“With all of the budget pressures that agencies are going to be faced with ... we are going to be seeing a lot more terminations, restructures and changes to contracts,” said Elizabeth A. Ferrell, chairwoman of McKenna Long & Aldridge’s terminations and contract restructures group, which was only established last year. Companies “believe that their programs are at risk.”
Contract termination is a complex legal process, but essentially the trouble starts when the government needs to terminate for convenience, rather than for cause.
If a termination is for cause or default — meaning something has gone wrong with the program — the government is off the hook. But if it’s for convenience — which is typically what happens — the government must pay the contractor the costs it will incur to shut down the contract.
Analysts and attorneys say the government is often in a position of weakness in these negotiations as contractors with expensive attorneys fight for large fees.
The Army confirmed this month that it expects to pay nearly $500 million — still $200 million shy of the level it anticipated — to close out with prime contractor Boeing the sprawling Future Combat Systems program, which began to shut down in 2009 when then-Defense Secretary Robert Gates cut its manned ground vehicle component.
The high-priority program was made up of multiple parts, including a family of vehicles, unmanned air and ground systems and high-tech radios, all connected by a network. While some pieces have been salvaged, the program as it was imagined was never built.
The vehicle cancellation fee alone is expected to hit about $164 million, according to the service.
In a statement, the Army said termination negotiations — being handled by the Defense Contract Management Agency — are still ongoing because the contractor has a year to present termination fee proposals. Most of those negotiations are expected to end in December; some are slated to continue until July 2013.
New contract language needed?
“I think contract termination costs are going to become an increasing consideration,” said Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments. The government has “got to do a better job, I think, from now on in writing contracts, thinking through what would happen if this contract were terminated at any given point.”