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Terminations for convenience and the termination costs clause.

I. INTRODUCTION

You are a first or second assignment Assistant Staff Judge Advocate assigned to a base or even an air logistics center. When you arrive at the base your boss, the Staff Judge Advocate (SJA), tells you that you will be the new contracts attorney and you will advise the contracting squadron on all contract matters. Somewhere in the back of your mind, you can recall snippets of contract law from law school, from your bar review a couple of years ago or maybe even from your two weeks at the Army JAG School Contract Attorney's Course.

One bright, sunny day, you get a voice mail message from a civilian in the contracting squadron who identifies himself as the termination contracting officer for the Moab Industries (MI) termination. In the message, he first congratulates you on your new assignment. He then mentions that his ACO has sent notification to MI terminating the contract, he has conducted the post termination conference, and DCAA has finished auditing MI's termination settlement proposal. The audit has questioned a number of termination settlement costs, and the TCO needs a legal opinion about whether to disallow the questioned costs in the termination settlement. He also wants you to go with him to the termination settlement conference to advise him.

Not being a career contracts attorney, you wonder what he is talking about: "This doesn't sound like Contracts 101," you say. What is a termination contracting officer (TCO)? How, exactly does a termination work? What is DCAA? What are termination costs? What does the TCO mean by "questioned" and "disallow"?

This primer will provide guidance and be a reference for exactly this type of situation. It will briefly outline the termination for convenience process under FAR Part 49, explain who the participants are and what they do, and describe the process they are trying to follow as they finalize a convenience termination. Finally, it will analyze FAR 31.205-42, Termination Costs, and provide guidance on handling the types of costs specific to a termination settlement.

II. TERMINATION FOR CONVENIENCE

A. Generally

Termination for Convenience is a unique right reserved by the Government in its contracts, giving the Government the right to terminate a contract without cause at any time after award. (1) What the contractor receives in compensation for such a termination are various "costs" arising from the termination. (2) In virtually every case, the termination for convenience clause (3) entitles the contractor to recover costs incurred, profit on work done, and costs of preparing the termination proposal (4) no matter what type of contract it executed with the Government. (5)

The mechanics of getting to a termination for convenience are fairly straightforward. The Government, in the form of the requiring activity, determines that it no longer needs the goods or services required by the contract and formulates a reason why it is "in the Government's interest" to terminate the contract. (6) The requiring activity informs the Contracting Officer (CO) who has authority to terminate the contract. (7) At this point, the CO becomes a Termination Contracting Officer ("TCO") (8) or, if the command has sufficient contracting staff, (9) the CO transfers responsibility to a permanently appointed TCO. (10)

FAR Part 49 governs the TCO's actions and incorporates the FAR 52.249, Termination of Contracts, clauses into the contract by reference. (11) The TCO must first notify the contractor in writing that the Government is terminating the contract. (12) The writing must include the effective date of the termination, the extent of the termination, any special instructions, and any special steps the contractor should take to minimize the impact on personnel if the termination will result in a significant reduction in the contractor's work force. (13) Once notified, the contractor must stop work immediately, terminate all subcontracts, and begin preparing its termination settlement proposal. (14)

The TCO's primary objective in a termination for convenience is to negotiate with the contractor to reach a bilateral agreement settling the termination. (15) The TCO's settlement authority is not unlimited, however. The TCO must follow the cost principles associated with reimbursement of cost type contracts found in FAR Part 31, Contract Cost Principles and Procedures. (16)

B. Termination Steps

Termination procedures after notice to the contractor are set out by each command and are based upon the FAR's requirements. A good example of such procedures are those of the Defense Contract Management Agency ("DCMA"). (17) When a DCMA TCO receives the notice of a need to terminate a contract, the TCO first prepares and reviews the termination notification for completeness. (18) It is at this stage that the TCO might consider coming to the contracts attorney for assistance in reviewing the notice of termination. (19) After review, the TCO issues the termination notice and conducts the post termination conference. (20) At this conference, the TCO advises the contractor on the termination process (21) including the requirement for submission of the termination settlement proposal to the TCO. (22)

As alluded to above, a termination for convenience essentially treats a fixed-price contract as a cost-type contract, (23) so the TCO (and the contracts attorney) should be familiar with FAR Part 31 and cost-reimbursement contracting. To work towards settlement, the TCO will have to examine the termination settlement proposal to determine whether the costs asserted by the contractor are "allowable" (24) under the terminated contract. Allowability is a term of art (defined at FAR 31.201-2) composed of several factors: reasonableness, (25) allocability, (26) cost accounting standards, (27) the terms of the contract, (28) and the limitations of FAR subpart 31.201. (29)

Most of the time, the TCO is already familiar with Part 31 and, in the case of settlement proposals under $100,000,30 the TCO can and often will decide allowability. If the termination settlement proposal is over $100,000, then the TCO must forward the contractor's termination settlement proposal and all of the supporting accounting documentation to the Defense Contract Audit Agency (DCAA) for an audit. (31) The FAR considers the DCAA audit part of a TCO's field review of the contractor's settlement proposal. (32)

C. The DCAA

The DCAA is an agency of the Department of Defense that is separate from the individual military services. (33) The DCAA sets out its purpose on the first page of its website:

The Defense Contract Audit Agency is under the authority, direction, and control of the Under Secretary of Defense (Comptroller), and is responsible for performing all contract audits for the Department of Defense. It also provides accounting and financial advisory services regarding contracts and subcontracts to all DoD components involved in procurement and contract administration. (34)

In a termination, the DCAA's responsibility is to audit the contractor's termination settlement and help determine whether costs are allowable or unallowable (35) based upon the Cost Accounting Standards (CAS) and FAR Part 31. What the DCAA field auditor generates in response to a termination settlement audit request is called an "audit report" An audit report will have a number of sections detailing the factors considered and the accounting rules and assumptions applied. Since audits are merely advisory, (36) the DCAA auditors do not tell the TCO that certain costs are unallowable: they "question" the costs. Thus, having submitted a termination settlement proposal to DCAA for audit, the TCO should expect to receive back a multi-page report that concludes that certain of the contractor's proposed settlement costs are "questioned as being unallowable costs."

Practice pointer: DCAA is independent from the military services and, therefore, is not subject to service-specific pressure in auditing terminations. The DCAA's independence is generally a blessing, especially in situations where the command does not want to pay certain termination costs and the TCO feels they are allowable, or where the Government is using an auditor as an expert witness in a contract appeal. However, its independence can also be a hindrance when the TCO and DCAA auditor are at odds. When the TCO supports allowing a cost and the DCAA auditor thinks the TCO should disallow the cost, a conflict can create a situation in which the TCO asks the base-level contracts attorney to disprove the conclusions of the DCAA auditor's attorney on certain costs. (37)

D. Termination Settlement Negotiation

After the TCO has received all of the field review information including a DCAA audit report, the TCO will prepare a prenegotiation position. (38) This is often the point at which a TCO will call the contracts attorney and ask for an opinion. The TCO will want the base contracts attorney to review the TCO's position on allowable and unallowable costs and perhaps even attend the termination settlement negotiation. If the TCO requests assistance, the contracts attorney should carefully scrutinize any costs DCAA has questioned as unallowable. The contracts attorney should also realize that after the Government terminates its contract for convenience, a contractor is likely to believe that it is entitled to all of its costs--as opposed to just the allowable ones. When a contractor has this mindset, a disallowance by the TCO easily becomes contentious in the negotiation. Thus, it is important to fully understand DCAA's position in order to advise the TCO. (39) In addition, preparation for attending a termination settlement negotiation includes discussing with the TCO both the issues mentioned in the DCAA audit report and other foreseeable issues. It is possible that a contractor may have additional justifications for claimed costs and it may switch its argument mid-negotiation, hoping to catch the TCO unprepared. (40)

Once the termination settlement negotiation is complete, there are two possible outcomes: a bilateral agreement in which the parties have agreed on a termination settlement or a "settlement by determination." (41) A bilateral agreement on the termination settlement requires a Settlement Negotiation Memorandum (42) which the agency must review according to its procedures. (43) Neither the FAR nor DFARS requires legal review of the Settlement Negotiation Memorandum, but such review is advisable. (44)

If the termination negotiation proves to be fruitless, the TCO will issue a settlement by determination. (45) A settlement by determination not resulting from a contractor's failure to submit a termination settlement proposal is an appealable final decision for purposes of the Contract Disputes Act. (46) Thus, a contracts attorney should, before its issuance, review a settlement by determination for completeness (47) and fairness. (48)

E. The Contractor Cost System

The FAR determines the overall procedure for conducting a termination for convenience. Thus, the TCO and the TCO's contracts attorney will be dealing primarily with FAR Part 49, Termination of Contracts. When the issue narrows to which costs are allowable in a convenience termination settlement, FAR 49.113 directs the parties to use the cost principles of FAR Part In interpreting FAR Part 31, military contracts attorneys have to look at precedent from the Armed Services Board of Contract Appeals (ASBCA), the United States Court of Federal Claims (COFC), and the Court of Appeals for the Federal Circuit (CAFC). (50) The ASBCA's position is that a termination for convenience effectively converts a fixed-price type contract into cost-reimbursement type contract. The COFC takes the same position. (52)

