Contract T4C, REAs, and Claims: What Costs Can You Recover?

In the face of a Termination for Convenience (T4C), REA, or Claim, a common question is whether contracts such as Firm Fixed Price (FFP), Fixed Labor Hour (FLH), or Time & Materials (T&M) must be converted to a cost-based format in order to receive reimbursement from the government, who reimburses actual allowable costs under Federal Acquisition Regulation (FAR) Part 31. 

The simple answer is yes; in most cases, contractors need to structure their cost recovery submission using a cost-reimbursable methodology supported by details of both direct and indirect costs incurred. However, the nature of the submission (whether a settlement proposal, equitable adjustment, or claim) depends on the specific contract terms and the reason for the cost recovery; any progress or advance payments are deducted from the settlement. 

To maximize reimbursement, contractors must maintain detailed documentation, track all incurred costs separately, and follow the appropriate cost recovery method based on the contract type and the nature of the claim. Using actual indirect rates when possible, ensuring costs are allocable and allowable, and clearly justifying the inclusion of professional fees will strengthen a contractor’s position when seeking compensation. Understanding these key principles can make the difference between recovering costs efficiently and facing delays or denials in reimbursement.

Cost-based recovery methods include:

• Cost-based invoice – a contractor bills the government for th actual costs incurred to perform a service or deliver a product, including direct labor, material, and overhead, plus a predetermined profit margin. This is distinct from a fixed price invoice in which a price is set regardless of actual costs involved.

• Cost build-up format – contractors present incurred costs in a manner that aligns with FAR requirements for reimbursement. Direct costs, such as labor, materials, and subcontractor expenses must be reported based on actual expenditures. Indirect costs, including general and administrative (G&A) expenses, overhead, and fringe benefits must also be applied appropriately. 

Considerations for indirect costs

If using a cost-build up format, the key question is whether to use actual or budgeted indirect rates. T4C and REAs generally allow contractors the option to use either actual or budget (forward pricing) rates. However, actual indirect rates are typically preferred, as they reflect the true cost incurred by the business and may reduce the risk of government scrutiny or later adjustments. If budgeted rates are used, they must be justifiable and may be subject to reconciliation. 

In contrast, for Claims, only actual costs can be submitted, and budgeted rates are not allowable. This distinction is important, as government audits focus on verifying that all costs included in a Claim were actually incurred and paid.

Preparing a T4C or REA cost recovery submission

Contractors should ensure they include all allowable costs under FAR Part 31. The following costs are generally recoverable and allowable:

• Direct labor and material costs, subcontractor expenses, and indirect costs proportionate to the terminated work. 
• Settlement costs such as legal fees, accounting support, and administrative costs related to closing out the contract.
• Costs related to idle facilities or workforce that were retained due to contract expectations may be included. 
• If the termination resulted in penalties for canceled orders, restocking fees, or non-refundable deposits may be eligible for reimbursement.

Converting to a claim

If a contractor initially submits a T4C and later decides to convert it into a Claim due to a lack of government response, then previously claimed legal and accounting costs can remain in the Claim submission. However, any additional legal or accounting fees incurred after the conversion can no longer be included. This creates a strategic consideration when deciding whether to initially file a T4C or REA versus moving straight to a Claim, as legal and professional costs are recoverable only in the former.

The bottom line

Government contractors navigating a T4C, REA, or Claim can recover their costs, but maximizing your reimbursement relies heavily on selecting the best cost-based recovery method and remaining diligent with documentation.

Navigating terminations, claims, and settlement packages can be complex, but you don’t have to do it alone. Aprio’s Government Contracting and Nonprofit teams are here to guide you every step of the way. Whether you need support with claims work, termination settlements, or strategic planning, we’re ready to help.

Connect with an Aprio team member. 

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