sometimes results because what was intended as a production contract turns into an unanticipated research and development effort. Under such circumstances, the additional difficulty and risk would entitle the terminated contractor to a higher rate of profit than that bid or negotiated for the underlying contract.
You should set up a separate account to accumulate settlement expenses for in-house personnel. 94 To avoid double counting, in-house personnel costs charged directly as settlement expenses should be removed from indirect cost pools.
The FAR provides that “indirect costs” for settlement expenses for in-house personnel “normally. . .shall be limited to payroll taxes, fringe benefits, occupancy costs, and immediate supervision costs.” 95 Until recently, the DCAA’s position was that this provision limited indirect charges for all personnel irrespective of whether the costs are normally charged directly or indirectly. By Memorandum dated November 22, 1996, the DCAA revised its Contact Audit Manual to conform with cases holding that the FAR limitation only applies to employee costs normally charged as indirect costs.96 The DCAA no longer disputes that a contractor is entitled to follow its normal overhead practices for employee costs normally charged as direct costs.
(e) Item 13, “Total (Items 10 to 13 inclusive)”–Item 13 is a computational block. List here the sum of the amounts claimed in Items 10, 11, and 12.
As previously noted, a terminated contractor is entitled to recover G&A expenses on subcontractor settlements. 98 The G&A expenses claimed on subcontractor settlements should either be applied at Item 9 or included at Item 14 and explained as applicable at Schedule C or F.
(g) Item 15, “Acceptable Finished Product”–Acceptable finished product is listed at Item 15 at the contract price. As previously noted, “Acceptable Finished Product” means deliverables that are contract line items and not Item 4 “Finished Components,” which are parts of contract line items.
(h) Item 16, “Gross Proposed Settlement (Items 13 thru 15)”–Item 16 is a computational block. List here the sum of the amounts claimed in Items 13 through 15.
(j) Item 18, “Net Proposed Settlement (Item 16 less 17)”–Item 18 is a computational block. List here the amount remaining after the disposal and other credits set forth at Item 17 are subtracted from the gross proposed settlement at Item 16.
(k) Item 19, “Advance, Progress & Partial Payments (from Schedule H)”–List at Item 19 the sum of all advance, progress, and partial payments received under the contract. Advance, progress, and partial payments at Item 19 are all unliquidatedpayments made to the contractor before, during, and after performance. 100 This amount does not include payments for completed items invoiced at contract price. Provide details in Schedule H.
(l) Item 20, “Net Payment Requested (Item 18 less 19)”–Item 20 is a computational block. List here the amount remaining after the total for advance, progress, and partial payments at Item 19 is subtracted from the net proposed settlement at Item 18.
SF 1436, “Settlement Proposal (Total Cost Basis),” follows a similar format to SF 1435 and requests much of the same information. Both the background information on the contract and the computation of the contract price in Section I, “Status of Contract or Order at Effective Date of Termination,” are the same as must be provided on SF 1435.
Section II of SF 1436, Items 1 through 19, likewise provides a format for summarizing and computing claimed costs. Schedules A to H on pages 2 to 4 of the form provide space for a more detailed explanation of claimed costs, credits, and payments received to date. As previously discussed, in addition to the explanation provided at Schedules A through H, your termination proposal should include a separate “Description of Cost Elements” setting forth the legal and factual bases for claimed costs.
Instructions for completing each Item (1 to 19) in Section II of SF 1436, with references where appropriate to the prior discussion in this PAPER of the corresponding line items in SF 1435, are provided in the paragraphs that follow.
(a) Item 1, “Direct Material”–Item 1 sets forth the amount claimed for direct material costs other than those included in Item 5, “Other Costs.” “Direct material” is material that becomes part of the finished product or is otherwise consumed during production. Direct material costs include any transportation charges.
(b) Item 2, “Direct Labor”–Item 2 sets forth the amount claimed for direct labor costs other than those included in Item 5, “Other costs.” Direct labor costs represent the wages and fringe benefits of personnel engaged in manufacturing.