Therefore, the most important part of the termination process is applying Parts 30 and 31 cost principles to different types of contractor costs regardless of whether the terminated contract was fixed price or cost reimbursement

FAR Parts 30, Cost Accounting Standards Administration, and 31, Contract Cost Principles and Procedures, contain a number of rules, including Cost Accounting Standards (CAS), that govern how cost reimbursement contracts are accounted for and managed. The CAS are general accounting principles promulgated by the CAS Board, (53) detailing how contractors must maintain an accounting system and account for costs incurred on Government contracts. The contract cost principles are the actual rules describing the determination, negotiation, or allowance of costs when a contract clause requires such accounting. (54) It is the CAS and FAR Part 31 that DCAA uses in auditing a termination settlement and writing an audit report. Those rules are interpreted for DCAA in their internal audit guidance document, the DCAA Contract Audit Manual (CAM) (55)

III. TERMINATION COSTS (FAR PART 31.205-42)

Having reviewed the basic procedures associated with convenience terminations and the agencies and personnel involved, let us revisit the original hypothetical about the Moab Industries termination. You go to visit the TCO to talk and have a look at the contract. Along with a copy of the proposed termination settlement, the TCO gives you a copy of the DCAA audit report for the case. After going through several pages of auditing assumptions made by the DCAA auditor, the audit concludes that the costs proposed by MI appear generally allowable with the exception of the following questioned costs:

1) FAR 31.205-42(a): The salvage cost (56) of titanium castings suitable for machining aircraft parts;

2) FAR 31.205-42(b): The cost of the remaining four-month maintenance contract on the 5-axis machine tool used on the contract;

3) FAR 31.205-42(c): Employee safety training specific to the 5-axis machine tool MI used that was conducted prior to the start date of the contract;

4) FAR 31.205-42(d): The cost of an overhead rail system designed to transport the contract items throughout the plant;

5) FAR 31.205-42(e): The cost of the remaining fourteen months of MI's lease on the building in which it is located;

6) FAR 31.205-42(f): The cost of relocating floor anchors (57) for the 5-axis machine tool;

7) FAR 31.205-42(g): Attorney's fees for the preparation of the contractor's settlement proposal;

8) FAR 31.205-42(h): The cost of terminating MI's electronics subcontractor for convenience.

After reading the Audit Report, you scratch your head and wonder whom you can get to take this from you. As far as you can tell, these questioned costs are all specific to convenience terminations and it looks like there is very little case law or authoritative guidance to follow. Then you remember that you read a primer on "Termination Costs" awhile back that may prove a useful starting point for your analysis.

Most of the FAR Part 31 rules deal with cost reimbursement contracts. Because the general law surrounding cost accounting for cost reimbursement contracts is well established, this primer will not go into detail about those rules. Instead, the focus here will be on FAR Part 31.205-42, Termination Costs, (58) examining each type of termination cost and giving guidance that a contracts attorney can use to determine whether a particular cost is allowable.

A. 31.205-42(a): Common Items (59)

As the name and the description suggest, common items are items the contractor can use in the "contractor's other work." (60) According to both federal court and BCA case law, the key parts of FAR 3 1.205-42(a) seem to be "reasonably usable on the contractor's other work," (61) and "could not be retained at cost without sustaining a loss." (62)

1. Reasonably Usable on the Contractor's Other Work

In order to determine what is reasonably usable on the contractor's other work, the CAM recommends looking at the contractor's plans and orders for current or scheduled production and for current purchases of common items. It also recommends looking at the contractor's entire stock and the ordering record of the item to see if the same item is being used for other contracts. (63) According to the ASB CA, a reasonably usable determination is a subjective determination from the contractor's perspective dependent on the particular factual situation. (64.) For instance, in a contract to supply clocks to the Government, the cost of clock bottom set rods procured for the terminated contract and used on another contract were considered reasonably usable, while the terminated contract's 24-inch power cords were not because the current model clock designs used 36-inch cords. (65)

More often, "reasonably usable on the contractor's other work" applies to items that are basic commodities used to perform a contract (e.g., the sand, cement, gravel, paint thinner, reflector paint and paint used on a roadway repaving contract. (66) Common items can be finished items such as uniforms and radios, (67) shelves, (68) or office furniture. (69) Common items can also be large, expensive items that were either manufactured, (70) or leased by the contractor. (71) For large, expensive items, one test used to determine "reasonably usable in the contractor's other business is whether the contractor could sell, lease or operate the item when an opportunity arose. (72) In at least one other case, a large expensive item was not considered a common item because it could not be sold or leased ("reasonably used") to defray the contractor's expenses after termination. (73)

2. Could Not be Retained at Cost Without Sustaining a Loss

The second part of an analysis of whether items claimed by a contractor are, in fact, common ones examines whether the contractor could retain the items at cost without sustaining a loss. This portion of the analysis is not always considered in the Board opinions, but when the Boards have considered it, they have looked at whether the contractor, in fact, had other work on which it could use the claimed common items. (74) This analysis appears to be a snapshot of the contractor at the time, not necessarily looking at whether, in the future, the contractor would have contracts on which it could use the common items. In most cases, "retained at cost without sustaining a loss" means that a common item will not cost the contractor something to retain after the termination. For instace, if the common item in question is a load of steel that the contractor can immediately use on other contracts without having to pay any storage fees, it may be a noncompensable common item. However, if the contractor takes a loss o n reuse or incurs costs for storage of the steel, then it cannot be "retained at cost without sustaining a loss" and the contractor may be able to claim the costs as termination costs.

In the case of usable "items," (e.g., buses), the courts and boards have established a different definition of "retained at cost without sustaining a loss": even though certain contractor items continue to be used by the contractor, if the allowable costs on the items (such as lease expense) are less than the revenue generated by the other use (such as rental fees from other companies), they are "retained at cost without sustaining a loss." (75) For items that have to be scrapped, the "cost" of the items is the depreciated cost value, less the salvage value. (76) Diminution of profit is not a "loss" for common items that are reused by a contractor. (77)

3. Hypothetical Analysis

Let us return to the hypothetical about the titanium castings. If the contractor has other contracts (Government or commercial) on which it can use the castings, then that stock would likely be considered common items and not be reimbursable through the termination settlement. However, if the terminated contract was the contractor's only work and the termination put it out of business, then the castings would not be common items and would be reimbursable. How much would the contractor get? Answer: purchase cost (or depreciated value, if the items depreciated) less salvage value.

B. 31.205-42(b): Costs Continuing After Termination (78)

This category of costs represents those costs a contractor has incurred or agreed to pay in performance of the contract that could not necessarily be stopped immediately upon notification that the Government had terminated the contract. "Continuing costs," as they are called, are often misunderstood and contractors consider the continuing costs provision a catchall provision for costs that do not seem to fit in other categories of termination costs. (79) As such, FAR 31.205-42(b) costs are frequently challenged by the DCAA auditors and litigated by contractors. (80)

At the most fundamental level, continuing costs are those a contractor incurs as a result of performing terminated work or that flow from termination. (81) The DCAA's focus in evaluating allowability of continuing costs is on the termination date: did the contractor continue to incur the claimed cost after the effective date of the termination? (82) The CAM states "reasonable costs associated with termination activities are allowable," for instance, the salary or wage costs of contract personnel at a remote site, or of personnel in transit that have to be diverted to other non-terminated work, can be allowable. (83) The CAM also provides the example that costs involving items that are in the midst of a process (such as electroplating or heat-treatment) may be allowable where stopping the process would make these items significantly less valuable to the Government post-termination. (84)

Courts and boards consider the continuing costs provision a "vehicle by which certain post-termination costs may be recovered absent specific authority therefore... [which] furnishes a means by which the Government can provide fair compensation on a case by case basis within the regulatory scheme." (85) Thus, they have not necessarily developed a specific test to apply to continuing costs. Instead, the courts and boards appear to look at the fairness and facts of each case individually. Nonetheless, the cases can be divided into three basic types: personnel, facilities, and unabsorbed overhead.

1. Personnel Cases

In performing a contract, there are invariably contractor personnel the contractor hired for that contract or diverted from another Government or commercial contract to work on the terminated contract. If a contractor lays an employee off as a result of the contract termination, the contractor may charge severance pay as continuing costs. (86) However, the contractor must be able to prove that the costs are applicable to specific employees or the severance pay will not be allowed. (87) If the contractor did not lay off an employee but the employee was validly working on the termination effort, his or her salary will be allowable. (88) The source of the obligation to pay an employee does not seem to matter: it can be a contractual obligation or an obligation required by local law. (89) Finally, continuing costs do not have to be direct payments of salary or severance pay, they can also be reimbursement to the employee for incidental expenses such as relocation. (90) The bottom line on continuing costs for pers onnel is that they must have been involved in the termination or the obligation to pay them must have arisen from a contractual or legal obligation and be properly documented. Otherwise, continuing costs for personnel will not be allowable.

