Terminations for Convenience & Federal Subcontracts
The federal government has the right to terminate almost any federal contract “for convenience,” that is, when the government deems termination to be in its best interest, regardless of how well the contractor has performed. Federal prime contractors, however, do not necessarily have the same right to terminate their subcontractors for convenience, unless the subcontract specifically allows it. In this article, we discuss what the FAR says regarding terminations for convenience and subcontracts.
1. No Flow-Down Requirement
Contrary to the expectations of many prime contractors, the FAR clauses implementing the government’s termination for convenience rights need not be flowed down to subcontractors. For example, FAR 52.249-2, which appears in many fixed-price contracts, is silent about its application to subcontractors.
Prime contractors often use so-called “incorporation by reference” clauses in their subcontracts. These clauses typically say that the subcontract includes all prime contract clauses that the FAR requires to be flowed down to subcontractors. Because the FAR’s termination for convenience clauses are not mandatory flow-downs, a standard incorporation by reference clause won’t give the prime contractor the right to terminate for convenience.
2. The FAR’s Recommendations
Instead of mandating that prime contractors include termination for convenience clauses in their subcontracts, the FAR, instead, strongly recommends it. FAR 49.108-2 says that prime contractors “should include termination clauses in their subcontracts for their protection.” Without this protection, a prime contractor could find itself in a tough position if the government terminates the prime contract but the prime contractor has no contractual right to terminate its subcontractor as a result.
The FAR goes beyond merely offering general advice. FAR 49.502 provides recommendations about specific FAR termination for convenience clauses that can be used in subcontracts, as well as modifications to those clauses that prime contractors should consider to make the clauses appropriate for the prime/subcontractor relationship.
3. A Potential Compromise
Unlike prime contractors, subcontractors often disfavor broad termination for convenience clauses, preferring the certainty of knowing that their subcontract will remain in place unless they default. When a subcontractor refuses to accept a broad termination for convenience clause, a common compromise is a limited termination for convenience clause. Such a clause often grants the prime contractor the right to terminate for convenience, but only if the government terminates the prime contract.
4. In Conclusion
Termination rights are an important part of any subcontract and prime contractors and subcontractors alike should carefully consider and negotiate those rights. As with any matter involving contractual negotiation and interpretation, primes and subcontractors should seek expert legal advice about their specific circumstances.
Disclaimer:
Nothing contained in this article is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This article is intended for educational and information purposes only. Although the author strives to present accurate information, the information provided in this article is not guaranteed to be accurate, complete, or up-to-date. Reading this article does not establish an attorney-client relationship with the author.