(c) Item 3, “Indirect Factory Expense (from Schedule A)”–Item 3 sets forth the amount claimed for indirect factory expenses other than that included in Item 5, “Other Costs.” Indirect factory expenses are all allocable manufacturing costs other than direct material and direct labor costs. The rates utilized should be adjusted to exclude any costs normally charged indirectly that are charged directly to the terminated contract.
(d) Item 4, “Special Tooling and Special Test Equipment”–Item 4 is for the loss of useful value of special tooling and special test equipment used to manufacture contract end items. See the prior discussion of SF 1435, Section II, Item 7.
(e) Item 5, “Other Costs (from Schedule B)”–The “other costs” that may be claimed in a total cost basis settlement proposal will be the same as under an inventory basis proposal. See the previous discussion of SF 1435, Section II, Item 8.
(f) Item 6, “General and Administrative Expenses (from Schedule C)”–The G&A expense rate is applied to Items 1 to 5 and Item 14, “Settlements With Subcontractors.” See the earlier discussion of SF 1435, Section II, Item 9.
(g) Item 7, “Total Costs (Items 1 thru 6)”–Item 7 is a computational block. List here the sum of the amounts claimed in Items 1 through 6.
(h) Item 8, “Profit (Explain in Schedule D)”–As explained previously, a terminated contractor is entitled to a reasonable profit on its incurred costs and post-termination costs other than settlement expenses. 101 See the prior discussion of SF 1435, Section II, Item 11.
(i) Item 9, “Total (Items 7 and 8)”–Item 9 is a computational block. List here the sum of the amounts claimed in Items 7 and 8.
(j) Item 10, “Deduct Finished Product Invoiced or To Be Invoiced”–Item 10 is for finished product invoiced or “to be invoiced.” Finished product is charged at the contract price.
(k) Item 11, “Total (Item 9 less Item 10)”–Item 13 is a computational block. List here the difference between the total for finished product at Item 10 and the subtotal at Item 9 (which is the total of Items 1 through 6 and 8).
(l) Item 12, “Settlement Expenses (from Schedule E)”–Item 12 is for the total of settlement expenses detailed on Schedule E of SF 1436. See the earlier discussion of SF 1435, Section II, Item 12.
(m) Item 13, “Total (Items 11 and 12)”–Item 11 is a computational block. List here the sum of the amounts claimed in Items 11 and 12.
(n) Item 14, “Settlements With Subcontractors (from Schedule F)”–Item 14 is for the total costs of settlements with subcontractors. List here the sum of the amounts detailed on SF 1436, Schedule F. See the prior discussion of SF 1435, Section II, Item 14.
(o) Item 15, “Gross Proposed Settlement (Items 13 thru 14)”–Item 15 is a computational block. List here the sum of the amounts claimed in Items 13 and 14.
(p) Item 16, “Disposal and Other Credits (from Schedule G)”–List here any disposal or other credits the Government is entitled to as detailed on SF 1436, Schedule G. See the previous discussion of SF 1435, Section II, Item 17.
(q) Item 17, “Net Proposed Settlement (Item 15 less 16)”–Item 17 is a computational block. List here the remainder after the total for disposal and other credits set forth at Item 16 is subtracted from the gross proposed settlement at Item 15.
(r) Item 18, “Advance, Progress & Partial Payments (from Schedule H)”–List at Item 18 the sum of all unliquidated advance, progress, and partial payments received under the contract as detailed in SF 1436, Schedule H. See the earlier discussion of SF 1435, Section II, Item 19.
(s) Item 19, “Net Payment Requested (Item 18 less 19)”–Item 19 is a computational block. List here the remainder after the total for advance, progress, and partial payments at Item 18 is subtracted from the net proposed settlement at Item 17.