2. Facilities Cases

In contracts involving the delivery of goods or services, contractors often seek to use FAR 31.205-42(b) to recover the continuing costs of contractor-leased facilities or machinery and equipment. Because of the fairly broad definition of continuing costs, termination costs that are not recoverable under FAR 31.205-42(d), Loss of Useful Value, and FAR 31.205-42(e), Rental Costs, may be recoverable as continuing costs. An example of a cost that is recoverable as a continuing cost is depreciation. For example, the Department of Transportation Board of Contract Appeals (DOTBCA) has held that, following the convenience termination of an aircraft use requirements contract, the contractor was entitled to depreciation, maintenance costs, the cost of facilities capital, general and administrative expenses and advertising between the termination date and the date the contract would have ended. (91) The DOTBCA supported this finding by reasoning that the costs could not have reasonably been discontinued immediately des pite the company's best efforts to mitigate. (92)

Mitigation by ceasing to incur costs appears to be a key factor to allowability of continuing costs, because where a contractor fails to make reasonable efforts to discontinue incurring costs related to the terminated contract, the BCAs refuse to allow the costs. In a recent case, the ASBCA sustained disallowance of four months' post-termination costs for office rental, land rental, labor, and excavator rental after the contractor failed to make efforts to discontinue the costs.(93)

3. Unabsorbed Overhead

The sure way to have a cost claim disallowed is to call it, or have a BCA call it, continuing overhead or unabsorbed overhead.(94) Boards have consistently sustained disallowance of continuing cost claims that are for unabsorbed overhead for a period past the termination date.(95) Even where the contractor has argued that an improper convenience termination prevented it from entering into any contracts by which to absorb its indirect costs, the Boards still have not allowed unabsorbed overhead.(96) The only relief has been for a contractor to claim that some costs, such as rental, utility and insurance, could not reasonably have been shut off at the time a termination rendered the plant completely useless.(97)

4. Hypothetical Analysis

Looking at the hypothetical claimed cost for the remaining four-month maintenance contract on the 5-axis machine tool used on the contract, a contracts attorney must consider whether the cost had to be continued past termination. If the contractor could have stopped incurring the cost at the time of contract termination, then a claim for continuing costs for maintenance will not be allowable. By contrast, if the cost was necessary to maintain the value of the machine tool, was not transferable or terminable by the contractor, and the contractor could not otherwise have mitigated, then the cost is likely allowable.

C. 31.205-42(c): Initial Costs (98)

At its most fundamental level, FAR 31.205-42(c) allows a terminated contractor to recover the early-on, preparatory costs it expended in initiating performance that it will not recover entirely because the termination prevented it from manufacturing or supplying the full quantity of contract items. The need to compensate for initial costs is best shown by an example:

The Government awards a contract to Aim High, Inc. for 500 widgets at $1000 each ($500,000 for the whole contract). Widgets' cost per item to produce the entire contract amount is $800 per unit for a total profit of $100,000. Assume the total cost to set up machinery, train the workers, and let them do a number of practice runs to learn how to build the item quickly is $50,000. When the Government terminates the contract at 300 widgets, the contractor's profit would only be $40,000, not the $60,000 that you would expect from a termination of the contract at 300 units. The balance sheet looks something like this:
Full Performance

Contract Payment

Units Price Total

500 1000 500,000

Manufacturing Cost (with Initial Costs)

Units Price Total

500 700 [350,000]
Initial costs [50,000]

Cost Subtotal [400,0001

Profit 100,000
Profit per unit 200
Profit Rate (20%)

Termination at 300 Units

Contract Payment

Units Price Total

300 1000 300,000

Manufacturing Cost (with Initial Costs)

Units Price Total

300 700 [210,000]
Initial Costs [50,000]

Cost Subtotal [260,000]

Profit 40,000
Profit per unit 133
Profit Rate (13%)


Clearly the inequity is that the startup costs, if not covered by the termination, would cause the contractor profit margin to be lower because of the termination. Thus, FAR 31.205-42(c) makes these costs allowable. While allowability of these costs may be clear, the contractor's and TCO's conflict is over how to calculate the initial costs.

The DCAA states that contractors "rarely segregate initial costs in their formal records of books of account..." (99) Thus, the CAM recommends looking at high unit costs at the outset of the contract. (100) Those high unit costs can be found in informal records, cost reports, production data and other documents. (101) The CAM also says that an auditor can determine initial costs from the rate of production loss at the outset of the contract as reflected in the scrap reports, efficiency reports and spoilage tickets. (102) Once an auditor identifies costs, the hard part is assigning the initial costs to the terminated and nonterminated parts of the contract. (103) Needless to say, this part of determining initial costs is very evidence intensive and a contracts attorney without an accounting background should defer to the DCAA auditor's position if well supported.

When initial costs are hard to calculate because a contractor has not kept detailed records of costs incurred in training the workforce, the BCAs have consistently used a learning curve analysis. (104) The learning curve analysis involves calculating an amount for learning costs by applying a mathematical formula to the labor costs booked during performance. (105) The only twist to learning curve cases appears to be this: where the contractor recovers initial costs associated with learning on one terminated contract, the Government is not entitled to a reduction in unit prices on a subsequent contract for the same items that benefited from the learning. (106) A smart contracts attorney will often understand the process, but leave the calculations to DCAA, remembering that because the calculation uses labor costs over the course of performance, the initial cost calculation will appear to involve labor costs up to the date of termination. (107)

An issue frequently encountered in initial cost claims is first article costs. A first article is a first item required by the Government in a contract for testing to confirm that the contractor can produce the item in accordance with contract requirements. (108) The first article issue comes into play when the contractor submits a first article, but the Government terminates the contract before any further items are manufactured. According to the Boards, the termination costs associated with submission of first articles are allowable as initial costs if the first articles pass the testing and the Government accepts them. (109)

Further, costs attributable to contract quantities produced before first article acceptance may also be allowable. (110)

Beyond the costs of learning and first articles, contractors have recovered initial costs, unabsorbed training costs, (111) phone costs associated with calling overseas suppliers, (112) the cost of being put on a buyers' waiting list, (113) and the cost of painting a bus, delivering the bus and installing new tires. (114) Regarding when the initial costs can commence, the factors appear to be the type of contract and the contractor's intent. One BCA has allowed a conscientious contractor's initial costs incurred prior to award of the contract, (115) while another BCA has disallowed initial costs incurred by a contractor while awaiting a work order. (116)

Hypothetical Analysis

So is employee safety training specific to the MI's 5-axis machine tool conducted prior to the start date of the contract allowable? Assuming that the first article was approved prior to the termination, and assuming that there are no other contracts that the employees worked on, the costs of the safety training would be allowable as initial costs incurred in preparation for performing the contract. If the first article was not approved, or the contractor had not properly segregated the costs, then they might not be allowable.

D. 31.205-42(d): Loss of Useful Value

Loss of useful value, (117) like continuing costs, supra, is often a hotly contested subcategory of termination costs. (118) The language of the rule is fairly clear, but one of the key terms, "special machinery and equipment," is left undefined by the FAR. (119) The lack of definition leaves that phrase wide open to interpretation by contractors seeking to recover the costs of equipment purchased for a later-terminated contract.

On its face, this loss of useful value provision allows reimbursement for costs of special tooling (ST) (120) and special machinery and equipment (SME) that was purchased or modified for the specific, terminated contract. Simplifying and rephrasing FAR 31.205-42(d), the ST or SME must: 1) not have been reasonably usable on the contractor's other work; 2) have been given to the Government (through title transfer); and, 3) if the ST or SME was used for non-terminated contracts, have only the proportional lost value that relates to the terminated contract claimed. This provision has the greatest effect on terminated fixed-price contracts where the contractor has factored the cost of ST and SME into the unit prices through the end of the production. When the Government terminates the contract, this provision allows the contractor to recoup the ST and SME costs that it could not recoup through the prices on the full production run.

The CAM recognizes that loss of useful value determinations are often challenged, noting that they are "usually a technical matter." (121) It then suggests that a legal opinion as to the intent of the parties regarding the SME may be necessary. (122) The manual also tells DCAA auditors not to consider machinery or equipment SME when it is ordinary equipment in the contractor's industry, it is similar to other facilities owned by a contractor, or it is usable on the contractor's other work without loss. (123)

What is not considered by the FAR, but is clear from the case law, is that the intent of the parties can be a key factor in determining the allowability of SME. If the parties intended the contractor to purchase the SME to perform the contract, the contractor likely can recover the cost of the lost value upon termination. (124) If the parties did not intend the contractor to purchase a particular type of equipment, the equipment will likely not be SME unless it truly is "special" in the sense that it cannot be used in the contractor's other work and has no use to any other contractors in the industry.

