Balancing the Scales: Applying the Fair Compensation Principle to Determine Recovery for Commercial Item Contracts Terminated for the Government's Convenience

• Author: Major Phillip T. Korman
• Pages: 218-241

218 MILITARY LAW REVIEW [Vol. 220

BALANCING THE SCALES: APPLYING THE FAIR

COMPENSATION PRINCIPLE TO DETERMINE RECOVERY

FOR COMMERCIAL ITEM CONTRACTS TERMINATED FOR

THE GOVERNMENT’S CONVENIENCE

MAJOR PHILLIP T. KORMAN*

I. Introduction

One lovely Monday morning, you return from physical training to

find a voice-mail message from the contracting squadron requesting

advice about a commercial items1 contract terminated for the Air Force’s

convenience. Following up with the contracting officer, you learn that

although the contract provided flight simulators for twelve months, the

Air Force terminated it for convenience2 after three months due to budget

cuts. The contractor and contracting officer are at loggerheads over the

entitled recovery under the Federal Acquisition Regulation (FAR).3

* Judge Advocate, U.S. Air Force. Presently assigned as an acquisition attorney with the

78th Air Base Wing, Robins Air Force Base, Georgia. LL.M., 2014, in Military Law and

a specialty in Government Contracts and Fiscal Law, The Judge Advocate General’s

School, U.S. Army, Charlottesville, Virginia; J.D., 2001, University of Richmond; B.S.,

1996, Furman University. Previous assignments include Deputy Staff Judge Advocate,

460th Space Wing, Buckley Air Force Base, Colorado, 2011–2013; Appellate Defense

Counsel, Air Force Legal Operations Agency, Joint Base Andrews, Maryland, 2011;

Appellate Defense Counsel, Air Force Legal Operations Agency, Joint Base Anacostia-

Bolling, District of Columbia, 2007–2011; Area Defense Counsel, Air Force Legal

Operations Agency, Altus Air Force Base, Oklahoma, 2006–2007; Assistant Staff Judge

Advocate, 97th Air Mobility Wing, Altus Air Force Base, Oklahoma, 2003–2006.

Member of the bars of the United States District of South Carolina, the Air Force Court

of Criminal Appeals, the Court of Appeals for the Armed Forces, the Court of Appeals

for the District of Columbia, the Supreme Court of South Carolina, and the Supreme

Court of the United States. This article was submitted in partial completion of the Master

of Laws requirements of the 62d Judge Advocate Officer Graduate Course. The author

would like to thank Greg Harding and Skye Mathieson for their time and dedication in

helping him complete this article.

1 For purposes of this illustration, the flight simulators are “commercial items” as

defined in FAR 2.101(b).

2 Reference to terminations of commercial item contracts will always refer to the

convenience of the government unless otherwise stated.

3 The Federal Acquisition Regulation (FAR), issued as Chapter 1 of Title 48 C.F.R.,

serves as the primary regulation for all federal executive agencies in their acquisition of

supplies and services with appropriated funds. It became effective on April 1, 1984.

FAR 1.105-1(b) foreword (Mar. 2005).

2014] CONTRACTS TERMINATED FOR GOV’T CONVENIENCE 219

The contractor claims that the Air Force owes him a percentage of

the contract price reflecting three months of performance, unamortized

costs4 incurred in manufacturing the simulators in anticipation of the

year-long contract, post-termination settlement costs, and lost anticipated

profit for the remaining nine months of the terminated contract. The

contractor claims that, despite diligent efforts, he has been unable to

contract out the simulators elsewhere. The contracting officer wants

your advice before rejecting the contractor’s settlement offer.

Hanging up the phone, you scramble to find FAR 52.212-4(l), the

Termination for the Government’s Convenience Clause,5 included in the

contract. You stare at its two-part recovery formula, which reads,

“Subject to the terms of this contract, the Contractor shall be paid a

percentage of the contract price reflecting the percentage of the work

performed prior to the notice of termination, plus reasonable charges the

Contractor can demonstrate . . . have resulted from the termination.”6

You are unsure about what encompasses “reasonable charges” but are

encouraged to find detailed recovery guidelines for terminated traditional

government contracts in FAR part 49.7 However, FAR 12.403(a) states

that the “requirements of Part 49 do not apply” but that “[c]ontracting

officers may continue to use part 49 as guidance to the extent that part 49

does not conflict with this section and the language of the termination

paragraphs in § 52.212-4,”8 leaving you a bit puzzled. You vaguely

4 Here, “unamortized costs” refers to costs incurred by the contractor in providing the

simulators in anticipation of the full twelve months of performance but uncompensated

for due to early termination.

5 48 C.F.R. § 52.212-4(l) (2014).

6 Id. A judge advocate facing a novel or unfamiliar contracting issue would be wise to

consult more senior legal advisors, including AFLOA/JAQK (Contract Law Field

Support Center). Contracting officers should be aware that the Defense Contracting

Management Agency (DCMA) offers support through Termination Contracting Officers,

whose sole purpose is to settle delegated contracts terminated for the convenience of the

government. DEF. CONTRACT MGMT. AGENCY (DCMA) TERMINATIONS CTR.,

guidebook.dcma.mil/25/Terminations_Customer_Pamplet.doc (last visited June 10,

2014).

7 The FAR pt. 49.113 provides that “[t]he cost principles and procedures in the

applicable subpart of Part 31 shall, subject to the general principles in 49.201-(a) [b]e

used in asserting, negotiating, or determining costs relevant to termination settlements

under contracts with other than educational institutions . . . .” 48 C.F.R. § 49.113(a)

(2014). Section 31.205-42 lists numerous cost principles peculiar to termination

situations, including initial costs and costs continuing after termination, among others.

Id. § 31.205-42.

8 48 C.F.R. § 12.403(a). Neither the mandated § 52.212-4(l) clause nor § 12.403

expressly recognizes the fair compensation principle or loss adjustment principle as

applicable to commercial item contract terminations. Id. § 52.212-4(l); id. § 12.403.