To support a termination settlement proposal, contractors submit inventory schedules that provide information on various types of property acquired for the performance of the contract. Effective September 24, 1996, the FAR was amended to require contractors to submit inventory schedules within 120 days of the effective date of contract termination unless granted a time extension in writing by the CO. 102Previously, the FAR had imposed no deadline on the submission of inventory schedules following a termination for convenience. Inventory schedules should in any event be submitted as soon as possible to expedite plant clearance (the screening, redistribution, and disposal of contractor inventory from a contractor’s plant or work site). 103 A CO will often not act on a request for partial payment until plant clearance is completed.
Code 1, Unused-good. Unused property that is usable without repairs and identical or interchangeable with new items from normal supply sources.
Code 2, Unused-fair. Unused property that is usable without repairs, but is deteriorated or damaged to the extent that utility is somewhat impaired.
Code 3, Unused-poor. Unused property that is usable without repairs, but is considerably deteriorated or damaged. Enough utility remains to classify the property better than salvage.
Code 4, Used-good. Used property that is usable without repairs and most of its useful life remains.
Code 5, Used-fair. Used property that is usable without repairs, but is somewhat worn or deteriorated and may soon require repairs.
Code 6, Used-poor. Used property that may be used without repairs, but is considerably worn or deteriorated to the degree that remaining utility is limited or major repairs will soon be required.
Code 7, Repairs required-good. Required repairs are minor and should not exceed 15 percent of original acquisition cost.
Code 8, Repairs required-fair. Required repairs are considerable and are estimated to range from 16 percent to 40 percent of original acquisition cost.
Code 9, Repairs required-poor. Required repairs are major because property is badly damaged, worn, or deteriorated, and are estimated to range from 41 percent to 65 percent of original acquisition cost.
Code X, Salvage. Property has some value in excess of its basic material content, but repair or rehabilitation to use for the originally intended purpose is clearly impractical. Repair for any use would exceed 65 percent of the original acquisition cost.
Code S, Scrap. Material that has no value except for its basic material content.
The forms also require the contractor to provide the price or costs of the inventory. Anytime the actual costs or invoiced price of an inventory item is not available, you should use an estimate and identify estimated costs with the symbol “(e).” 106 In theory, the use of estimates other than for bulk raw materials and metals and work-in-process will largely be limited to inventory schedules furnished for settlement proposals submitted on a total cost basis.
SF 1428, “Inventory Schedule B,” is a catchall schedule. It must be used for all inventory that does not belong on SF 1426, SF 1430, or SF 1432. 109 Inventory required to be listed on SF 1428 includes raw materials (other than metals), purchased parts, and finished components.
“Work-in-process” is material “released to manufacturing, engineering, design or other services under the contract and includes undelivered manufactured parts, assemblies, and products, either complete or incomplete.” 110 Under the inventory basis (SF 1435), the amount on SF 1430, “Inventory Schedule C (Work-in-Process),” for work-in-process is composed of direct material costs, direct labor costs, and indirect factory expenses. You must provide a cost breakdown of these three factors in Schedule A, “Analysis of Inventory Cost (Items 4 and 6).” As previously discussed, “Work-in-Process” on Inventory Schedule C is the same as “Work-in-Progress” on SF 1435, Item 6. Under the total cost basis (SF 1436), the amount listed is limited to direct material costs, which include any freight charges.
SF 1432, “Inventory Schedule D (Special Tooling and Special Test Equipment),” is used for listing special tooling and special test equipment such as dies, jigs, and gauges. 111 If the inventory basis (SF 1435) is used for the settlement proposal, special tooling and special test equipment are priced at purchase price plus any direct material costs, direct labor costs, or indirect factory expenses. If the total cost basis (SF 1436) is used, pricing may be limited to acquisition or direct material costs. However, contractors using the total cost basis often elect to price special tooling and special test equipment in the same manner they would under the inventory basis.
The FAR requires all prime contractors to submit SF 1439, “Schedule of Accounting Information” in support of a termination settlement proposal, 113 and both SF 1435 and SF 1436 ask for an explanation if SF 1439 is not provided. Prime contractors sometimes indicate they are not providing SF 1439 because they have a current CAS Disclosure Statement. Although such an explanation may be accepted, it is not a good idea to fail to provide SF 1439 if you are deviating from your normal accounting practices in your settlement proposal.