1. Standard Analysis Cases

The underlying principle for all situations where a convenience termination deprives an item of its useful life is that the Government should pay the full amount otherwise due for any items whose useful life becomes zero upon termination. (125) "Useful life" appears to be contractor-specific, because equipment that could not be used by one contractor on other work but could be used by other contractors has been considered SME. (126) Examples of items usable by others but allowed as SME are washing machines, (127) machine tools, (128) and a wire-braiding machine. (129) Special Machinery and Equipment status has not generally been extended to non-specialized types of machinery and equipment because it is reasonably usable after termination of the contract. In particular, the BCAs consistently refuse to find that 130 and furniture (131) qualify as SME. (132)

The distinction between many of these cases is hard to draw. The most consistent analysis appears to be that the Boards look at the standard factors of FAR 31.205-42(d): 1) reasonably capable of use in other work; 2) title offered to the Government; 3) cost proportional to use on terminated contract; and then, if the equipment is arguably SME, the Boards look at the reasonableness of the CO's decision. Where the CO's decision is very unfair, the Board is more likely to find the loss of useful value allowable. (133)

2. Intent of the Parties

The most frequently cited case on loss of useful value is American Electric. (134) The case represents the broadest expansion of what FAR 31.205-42(d) allows to be compensated. In American Electric, the Government issued a letter contract to American Electric, Inc. to develop a munitions manufacturing capability quickly. The contractor conducted a thorough search for facilities it could use, but having found none, determined that it would have to purchase land and construct facilities. The facilities it constructed were special facilities for high-risk smelting and grinding of explosive materials, so the contractor had to incorporate many safety features into the design of the buildings at extra cost. All of the manufacturing equipment was custom designed and built for this contract and the contractor discussed the proposed actions regarding manufacturing equipment and facilities at length with the contracting officer. Upon appeal of disallowance of the costs, the ASBCA applied a straightforward analysis of the loss of useful value factors. However, it held that loss of useful value applied to the special machinery and equipment, as well as the buildings and other facilities. Of course, buildings and other facilities are well beyond the broadest definition of SME. However, the ASBCA seemed to imply that the intent of the parties regarding their necessity justified treating them as SME. (135) In this way, FAR 31.205-42(d) seems to have an added factor of "intent" that contractors have tried to apply. (136)

3. Hypothetical Analysis

So how does a contracts attorney analyze the allowability of the cost of an overhead rail system designed to transport the contract items throughout the plant? First, the contracting officer could argue that it is not special machinery and equipment. The system as purchased was an off-the-shelf modular system that bolted together before being installed in the ceiling of the plant. As such, it did not appear to be "special machinery and equipment" as the cases describe the term; it was not an item peculiar to one contract that the contractor could not remove and reuse on the contractor's other work.

Assuming it is special machinery, the next issue is title. Did the contractor offer title to the Government? Here, the contractor did not offer title, which militates against finding the special machinery allowable.

Next, did the contractor appropriately apportion the loss of useful value amount sought to the proportionate amount the equipment was used for the terminated contract? Here, the contractor only used the equipment on the terminated contract, so apportionment to the other work of the contractor was not an issue.

Finally, in accordance with American Electric, what was the intent of the parties regarding this equipment? Did they agree that this equipment was going to be necessary to perform the contract? Unlike the situation in American Electric, the Government here did not agree with the contractor's election to create this custom item transport system. In fact, the Government did all it could at contract inception to try to get the contractor to use existing facilities and capabilities to perform the contract, rather than purchasing a lot of expensive equipment. Based on the foregoing, a BCA would likely disallow this termination settlement claim for "special machinery and equipment."

E. 31.205-42(e): Rental Costs under Unexpired Leases

Rental costs (137) under unexpired leases is one provision of termination costs that is seldom challenged. (138) In dealing with these costs, the CAM recommends looking at the length of the lease in relation to the anticipated contract period and whether the lease expense is comparable to the expenses at other facilities in the area. It notes that where a leased facility supports several contracts, the portion allocable to the terminated contract will be allowable if the facility was leased in order to perform the now-terminated contract. If the terminated contract was performed in a facility already leased for other contracts, the lease cost will not be allowable. (139)

The contract appeals involving disallowance of rental costs under unexpired leases mostly revolve around whether the lease expense was for a reasonable period of time after the termination and whether the contractor made efforts to sublet or otherwise mitigate the lease expense. For instance, in Southland Manufacturing Corp., (140) the contractor was allowed to recover lease costs and incentive rental credits from the wrongful default termination in December 1964 through May 1967 because it had made efforts to sublease the premises and was unable to execute a lease for the property. (141)

It is unclear whether the absolute limit of rental costs under unexpired leases is necessarily the contract completion date. The United States Court of Claims (now the COFC) has held that the allowable period may extend past the contract completion date if it is reasonable. (142) However, the DOTBCA has more recently held that lease costs for two months past the termination date were unallowable where the contractor had been unreasonable in executing a lease that extended two years beyond the contract performance date. (143) Further, in Qualex, (144) the ASBCA split the ruling on rental costs of unexpired leases. On one hand it supported disallowing reimbursement for unexpired lease costs past the termination because the contractor bore the risk of the Government not continuing the contract past the initial performance period. On the other, it allowed reimbursement for the long-lease discount on lease costs that inured to the Government's benefit as a result of the contractor's five-year lease. (145)

All that is clear from the few cases on this issue is that "... a reasonable period of time is a question of fact and is based upon the reasonable efforts of the contractor to reduce the lease costs." (146) Lest one think that lease costs only apply to real property or facilities leases, that is not the case. Rental costs for unexpired leases have been allowed for computer hardware (147) and have been argued to apply to chartered tugboats. (148)

Hypothetical Analysis

What about the cost of the remaining fourteen months of MI's lease on the building in which it is located? If the lease extends only out to the projected contract completion date and the contractor cannot get out of the lease, despite its best efforts, then the lease costs are likely allowable. If the contract was scheduled to be completed twelve months after the termination date, then under TDC Management Corporation and Qualex, a contracts attorney should argue for the contracting officer to disallow the costs because the contractor should not have counted on continuing work from the Government. The only further question, under Qualex, is whether the contractor would be entitled to recover the amount of any long-lease discounts that might have inured to the Government's benefit.

F. 31.205-42(f): Alterations of Leased Property (149)

This section was new to the FAR when it was published in 1983. (150) This subsection permits recovery on termination of costs incurred by a contractor to prepare, improve or alter leased facilities used for the performance of a terminated contract. The CAM deals with alterations to leased property in subparagraph 12-305.5, Rental Costs Under Unexpired Leases. (151) Subparagraph 12-305.5(b) says that cost of leased property alterations is allowable and directs auditors to "[a]djust unexpired lease costs by any residual value of the lease due to termination, assignment or settlement of the lease agreement." (152)

There is very little case law on this issue. The only cases clearly addressing this issue are Southland Manufacturing Corporation, (153) and Energy Compression Research Corporation. (154) In Southland, the contractor claimed the depreciated value of leasehold improvements that consisted of landscaping, partitions and electrical work. The ASBCA held that recovery under Armed Services Procurement Regulation (ASPR) 15-205.42(e) was not allowable; however, the ASBCA did ultimately allow recovery because the amount claimed was reasonable, allocable and within general accounting principles and practices appropriate to the circumstances. (155) In Energy Compression, the contractor claimed the costs of improving property that they had leased. The ASBCA held, however, that since they had leased the property in anticipation of a Government contract and not as a result of a Government contract, the leasehold improvements were not allowable. (156)

Hypothetical Analysis

Based upon the rule and the above cases, it appears that the cost of relocating floor anchors for the 5-axis machine tool would be allowable because it was an improvement to the leased facilities that was required for performance of the contract. However, if the work had been done in anticipation of a government contract, the costs may not be allowable.

G. 31.205-42(g): Settlement Expenses

Settlement expenses (157) are those expenses associated with the labor costs and material costs that arise from personnel working on the contract termination settlement effort (as opposed to the personnel completing the last few uncompleted items the contractor may have been directed to complete). Direct costs for personnel employed by the terminated contractor (such as the property managers, accountants, and clerical staff) and personnel hired as outside consultants (attorneys, accountants, evaluators) are generally allowable. (158) Indirect costs such as payroll taxes, fringe benefits, occupancy costs, and immediate supervision costs are also allowable. (159)

In auditing settlement expenses, DCAA looks at whether the contractor established a separate accounting code for work performed on the termination settlement. (160) An auditor will look for the costs of direct labor and materials expended and an amount for related overhead costs. (161) Much of the auditor's guidance requires him or her to second-guess the contractor and apply common sense. The auditor must determine whether:

-The work done corresponds to the pay level of the employee doing the work; (162)

-The amount of time spent corresponds to the time required for the termination activities; (163)

-The cost of professional accounting services is reasonable; (164)

-The cost of legal expenses is reasonable; (165) and

-The cost of storage charged is reasonable. (166)

The CAM also advises that when a settlement proposal becomes a Contract Disputes Act claim, the legal and consultants' costs incurred in the prosecution of the claim are unallowable. (167) The case law indicates a number of recurring issues that arise when considering 31.205(g) settlement expenses.

