Federal Contracting in Flux: Strategies for Managing Trump Administration Stop-Work Orders, Terminations and REAs

At a glance

• Understand Contractual Obligations: In the current, uncertain state of federal contracting, it is critical to proactively address operational interruptions. A first step in doing that is to review contract clauses for applicable FAR provisions.
• Document and Track Costs: It’s also important for government contractors to establish dedicated cost accounting for expenses and claim preparation.
• Seek Professional Support: Engage legal, accounting, and compliance professionals to ensure accurate claims and adherence to FAR requirements.

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The full story

The uncertain state of federal contracting has brought heightened attention to stop-work orders, terminations, claims, and equitable adjustments. While the reasons for contract cancellations vary—budgetary constraints, policy shifts, or executive mandates—the implications for contractors are significant. Companies must proactively address the operational and financial challenges arising from these disruptions while adhering to Federal Acquisition Regulation (FAR) guidelines. 

The recent rise in stop-work orders reflects the federal government’s adjustments to evolving policies and priorities. A stop-work order is a temporary suspension of work on a contract, issued by the Contracting Officer to address issues such as funding delays, scope changes, or other unforeseen circumstances. These orders provide the government with time to resolve these matters, but they also create operational and financial uncertainties for contractors.

How stop-work orders work within FAR 52.242-15

Stop-work orders can be issued at any time by written order of the Contracting Officer to stop part or all of the work being performed on the contract. This pause is to be for a reasonable period, not to exceed 90 days, unless extended by mutual agreement.  

Contractors must submit their request for equitable adjustment within 30 days after the work has stopped. If the stop-work order is not cancelled, and the contract is terminated either for convenience or default, the contractor will still have the ability to capture actual costs as well as any reasonable costs associated with the stop work order and termination through the Termination Settlement Proposal process.

Understanding terminations, equitable adjustments, and claims

Terminations

Contractors must distinguish between terminations, requests for equitable adjustments (REAs), and claims to effectively navigate federal contracting. Each serves a unique purpose under the Federal Acquisition Regulation (FAR).

Terminations occur in two primary forms:

• Termination for Convenience: The government ends the contract without fault on the contractor’s part. Contractors may recover reasonable costs incurred up to the date of termination, including profits on completed work and termination-related expenses. 

• Termination for Default: The contract is terminated due to the contractor’s failure to perform or meet obligations. Recoveries are limited to allowable costs incurred up to the termination date, and profits are generally not recoverable. Contractors may dispute a default termination and seek equitable adjustments if justified.

Though profits on terminated contracts are recoverable under specific circumstances, that is primarily for work completed before the termination. 

Guidance for determining recoverable costs and profits comes from FAR Part 49– Termination of Contracts. The appropriate termination clause in a contract depends on the contract type, as outlined in FAR 52.249. Contractors should ensure their contracts include the relevant FAR clause to navigate terminations effectively, and properly document all work that has been completed. Key FAR clauses related to terminations include:

• FAR 52.249-2: Termination for Convenience of the Government (Fixed Price).
• FAR 52.249-6: Termination (Cost Reimbursement).
• FAR 52.249-8: Default (Fixed-Price Supply and Service)
  

Requests for Equitable Adjustments (REAs)

REAs are formal requests to modify a contract’s terms due to unforeseen circumstances or changes initiated by the government. These adjustments often address:

• Increased costs resulting from government-directed changes. When a contractor’s costs increase due to government changes (e.g., scope modifications, delays, etc.), profit can be included as part of the equitable adjustment.
• Schedule impacts due to scope modifications. By including a well-prepared schedule of impact, contractors strengthen their REA and increase the likelihood of receiving fair compensation for additional costs and time.

Applicable FAR clauses include:

• FAR 52.243-1: Changes—Fixed-Price Contracts.
• FAR 52.243-2: Changes—Cost-Reimbursement Contracts.

Claims

A claim is a formal demand for payment, adjustment, or interpretation of contract terms submitted under the Contract Disputes Act (CDA). Claims differ from REAs and terminations in that they often arise when disputes cannot be resolved amicably and may lead to litigation. Additionally, claims are governed under FAR 52.233-1– Disputes. In most cases, profits cannot be claimed as part of a dispute under the CDA unless the dispute arises from an equitable adjustment or termination for convenience that explicitly includes profit in the calculation. Disputes typically address unpaid invoices, contractual misinterpretations, or damages, which do not directly involve profit calculations.

Claims must be certified if they exceed $100,000, and contractors must comply with the procedural requirements of the CDA.

Steps to Manage a Contract Termination

1. Understand Your Contract
To effectively manage a contract termination, start by thoroughly reviewing all relevant clauses in your contract, particularly those related to termination and disputes. Pay close attention to notice requirements to ensure the government has followed proper notification procedures and be aware of deadlines for submitting termination settlement proposals.

2. Create a Termination Cost Center
Establishing a termination cost center involves creating a dedicated project to manage termination-related activities. This will include both the direct and indirect costs incurred. Proper and detailed records of costs claimed and work performed goes a long way to helping defend your claim invoice.

3. Engage Professional Support
When impacted by a termination or REA, it is always recommended to pull in Government Contracting professionals who are experienced in the legal and accounting fields, as well as those who are able to provide Government Contracting compliance guidance. Legal counsel can draft proposals, negotiate disputes, and handle appeals. Look to an accounting firm for guidance interpreting FAR provisions, calculating direct and indirect costs, and preparing cost analyses and support audits.

4.Prepare and Submit Your Claim
Include allowable costs such as labor, ODCs, and termination-related expenses. Then, calculate profits for completed or partially completed work per FAR. Finally, provide thorough documentation to withstand audits.

The bottom line

Federal contract terminations, while challenging, can be navigated successfully with strategic planning and adherence to regulatory guidelines. By understanding your contractual rights, maintaining meticulous records, and seeking guidance from experienced professionals, contractors can mitigate financial losses and help ensure equitable adjustments. Preparation and compliance are your strongest tools in protecting your business’s interests in an unpredictable contracting landscape.  

If you find yourself in need of compliance and accounting support for contract termination needs, schedule a consultation with Aprio’s Government Contracting Team today.

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