Subcontractors should consider submitting SF 1439 even though they are not required to do so. Furnishing SF 1439 will likely expedite the processing of partial payment applications.
SF 1440, “Application for Partial Payment,” is not a required form for submission of a fully compliant termination settlement proposal. However, to alleviate the cash-flow problems resulting from a termination, you may want to include an “Application for Partial Payment” with your settlement proposal.
(a) 100% of the contract price adjusted for items completed before the termination date or to be completed after the termination date with the CO’s approval.
(b) 100% of subcontractor settlements the contractor has paid that were approved by the CO.
(c) 90% of the direct costs of termination inventory including raw materials, purchased parts, supplies, and direct labor.
A partial payment request may be submitted with or after submission of the termination settlement proposal or interim settlement proposal. 116 Where complex termination settlement proposals are involved, the Government often makes more than one partial payment before a final settlement is reached or the parties resort to litigation. To facilitate prompt processing, an interim settlement proposal and accompanying “Application for Partial Payment” should generally be limited to costs that the Government is unlikely to dispute.
You should consider requesting permission to submit an interim settlement proposal on a total cost basis. If the CO is amenable, this technique can be used to facilitate prompt submission and a partial payment. A CO may approve use of the total cost approach for an interim settlement proposal even where the final settlement proposal is to be submitted on an inventory basis. 117 Before requesting permission to submit an interim settlement proposal on a total cost basis, you should discuss the matter with the CO. Otherwise, you may lose considerable time waiting for a reply.
As previously discussed, contractor recovery following a termination for convenience is limited to the contract price. 121 The contract price is the sum of the contract as awarded, plus any equitable adjustments to which the contractor is entitled. Thus, if a contractor claims amounts in excess of the original contract price, it must prove entitlement to a commensurate equitable adjustment to recover the excess. In other words, to recover amounts up to the original contract price, you need only show incurrence. To recover amounts in excess of the original contract price, you need to demonstrate a cause-and-effect relationship between some Government action or inaction and the additional costs.
You should therefore include a request for an equitable adjustment with your settlement proposal to claim amounts that exceed the original contract price. Such costs, except for G&A expenses and profit, should also be included in the termination settlement proposal under “Other Costs” (Item 8 on SF 1435 or Item 5 on SF 1436). It is not necessary to include G&A expenses and profit under the category “Other Costs” since they are added elsewhere on SF 1435 and SF 1436.
Assuming that our interpretation is proper and a termination settlement proposal can be initially submitted as a claim, the contractor should be entitled to receive both interest and the costs of preparing the settlement proposal. Just as the costs of preparing [a request for an equitable adjustment] for a directed change are properly costs of contract administration, the costs of preparing a termination settlement proposal are properly costs related to the termination. Both submissions are specifically required by the terms of the “Changes” and “Termination” clauses.
In sum, although there is some debate, it appears, at least to the authors, that (1) a contractor can initially submit a termination settlement proposal as a CDA claim and begin the accrual of interest, and (2) submitting a settlement proposal in this manner should not prejudice a contractor’s right to recover settlement expenses.
These Guidelines are designed to assist you in preparing a termination settlement proposal after a contract has been terminated for the Government’s convenience. They are not, however, a substitute for professional representation in any particular situation.
1. Submit a timely termination settlement proposal. Absent timely submission, the CO’s or higher-tier contractor’s payment determination is not subject to judicial review.
2. Follow basic strategies for maximizing recovery, including (a) claiming otherwise unallowable costs under the “fair compensation” principle, (b) not allowing the Government to improperly disallow costs by imposing its after-the-fact business judgment, (c) not accepting disallowances based on impractical proof requirements, (d) claiming all allowable costs, (e) charging normally indirect costs directly, (f) avoiding loss adjustments, (g) requesting a partial payment, and (h) obtaining professional help.