These issues can be grouped into two categories: legal fees and salaried employees.

1. Legal Fees

As noted above, the DCAA looks for proper documentation of personnel working, hours worked and some idea of what the personnel did. If a contractor makes a claim for legal fees, but there is insufficient documentation of the exact or the approximate amount of time devoted to the termination settlement claim, legal fees will not be allowable. (168) When legal fees claimed are for work on a claim against the Government, the legal fees are also not allowable. (169) Claims for legal and accounting fees incurred in termination settlement efforts are generally allowable, but to the extent they were expended in preparation of claims that are not compensable, such as claims for anticipatory profits, they are unallowable. (170) Finally, attorneys fees are not allowable when they are based upon a contingency fee arrangement. (171) However, in a situation where legal fees appear both standard and contingent, if the parties agreed to an hourly and daily charge that is reasonable in amount and not contingent upon reimburs ement by the Government, then the legal fees will be allowable. (172)

2. Salaried Employees

The boards and courts generally do not question the rates paid by a contractor for personnel that work on a termination settlement, including regular contractor personnel. However, they do question additional amounts paid to salaried employees. In particular, there must be a showing by the contractor that a salaried employee's work on a termination was over and above the work the employee did for his salary. (173) Perhaps by virtue of their positions of authority, company presidents' rates of compensation seem to get very careful scrutiny by the boards. (174)

In addition to the above, recently the boards and courts have journeyed into new areas of settlement expenses. In McDonnell Douglas Corp. v. United States (175) the COFC looked at whether retention bonuses could be recovered under FAR 31.205-42(g) and agreed with the contractor that such bonuses benefited both the contractor and the Government and the Government should pay them. In Energy Compression, (176) the Board sustained denial of a claim for a consultant whose services consisted of managing the work of the attorneys in the settlement of the vendor's claims.

3. Hypothetical Analysis

So what about the attorney's fees for the preparation of the original bid and the contractor's settlement proposal? Assuming that the fees are not on a contingency fee basis and the contractor has properly documented the time spent and work done, they will likely be allowable. If the contractor claims fees for any work done on the contract appeal then those fees will not be allowable.

H. 31.205-42(h) Subcontractor Claims

Far provision 31.205-42(h), Subcontractor Claims, (177) makes allowable virtually all of the termination costs a subcontractor bills to a contractor. (178)

The key element to the allowability of subcontractor settlements is that throughout the process the Government seeks to maintain privity with the contractor and avoid privity with the subcontractors. Thus, the FAR intends the subcontract settlement process to permit the contractor to reach settlement with its subcontractors and then submit a claim for reimbursement of the settlement amounts it paid the subcontractors. Only in rare situations can the Government negotiate settlement directly with subcontractors, (179) and even then, "[d]irect settlements with subcontractors are not encouraged." (180)

The CAM advises that subcontractor settlements generally follow the principles of prime contract settlements. The subcontractor's rights are against the prime, not against the Government. (181) Auditors are told to look specifically at settlements that were made without contracting officer approval or ratification using the authority granted under FAR 49.108-4. (182)

The boards and courts review allowability of subcontract settlements for reasonableness and prudence. (183) This means the board or court will look for the settlement to be a result of "arm's length" bargaining between the contractor and the subcontractor. (184) If the settlement appears to be the result of collusion, then the ASBCA will disallow all or a portion of the settlement. (185) Once the contractor and subcontractor reach a settlement, the amounts claimed are generally allowable. (186) As the COFC has recently stated, "[w]here sufficient evidence of allowability, allocability and reasonableness of costs are found, however, the court must sustain those [subcontractor] costs as incurred." (187)

Is the cost of terminating Ml's electronics subcontractor for convenience allowable? Assuming the parties arrived at a subcontract settlement through arm's length bargaining, the costs will be allowable. If, for instance, the electronics subcontractor is a wholly owned subsidiary of MI and several of the MI board are on the subcontractor's board, then there may be cause for the auditor and the TCO to question the settlement costs after a careful review of the settlement documents.

IV. CONCLUSION

As mentioned above, this primer helps to enlighten the average contracts attorney about what goes on in a convenience termination, who the players are, and where to find answers to the questions that typically arise. The primer also gives the contracts attorney a feel for how to analyze one of the most confusing areas that can come up in a termination settlement negotiation: the allowability of termination costs under FAR 31.205-42. Thus informed, it is up to the contracts attorney to work with the TCO and the DCAA Auditor to arrive at the right decision on the termination costs.

(1.) JOHN CIBINIC, JR. & RALPH C. NASH, JR., ADMINISTRATION OF GOVERNMENT CONTRACTS, 1073 (3d ed. 1992).

(2.) GENERAL SERVS. ADMIN. ET AL., FEDERAL ACQUISITION REGULATION 31.001 (June 1997) [hereinafter FAR]. There are many different types of costs, defined in FAR 31.001, Definitions. Id. The easiest way to describe contract costs is that they are the expenses that a contractor pays to manufacture goods or deliver services. This includes everything from the cost of the raw materials, such as steel bars, to the costs associated with secretarial services supporting the president of the company.

(3.) FAR, supra note 2, at 52.249-1 through 52.249-7 contains seven different versions of the Termination for Convenience clause that can be included by reference in a Government contract. Each clause is tailored to a different type of contract from Fixed-Price type contract to Fixed-Price Architect-Engineer type. Id. at 52.249-1 through -7.

(4.) CIBINIC & NASH, supra note 1, at 1073.

(5.) The distinction being that for Firm Fixed Price contracts, a contractor would normally recover all of the costs incurred and profit in the unit price of the items purchased when they are completed. For cost reimbursement type contracts the contractor would already be entitled to costs incurred and profit on work done according to FAR Part 31.

(6.) FAR, supra note 2, at 49.101(b).

(7.) Id. at 49.101(a).

(8.) Id. at 49.001. The FAR defines Termination Contracting Officer as "a contracting officer who is settling terminated contracts." Id.

(9.) In the Air Force, some large bases and Air Logistics Centers (Wright-Patterson AFB, Hill AFB, Tinker AFB, Warner-Robins AFB) have permanently appointed TCOs. For instance, U.S. DEP'T OF THE AIR FORCE, AIR FORCE MATERIEL COMMAND FEDERAL ACQUISITION REG. SUPP. 5349.101 (2000)[hereinafter AFMCFARS] available at http://farsite.hill.af.mil/vfafmca.htm (last visited July 19, 2002), requires each Air Logistics Center (ALC) Senior Center Contracting Officer to appoint at least one TCO for the ALC. Id. When the author was assigned to Defense Contract Management Agency, Defense Contract Management Command, Van Nuys, California, the Van Nuys area staff included five full-time TCOs.

(10.) There are no formal requirements for the transfer of terminated contracts from a CO to a TCO in the FAR. In the author's experience, each command formulates its own criteria for the transfer of terminated contracts to TCOs.

(11.) FAR 52.249 termination clauses are mandatory clauses for the contract types to which they apply. FAR, supra note 2, at 52.301. See the solicitation provisions and contract clauses (Matrix) at FAR 52.301 for a quick reference for which clause is mandatory for each different type of contract. According to W. NOEL KEYES, GOVERNMENT CONTRACTS UNDER THE FEDERAL ACQUISITION REGULATION, 40-42 (2d Ed. 1997), the Christian Doctrine, (G.L. Christian and Assocs. v. United States, 160 Ct. Cl. 1, 60-61, 312 F.2d 418 (1963), cert. denied, 375 U.S. 954 (1963)) reads a termination clause into a government contract that is required by regulation by operation of law, even if the clause was not originally included in the contract. Id.

(12.) FAR, supra note 2, at 49.102(a).

(13.) Id. at 49.102(a)(l-5).

(14.) Id. at 49.104(a-i).

(15.) Id. at 49.201(b).

(16.) Id. at 49.113.

(17.) U.S. DEP'T OF DEFENSE, DEFENSE CONTRACT MANAGEMENT AGENCY DIRECTIVE 1, Section 10.1 (Aug. 1999)[hereinafter ONEBOOK] available at http://www.dcma.mil/onebook/10.0/10.1/Termination.htm (last visited July 19, 2002). The ONEBOOK is DCMA's regulatory guidebook for its Administrative Contracting Officers. It contains step-by-step processes for nearly all aspects of contract administration including terminations for convenience. Id.

(18.) FAR, supra note 2, at 49.102(a); ONEBOOK, supra note 17, at 4.6.1.2.

(19.) Telephone Interviews with Mr. Melvin Moe, Termination Contracting Officer, Defense Contract Management Agency, Defense Contract Management Command, Van Nuys, California (Jan 22, 2001 and Feb. 7, 2001)(notes on file with author).

(20.) ONEBOOK, supra note 17, [section] 10.1, at para.4.6.3.

(21.) Id. (implementing FAR, supra note 2, at 49.105(a)(1)).

(22.) FAR, supra note 2, at 49.104(h).