4. Supplement your termination settlement proposal forms with a “Description of Cost Elements.” This is particularly important when you are using the FAR guarantee of “fair compensation” to claim an otherwise unallowable cost.
5. Be aware of the differences between the preferred inventory basis (SF 1435) andtotal cost basis (SF 1436) for preparing settlement proposals. Although both approaches theoretically lead to the same amount claimed, contractor recovery may be less under the total cost method where a loss contract is alleged.
6. Obtain CO permission if you plan to use the total cost basis (SF 1436) for your settlement proposal. Be sure to make a timely request, keeping in mind the deadline for submitting the termination settlement proposal.
7. Submit requests for equitable adjustments to which you are entitled. This will enable you to recover amounts in excess of the original contract price and avoid loss adjustments.
8. Adjust indirect cost rates to reflect costs normally charged indirectly that arecharged directly to the terminated contract.
9. Completely fill out the applicable inventory schedules. Be sure to use the pertinentcondition codes.
10. If you are using the total cost basis (SF 1436), do not allocate direct material costs, direct labor costs, and indirect factory expenses to inventory.
11. When using the inventory basis (SF 1435), use the “Description of Cost Elements” to explain any differences between the amount claimed for inventory on SF 1435 and inventory listed on the various schedules.
13. Consider submitting the settlement proposal as a CDA claim to recover interest.Be aware that the Government may argue that settlement expenses are an unallowable cost of prosecuting a claim against the Government.
1 See generally Pushkar, Janik & Rhodes, “Dealing With the Effects of Downsizing,” Briefing Papers No. 93-5 (Apr. 1993).
2 See, e.g., FAR 52.249-2 (“Termination for Convenience of the Government (Fixed-Price)” clause).
3 See FAR 52.249-2, paras. (f), (g), (i). See also FAR 49.113, 49.201, 49.202.
4 Seidman & Banfield, “Maximizing Termination for Convenience Settlements,” Briefing Papers No. 95-5 (Apr. 1995).
5 FAR 49.206-1(a), 52.249-2, para. (e).
7 FAR 52.249-2, para. (e).
8 FAR 52.249-2, paras. (e), (j); Do-Well Machine Shop, Inc. v. U.S., 870 F.2d 637 (Fed. Cir. 1989), 8 FPD ¶ 33, 31 GC ¶ 116.
9 See FAR 49.104(d), 49.208, 52.249-2, para. (l).
10 FAR 52.249-2, para. (l).
11 This BRIEFING PAPER does not discuss the preparation of SF 1438, “Settlement Proposal (Short Form),” the use of which is limited to settlement proposals for fixed-price contracts less than $10,000. See FAR 49.602-1(d).
12 FAR 49.602-1. See FAR 53.301-1435, -1436 (form illustrations).
13 FAR 49.602-2. See FAR 53.301-1426 to -1433 (form illustrations).
14 FAR 49.206-1(e), 49.602-3. See FAR 53.301-1439 (form illustration).
15 FAR 49.113, 49.201. See note 4, supra, at 3.
17 48 CFR § 9904.405. See generally Smith, Williams & Snyder, “Accounting for Unallowable Costs Under CAS 405,” 97-6 Govt. Cont. Costs, Pricing & Acctg. Rep. 3 (June 1997); Boyd & Villet, “Cost Accounting Standards Fundamentals,” Briefing Papers No. 96-12 (Nov. 1996).
18 18 USC § 1001 (criminal False Claims Act); 31 USC §§ 3729-3733 (civil False Claims Act).
19 FAR 49.602-4. See FAR 53.301-1440 (form illustration).
20 See FAR 49.112-1, 52.249-2, para. (m).
28 See American Packers, Inc., ASBCA 14275, 71-1 BCA ¶ 8846; Douglas Corp., ASBCA 5550, 60-1 BCA ¶ 2531, 2 GC ¶ 217.
30 Compare FAR 49.203(b) with (c).
31 DCAA, DCAM ¶ 12-308 (July 1997).
32 Maitland Bros., ASBCA 43088, 93-3 BCA ¶ 26007, affd. on reconsideration, 94-1 BCA ¶ 26285. See note 4, supra, at 5.
33 See note 8, supra.
34 Caskel Forge, Inc., ASBCA 7638, 1962 BCA ¶ 3318, 4 GC ¶ 258. See also Cubic Defense Sys., ASBCA 39859, 91-2 BCA ¶ 23748.
35 See FAR 49.112-1, 52.249-2, para. (m).
36 FAR 49.602-3. See FAR 49.602-1(d).
37 FAR 49.207, 52.249-2, paras. (f), (g). See Seven Science Indus., ASBCA 23337, 80-2 BCA ¶ 14518.
38 See, e.g., Durette, GmbH, ASBCA 34072, 91-2 BCA ¶ 23756.
45 FAR 49.207, 52.249-2, paras. (f), (g).
46 FAR 49.201. See note 4, supra, at 3.
48 FAR 31.205-32. See FAR 31.109.
49 Penberthy Electromelt Intl. v. U.S., 11 Cl. Ct. 307 (1986), 5 FPD ¶ 120, 29 GC ¶ 40.
50 FAR 49.113, 49.201. See Codex Corp. v. U.S., 226 Ct. Cl. 693 (1981), 23 GC ¶ 239.
51 Codex Corp. v. U.S., note 50, supra; Kasler Elec. Co., DOTCAB 1425, 84-2 BCA ¶ 17374, 26 GC ¶ 326.
52 Metered Laundry Servs., Inc., ASBCA 21573, 78-2 BCA ¶ 13451. See note 4, supra, at 6-7.
62 General Dynamics Corp., ASBCA 19607, 78-1 BCA ¶ 13203.
64 Note 4, supra, at 7–8.
70 FAR 31.205-42(e)(1) (emphasis added).
71 Note 4, supra, at 8.
73 FAR 52.242-15 (“Stop-Work Order” clause), 52.243-1 (“Changes– Fixed-Price” clause).
77 FAR 49.202, 52.249-2, paras. (f), (g)(2)(iii).
78 FAR 52.243-1. See Bill Strong Enters., Inc. v. Shannon, 49 F.3d 1541 (Fed. Cir. 1995), 14 FPD ¶ 18, 37 GC ¶ 141, overruled in part on other grounds by Reflectone, Inc. v. Dalton, 60 F.3d 1572 (Fed. Cir. 1995), 14 FPD ¶ 63, 37 GC ¶ 411.
81 See Spectrum Leasing Corp. v. General Servs. Admin., GSBCA 12189, 95-1 BCA ¶27317; AT&T v. General Servs. Admin., GSBCA 11730, 95-2 BCA ¶ 27869, 37 GC ¶ 531. See also FAR 31.205-10(a)(2); note 4, supra, at 8.
82 See Wilner Const. Co., ASBCA 26621, 84-2 BCA ¶ 17411, affd. on reconsideration, 84-3 BCA ¶ 17669.
83 Worsham Const. Co., ASBCA 25907, 85-2 BCA ¶ 18016, 28 GC ¶ 243 (Note).
84 See U.S. v. Winstar Corp., 116 S. Ct. 2432 (1996), 15 FPD ¶ 68, 38 GC ¶ 322. See generally Latham, “Government Interference and Sovereign Acts,” Briefing Papers No. 76-3 (June 1976), 4 BPC 31.
86 Wickham Contracting Co. v. Fischer, 12 F.3d 1574 (Fed. Cir. 1994), 13 FPD ¶ 1, 36 GC ¶201. See Eichleay Corp., ASBCA 5183, 60-2 BCA ¶ 2688, 2 GC ¶ 485, affd. on reconsideration, 61-1 BCA ¶ 2894, 3 GC ¶ 138(a). See generally Bastianelli & Lange, “Recovering Delay Damages for Home Office Overhead,” Construction Briefings No. 97-3 (Feb. 1997).