(23.) Best Foam Fabricators, Inc. v. United States, 38 Fed. Cl. 627, 638 (1997).

(24.) Allowable cost: "A cost that the Government will permit to be recovered (reimbursed by the Government) for the performance of a contract." RALPH C. NASH, JR. & STEVEN L. SCHOONER, THE GOVERNMENT CONTRACTS REFERENCE BOOK 19(1992).

(25.) "A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business." FAR, supra note 2, at 31.201-3(a). This means that if a company spent money to pay to advertise on a bus bench, the cost would be reasonable if, for instance, the company's competitors also advertise on bus benches and that kind of advertising is necessary to bring in business that keeps the company going between Government contracts. Such a cost would fall within the definition of reasonable.

(26.) FAR, supra note 2, at 31.201-4. "A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship." Id. This means that a cost is an amount spent to further the performance of a particular contract. For instance, the cost of a tank of gasoline in a company truck is allocable if that gas was burned to run errands exclusively for the contract to which the cost was "allocated."

(27.) FAR, supra note 2, at 31.201-2(a)(3). The Cost Accounting Standards can also be thought of as, "A series of accounting standards originally issued by the Cost Accounting Standards Board to achieve uniformity and consistency in measuring, assigning, and allocating costs to contracts with the Federal Government." NASH & SCHOONER, supra note 24, at 105.

(28.) FAR, supra note 2, at 31.201-2(a)(4).

(29.) Id. at 31.201-2(a)(5).

(30.) Id. at 49.107.

(31.) Id.

(32.) ONEBOOK, supra note 17, [section] 10.1, at para. 4.6.8.

(33.) See generally, Defense Contract Audit Agency, Internet site, at http://www.dcaa.mil (last visited July 19, 2002) [hereinafter DCAA Website].

(34.) Id.

(35.) The FAR defines unallowable cost as, "... any cost which, under the provisions of any pertinent law, regulation, or contract, cannot be included in prices, cost-reimbursements, or settlements under a Government contract to which it is allocable." FAR, supra note 2, at 31.001. NASH & SCHOONER, supra note 24, at 407, defines unallowable cost as "A cost incurred by a contractor that is not chargeable to Government contracts."

(36.) See DCAA Website, supra note 33. Though the DCAA maintains that audits are merely advisory, in the author's experience, TCOs consider the DCAA audit very convincing and rarely depart from their auditor's recommendations.

(37.) Such a situation can damage the Government's case in a contract appeal, especially when the conflicting legal opinions look like the agency is arguing with itself. To prevent the internal conflict from surfacing in discovery, always make sure that attorney work product and attorney-client documents are properly labeled and segregated from the discoverable litigation documents. It is also a good idea to remind the DCAA attorney to do the same.

(38.) ONEBOOK, supra note 17, [ss] 10.1, at para. 4.6.9.

(39.) Advising the TCO also requires the application of business sense in addition to legal acumen. Often, a position taken by the TCO may be legally tenable, but the attorney should be sure to consider whether advising the TCO to take such a position is in the best interests of the Government overall.

(40.) This happened to the author in a termination settlement negotiation in 1996. In the termination of a contract for chemical storage tanks, the contractor first proposed to try to recover some of its personnel costs in overhead costs (basically the cost of running the main office). When the TCO said that the contractor was not properly allocating (assigning to the correct contract) the costs, the contractor switched its argument to claiming those same costs as "unabsorbed overhead." Luckily, the TCO and attorney anticipated this argument and were prepared to deal with the issue of unabsorbed overhead. Despite the preparation, the settlement negotiation with this company still encompassed several meetings over the course of a year.

(41.) Settlement by determination is a unilateral modification stating that the TCO is settling the termination for the amount the TCO has decided properly compensates the contractor for the termination.

(42.) FAR, supra note 2, at 49.110. In the Department of Defense, the Settlement Negotiation Memorandum should be completed on a specific form prescribed in U.S. DEP'T OF DEFENSE, DEFENSE FEDERAL ACQUISITION REG. SUPP. 249.110 (1998)[hereinafter DFARS]; available at http://farsite.hill.af.mil/Vfdfar.htm (last visited July 19, 2002).

(43.) FAR, supra note 2, at 49.111.

(44.) The Air Force previously required all termination settlement agreements to have legal review per U.S. DEP'T OF THE AIR FORCE, AIR FORCE FEDERAL ACQUISITION REG. SUN'. 5349.109 (1996)[hereinafter AFFARS]. However, that requirement was rescinded in the AFFARS 2002 edition. Neither the Army nor the Navy has a legal review requirement.

(45.) FAR, supra note 2, at 49.107(a): "General. If the contractor and the TCO cannot agree on a termination settlement, or if a settlement proposal is not submitted within the period required by the termination clause, the TCO shall issue a determination of the amount due consistent with the termination clause, including any cost principles incorporated by reference."

(46.) FAR, supra note 2, at 49.109-7(f). The Contract Disputes Act is made available at FAR, supra note 2, Part 33, et seq.

(47.) The contents of a proper final decision are listed in the FAR, supra note 2, at 33.211. The Air Force requires all appealable proposed final decisions over $100,000 to be forwarded to the ASBCA trial team, AFMCLO/JAB, for review before transmission. AFFARS, supra note 44, at 5333.211. Neither the Army nor the Navy has a similar requirement.

(48.) A review for fairness should consider the TCO's conduct in the termination settlement as well as the amount the TCO has determined. Did the TCO negotiate even-handedly with the contractor? Did the TCO respond promptly and accurately to contractor calls and submissions? Does the TCO have good reasons for how he or she arrived at the amount of the settlement? These factors can dramatically affect the likelihood of litigation.

(49.) 49.113, states:

The costs principles and procedures in the applicable subpart of Part 31 shall, subject to the general principles in 49.201,

(a) Be used in asserting, negotiating, or determining costs relevant to termination settlements under contracts with other than educational institutions, and

(b) be a guide for the negotiation of settlements under contracts for experimental, developmental, or research work with educational institutions (but see FAR, supra note 2, at 31.104)

FAR, supra note 2, at 49.113.

(50.) The ASBCA and the COFC are the two different entities to which a contractor can appeal a contracting officer's final decision. Both avenues of appeal are set out in the Contract Disputes Act, 41 U.S.C. [section] 601-613 (2002) and the process is applied to contractors through FAR Part 33 and the clauses of FAR 52.233. 41 U.S.C. [section] 606 states that a contractor can appeal to an Agency Board of Contract Appeals (the ASBCA here) within 90 days of a contracting officer's final decision. Id. 41 U.S.C. [section] 609 states that a contractor also has the option of appealing a final decision to the COFC within twelve months after the contractor receives the final decision. Id. The CAFC has appellate jurisdiction for both the Boards of Contract Appeals (including the ASBCA - 41 U.S.C. [section] 607(g)(1) (2002)) and the Court of Federal Claims (28 U.S.C. [section] 1295(a)(3) (2002)).

(51.) Mandocdoc Const. Co., Inc., ASBCA No. 43,701, 1995 WL 431141, 95-2 B.C.A. (CCH) [paragraph] 27,800, (July 14, 1995) (citing Southland Mfg. Corp, ASBCA No. 16,830, 1974 WL 2026, 75-1 B.C.A. (CCH) [paragraph] 10,994 ,(Nov. 29, 1974), recons. denied, ASBCA No. 16,830, 1975 WL 1937, 75-1 B.C.A. (CCH) [paragraph] 11,272 (1975)).

(52.) Best Foam Fabricators, 38 Fed.Cl. at 638.

(53.) The Office of Federal Procurement Policy (OFPP) administers the GAS Board. Its five members are the Administrator of the OFPP, two Government representatives (one from General Services Agency and one from Department of Defense), and two private sector representatives (one representing industry and one cost accounting specialist). NASH & SCHOONER, supra note 24, at 106.

(54.) FAR, supra note 2, at 31.000.

(55.) U.S. DEP'T OF DEFENSE, DEFENSE CONTRACT AUDIT AGENCY CONTRACT AUDIT MANUAL, DCAAM 7640.1, (Jan. 2001)[hereinafter CAM]; available at http://www.deskbook.osd.mil/(last visited July 16, 2002).

(56.) The FAR defines salvage as ". . . property that, because of its worn, damaged, deteriorated, or incomplete condition or specialized nature, has no reasonable prospect of sale or use as serviceable property without major repairs, but has some value in excess of its scrap value." Salvage cost is the cost of something sold as scrap, as opposed to its true market value or depreciated value at the time of sale. See FAR, supra note 2, at 45.501.

(57.) For purposes of this hypothetical, assume large machine tools must be bolted to the floor to improve the accuracy of the machining and to prevent the vibration and forces generated from moving the entire machine tool across the shop.

(58.) FAR, supra note 2, at 31.205. The subpart on termination costs states: Contract terminations generally give rise to the incurrence of costs or the need for special treatment of costs that would not have arisen had the contact not been terminated. The following cost principles peculiar to termination situations are to be used in conjunction with the other cost principles in subpart 31.2.