88 See note 4, supra, at 4.
90 FAR 49.202(a), 52.249-2, paras. (f), (g)(2)(iii).
92 See note 4, supra, at 5.
95 FAR 31.205-42(g)(1)(iii) (emphasis added).
96 DCAA, DCAM ¶ 12-309 (July 1997). See Celesco Indus., ASBCA 22460, 84-2 BCA ¶ 17295, 26 GC ¶ 326; Condec Corp., ASBCA 14234, 73-1 BCA ¶ 9808, 15 GC ¶ 295.
97 FAR 49.108-3, 52.249-2, para. (b)(5).
99 See FAR 31.205-42(a), 49.204, 49.206-2(a)(2), 49.207, 52.249-2, paras. (b)(9), (k)(3).
100 FAR 49.206-2(a)(2), 52.249-2, para. (k)(1).
101 FAR 49.202(a), 52.249-2, paras. (f), (g)(2)(iii).
102 FAR 49.206-3, 52.249-2, para. (c) (added by 61 Fed. Reg. 39186 (July 26, 1996)).
103 See FAR 45.601 (defining “plant clearance”).
107 See also FAR 45.606-5(e).
110 See FAR 45.501, 45.601.
112 See note 4, supra, at 4.
114 FAR 49.112-1(a), 52.249-2, para. (m)(1).
117 See generally Southeastern Servs., Inc., ASBCA 22816, 85-3 BCA ¶ 18183.
119 See Nash, “Default for Failure To Proceed: The ‘No Pay-No Way’ Defense,” 1 Nash & Cibinic Rep. ¶ 39 (May 1987).
120 See FAR 52.249-2, paras. (f), (g).
121 FAR 49.207, 52.249-2, paras. (f), (g).
122 See James M. Ellett Const. Co. v. U.S., 93 F.3d 1537 (Fed. Cir. 1996), 15 FPD ¶ 90, 38 GC ¶¶ 426, 477, 574.
123 See 41 USC § 611.
124 See RBW & Assocs., AGBCA 96-205-R, 96-2 BCA ¶ 28616 (reversing its earlier decision on this issue based on note 122, supra), 38 GC ¶ 597.
125 41 USC § 611; FAR 33.208.
126 See Reflectone, Inc. v. Dalton, note 78, supra (interpreting FAR 33.201 regarding requirements 1, 2, and 3).
127 FAR 33.201. See 41 USC § 605(c)(1), FAR 33.207(a).
128 See FAR 33.206; 41 USC § 605(a). See also note 122, supra (requiring at least an implicit request for final decision for a claim to exist).
130 41 USC § 605(c)(1); FAR 33.201, 33.207(a).
131 FAR 33.207(c). See 41 USC § 605(c)(1).
132 41 USC § 605(c)(6); FAR 33.211(e).
133 41 USC § 605(c)(2); FAR 33.211(c).
134 41 USC § 605(c)(6); FAR 33.207(f).
136 Mid-America Engrg. & Mfg., ASBCA 48831, 96-2 BCA ¶ 28558, 38 GC ¶ 477. See West & Handwerker, “Feature Comment: The ‘In Dispute’ Requirement AfterEllett: A Resuscitation of the Dawco Standards?,” 38 GC ¶ 574.
137 RRP Const. Co., DOTBCA 2999 (Sept. 10, 1996), 38 GC ¶ 574.
138 Compare, e.g., Cibinic, “The Ellett Case: What’s All the Fuss About?,” 11 Nash & Cibinic Rep. ¶ 8 (Feb. 1997) (termination settlement proposal can be a claim when submitted if it requests a final decision) with 38 GC ¶ 477 (parties must reach an “impasse” before termination settlement proposal can be a CDA “claim”).
140 See note 78, supra.
142 Cibinic, note 138, supra, at 25.

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