Id.

(59.) Id. at 31.205-42(a). The section on common items reads: Common Items. The costs of items reasonably usable on the contractor's other work shall not be allowable unless the contractor submits evidence that the items could not be retained at cost without sustaining a loss. The contracting officer should consider the contractor's plans and orders for current and planned production when determining if items can reasonably be used on other work of the contractor. Contemporaneous purchase of common items by the contractor shall be regarded as evidence that such items are reasonably usable on the contractor's other work. Any acceptance of common items as allocable to the terminated portion of the contract should be limited to the extent that the quantities of such items on hand, in transit and on order are in excess of the reasonable quantitative requirements of other work. Id.

(60.) Id.

(61.) Id.

(62.) Id.

(63.) CAM, supra note 55, at 12-304.5(b).

(64.) Southland Mfg., ASCBA No. 16,830, [paragraph] 11,272 at 52,356 (holding items not "reasonably usable" in manufacturing contract where the contractor had no other work despite efforts to obtain other work).

(65.) Franklin Instrument Co., Inc., GSBCA No. 7497. 1985 WL 16362, 1985 GSBCA LEXIS 744, at 13 (Jan 11, 1985).

(66.) Joint Venture G.C.D. et al.,, ASBCA No. 47,285, 1997 WL 217391, 97-1 B.C.A. (CCH) [paragraph] 28,976 (1997).

(67.) Mid-Atlantic Sec. Servs., Inc., ENGBCA No.6,302, 97-2 B.C.A. (OCH) [paragraph] 29,012 (1997).

(68.) Hugo Auchter GmbH, ASBCA No. 39,642, 1991 WL 27067, 91-1 B.C.A. (CCH) [paragraph] 23,645, (Feb 15, 1991).

(69.) McDonnell Douglas Corp. v. United States, 40 Fed.Cl. 529, 552 (1998), rev'd on other grounds, 182 F.3d 1319 (Fed.Cir., 1999).

(70.) Orbital Sciences Corp., ASBCA No. 49,250, 1997 WL 606986, 97-2 B.C.A. (CCH) [paragraph] 29,265 (1997); aff'd on recons., ASBCA No. 49,250, 1998 WL 601096, 98-2 B.C.A. (CCH) [paragraph] 29,994 (1998) (finding that rocket motors manufactured by appellant were common items).

(71.) Globe Air, Inc., AGBCA No. 76-119, 1978 WL 23536, 78-1 B.C.A. (CCH) [paragraph] 13,079 (Ag.B.C.A., Mar. 20, 1978)(finding that the helicopter procured as a replacement for contract aircraft that had crashed was a common item because the contractor could sell, lease or operate it when an opportunity arose).

(72.) Id.

(73.) Fiesta Leasing and Sales, Inc., ASBCA No. 29,311, 1987 WL 40637, 87-1 B.C.A. (CCH) [paragraph] 19,622 (1987).

(74.) See e.g. Southland, ASBCA No. 16,830, [paragraph] 10,994 at 52,356 (finding that the contractor could not retain the disputed common items at cost without sustaining a loss because it had no other contracts on which to use the items, and despite "major effort" was unable to obtain other work.); Fiesta Leasing and Sales, Inc., ASBCA No. 29,311, [paragraph] 19,622 at 99,286-87.

(75.) Fiesta Leasing and Sales, Inc., ASBCA No. 29,311, [paragraph] 19,622 at 99,287 (holding as allowable the costs for buses leased for a contract that exceeded the revenue generated by the buses during and after the terminated contract).

(76.) Id at 99,288.

(77.) Symetrics Indus., Inc., ASBCA No. 48,529, 1996 WL 189675, 96-2 B.G.A. (CCH) [paragraph] 28,285 (A.S.B.C.A., Apr. 8, 1996) (holding telemetry sets were common items and loss of quantity discount resulting from use on other contract not a "loss."); Orbital Sciences, ASBCA No. 49,250, [paragraph] 29,265 at [paragraph] 49,804 (disallowing loss of profit on other contract resulting from having used common items (rocket motors) (citing Symetrics indus., ASBCA No. 48,529 and Fiesta Leasing and Sales, Inc., ASBCA No. 29,311, [paragraph] 19,622).

(78.) FAR, supra note 2, at 3 1.205-42(b) states: Despite all reasonable efforts by the contractor, costs which cannot be discontinued immediately after the effective date of termination are generally allowable. However, any costs continuing after the effective date of the termination due to the negligent or willful failure of the contractor to discontinue the costs shall be unallowable.

(79.) See ALLAN JOSEPH & NEIL O'DONNELL, TERMINATION OF GOVERNMENT CONTRACTS, XII-1 (1991).

(80.) Telephone Interviews with Mr. Mel Moe, supra note 19.

(81.) CIBINIC & NASH, supra note 1, at 1106 (citing Aviation Specialists, Inc., 1990 WL198291, 02-1 B.C.A. (CCH) [paragraph] 31,788, 91-1 B.C.A. (CCH) [paragraph] 23,554 (D.O.T.C.A.B., Dec 03, 1990)).

(82.) CAM, supra note 55, at 12-305.7(a).

(83.) Id. at 12-305.7(a)(1).

(84.) Id.

(85.) JOSEPH & O'DONNELL, supra note 79, at XII-1-2.

(86.) Globe Air, Inc., AGBCA No. 76-119, [paragraph] 13,079 (holding pilot's salary that continued for 2 weeks past termination was severance and was allowable).

(87.) TDC Mgmt Corp., DOTBCA No. 1802, 1991 WL 105566, 91-3 B.C.A. (CCH) [paragraph] 24,091, 120,572 (D.O.T.C.A.B., 1991). (holding $3905 in severance costs for 3 employees not allowable because there was no evidence regarding those employees); Mid-Atlantic Sec. Servs., Inc., No. 6,302, 97-2 B.C.A. (CCH) [paragraph] 29,012 (E.N.G.B.C.A., 1997) (holding full payroll costs of supervisors that contractor retained but did not reassign to other work not recoverable absent proof they did work on termination).

(88.) TDC, DOTBCA No. 1802 [paragraph] 24,061 at [paragraph] 120,572 (continuing costs claim for employee that expended 275 hours after termination was allowable).

(89.) R&B Bewachungs GmbH, ASBCA No. 42214, 1992 WL 115141, 92-3 B.C.A. (CCH) [paragraph] 25,105, 125,156 (May 26, 1992) (holding employees' pay past termination date was allowable where German law required security guards to receive pay).

(90.) In at least one case, the COFC has ruled that the cost of relocating employees because of a termination is allowable under FAR 31.205-42(b). See McDonnell Douglas, 40 Fed.Cl. at 552.

(91.) Aviation Specialists, DOTBCA No. 1967, [paragraph] 23,554 at 117,993.

(92.) Id. See also, Fiesta Leasing and Sales, Inc., ASBCA No. 29,311, [paragraph] 19,622 at 99,289 (holding depreciation cost and advertising cost allowable as continuing costs of the termination). But see, Southland, [paragraph]29,265 at [paragraph] 52,359 (holding contractor interest due on equipment loans not allowable as continuing cost of termination).

(93.) Joint Venture G.C.D., ASBCA No. 47,285, [paragraph] 28,976 at 144,310-11 (holding that overhead costs such as office rental, land rental, labor and excavator rental were not allowable because the contractor failed to make an effort to discontinue the costs).

(94.) "Unabsorbed overhead is overhead that cannot be charged to a contract as originally anticipated because the direct costs of performance have been stopped due to a delay." NASH & SCHOONER, supra note 24, at 407.

(95.) Southland, ASBCA No. 16,830, [paragraph] 10,994 at 52,360 (citing Chamberlain Mfg. Corp., ASBCA No. 16,877, 1973 WL 1882, 73-2 B.C.A. (CCH) [paragraph] 10,139, 47,679 (June 22, 1973)).

(96.) Foremost Mechanical Sys., Inc., GSBCA Nos. 13250-C(12335), 13251-C(12384), 13252C(12527), 13584, 1998 WL 148412 (G.S.B.C.A.), 98-1 B.C.A. (CCH) [paragraph] 29,652, 146,922 (Mar. 31, 1998).

(97.) Baifield Indus., Div. of A-T-O, Inc. ASBCA No. 20,006, 1976 WL 25,427, 76-2 B.C.A. (CCH) [paragraph]12,096, 58,091 (1976) (holding continuing costs for rent, utilities and insurance allowable where contractor was making diligent efforts to dispose of the facility).

(98.) FAR, supra note 2, at 31.20542(c) states:

(c) Initial costs. Initial costs, including starting load and preparatory costs, are allowable as follows:

(1) Starting load costs not fully absorbed because of termination are nonrecurring labor, material, and related overhead costs incurred in the early part or production and result from such factors as-

(i) Excessive spoilage due to inexperienced labor;

(ii) Idle time and subnormal production due to testing and changing production methods;

(iii) Training; and,

(iv) Lack of familiarity or experience with the product, materials, or manufacturing processes.

(2) Preparatory costs incurred in preparing to perform the terminated contract include such costs as those incurred for initial plant rearrangement and alterations, management and personnel organization, and production planning. They do not include special machinery and equipment and starting load costs.

(3) When initial costs are included in the settlement proposal as a direct charge, such costs shall not also be included in overhead. Initial costs attributable to only one contract shall not be allocated to other contracts.

(4) If initial costs are claimed and have not been segregated on the contractor's books, they shall be segregated for settlement purposes from cost reports and schedules reflecting that high unit cost incurred during the early stages of the contract.

(5) If the settlement proposal is on the inventory basis, initial costs should normally be allocated on the basis of total end items called for by the contract immediately before termination; however, if the contract includes end items of a diverse nature, some other equitable basis may be used, such as machine or labor hours.

(99.) CAM, supra note 55, at 12-305.1(b)(2).

(100.) Id.

(101.) Id.

(102.) Id. at 12-305.1(c).

(103.) Id. at 12-305.1(e).

(104.) Sierracin/Sylmar, ASBCA Nos. 27,531, 30,380, 1985 WL 16,589, 85-1 B.C.A. (CCH) [paragraph] 17,875, 89,549 (Jan. 22, 1985) explains the theory behind learning curve analysis: The general theory of learning curves is that with repetitive tasks involving a considerable amount of labor, the speed or efficiency with which the task is performed increases as the number of units of the work increases. In general theory, as quantities double, learning is in the same ratio. Stated mathematically and assuming an 80 percent learning curve, this would mean that as the item quantities double the number of labor hours necessary to produce a unit would be 80 percent of the labor hours necessary to make the original unit; that if the first unit took 100 hours, the second unit would take 80 hours, the fourth unit would take 64 hours (80 percent of 80 hours), and the eighth unit 51.2 hours (80 percent of 80 percent of 80 hours), and so on.

(105.) Lockley Mfg. Co., ASBCA No. 21231, 1978 WL 2708, 78-1 B.C.A. (CCH) [paragraph] 12,987, 63,319 (Jan. 26, 1978).

(106.) Sierracin/Sylmar, ASBCA Nos. 27,531, 30,380, [paragraph] 17,875 at 89,551.

(107.) Lockley, ASBCA No. 21,231, [paragraph] 12,987 at 63,319 (holding it was proper to use labor costs up to termination to calculate the labor learning allocable to terminated units).

(108.) The Government will often not provide contractors with a production

release until first article testing is successfully completed. Nonetheless, contractors often begin incurring costs in preparation of full-scale production even before the production release to be able to meet the required delivery schedule.

(109.) Balimoy Mfg. of Venice, Inc., ASBCA Nos. 47,140, 48,165, 1998 WL 655472, 98-2 B.C.A. (CCH) [paragraph] 30,017, 148,512 (Sep. 23, 1998) (holding first article costs allowable in termination of contract for ammunition but failure to segregate the costs specific to first article prevented recovery); Agrinautics, ASBCA Nos. 21,512, 21,608, 21,609, 1980 WL 120474, 79-2 B.C.A. (CCH) [paragraph] 14,149, 69,649 (1980) (holding first article costs allowable for helicopter-mounted insecticide duster that had been given first article approval).

(110.) Agrinautics, ASBCA Nos. 12,512, 21,608, 21,609, [paragraph]14,149 at 69,650.

(111.) R&B Bewachungs, ASBCA No. 42,214, [paragraph] 25,105 at 125,157.

(112.) Hugo Auchter, ASBCA No. 39,642, [paragraph] 23,645 at 118,442.

(113.) Fiesta Leasing and Sales, Inc., ASBCA No. 29311, [paragraph] 19,622 at 99,289-90.

(114.) Id. at 99,289-90.

(115.) RHC Construction, IBCA No. 2083, 88-3 B.C.A. (CCH) [paragraph] 20,991, 106,061 (1988).

(116.) Air-Flo Cleaning Sys., ASBCA No. 39,608, 1990 WL 132887, 90-3 B.C.A. (CCH) [paragraph] 23,071, 115,844 (June 22, 1990). But see Teague Indus. & Technical Servs Co., ASBCA Nos. 29,230, 29,642, 1986 WL 19704, 86-2 B.C.A. (CCH) [paragraph] 18,790, 94,669 (Feb. 13, 1986) (holding cost of retaining employee to be ready for open orders allowable).

(117.) FAR, supra note 2, at 31.205-42(d) states:

Loss of useful value. Loss of useful value of special tooling, special machinery and equipment is generally allowable, provided-

(1) The special tooling, or special machinery and equipment is not reasonably capable of use in the other work of the contractor;

(2) The Government's interest is protected by transfer of title or by other means deemed appropriate by the contracting officer; and

(3) The loss of useful value for any one terminated contract is limited to that portion of the acquisition cost which bears the same ratio to the total acquisition cost as the terminated portion of the contract bears to the entire terminated contract and other Government contracts for which the special tooling or special machinery and equipment was acquired.

(118.) Claims for loss of useful value can reach into the hundreds of millions of dollars. One example is a major contract termination for which the author was contracts attorney in 1996-7: within the contractor's termination settlement proposal was a nearly $200 million claim for loss of useful value of a custom-built production facility in Georgia.

(119.) CIBINIC & NASH, supra note 1, at 1111. The Defense Acquisition Regulation and Federal Procurement Regulation, predecessors to the FAR, each contained a definition of special machinery and equipment. According to the Defense Acquisition Regulation, "Special machinery and equipment means that part of plant equipment which was acquired or constructed solely for the performance of the terminated contract or the terminated contract and other Government contracts, and as to which the contractor claims loss of useful value. 32 CFR [section] 8-101.21 (1981). The Federal Procurement Regulation used the same definition, "'Special machinery and equipment' means that part of plant equipment which was acquired or constructed solely for the performance of the terminated contract or the terminated contract and other Government contracts, and as to which the contractor claims loss of useful value." CFR [section] 1-8.101(t) (1980).

(120.) FAR, supra note 2, at 31.205-40.

(121.) CAM, supra note 55, at 12-304.14(a).

(122.) Id. at 12-304.14(a).

(123.) Id. at 12-304.14(a)(1-3).

(124.) Id. at 12-304.14(b).

(125.) TERA Advanced Sys. Corp., GSBCA No. 6,713-NRC, 85-2 B.C.A. (CCH) [paragraph] 17,940 (1985) (holding cost of custom-designed document retrieval carousel system allowable once system was established as valueless upon termination) (citing American Elec., Inc., ASBCA No. 16,635, 1976 WL 2409, 76-2 B.C.A. (CCH) [paragraph] 12,151 (1976) and Metered Laundry Servs., Inc., ASBCA No. 21,573, 1978 WL 2351, 78-1 B.C.A. (CCH) [paragraph] 13,206 (1978)).

(126.) American Elec., ASBCA No. 16,635 [paragraph] 12,151.

(127.) Metered Laundry, ASBCA No. 21,573, [paragraph] 13,206.

(128.) Ralcon, Inc., ASBCA No. 43,176, 1994 WL 228181, 94-2 B.C.A. (CCH) [paragraph] 26,935 (1994).

(129.) Tubergen & Assocs., Inc., ASBCA Nos. 34,106, 34,107, 1990 WL 85435, 90-3 B.C.A. (CCH) [paragraph] 23,058, 115,766 (June 11, 1990).

(130.) Greer, ENGBCA No. 6,283, 1997 WL 305917, 97-2 B.C.A. (CCH) [paragraph] 29,013 (June 6, 1997); Qualex Int'l, ASBCA No. 41,962, 1992 WL 319583, 93-1 B.C.A. (CCH) [paragraph] 25,517, 127,090 (Oct. 21, 1992); Hugo Auchter, ASBCA No. 39642, [paragraph] 23,645 at 118,444.

(131.) Greer, ENGBCA No. 6,283, [paragraph] 29,013 at 144,548; Qualex Int'l, ASBCA No. 41,962, [paragraph] 25,517 at 127,090. But see, McDonnell Douglas, 40 Fed. Cl. at 552 (holding allowable loss of useful value for furniture).

(132.) Other equipment not considered allowable as special machinery and equipment under FAR 31.205-42(d) include: a lathe (Teems, Inc., GSBCA No. 14,090, 1997 WL 687905, 98-1 B.C.A. (CCH) [paragraph] 29,357, 145,962 (Oct. 31, 1997)); a wrapping machine (Dairy Sales Corp. v. U. S., 593 F.2d 1002, 1006 (Ct.Cl. 1979)); and commercial mowers (Greer, ENGBCA No. 6,283, [paragraph] 29,013 at 144,548).

(133.) See e.g., American Elec., ASBCA No. 16,635, [paragraph] 12,151.

(134.) Id.

(135) Id. at 2l,801.

(136.) In the recent major termination, mentioned supra at note 118, the intent argument resurfaced when the contractor argued that the Government should consider its entire plant SME because the Government concurred in its construction. The facts did not support their allegation that the Government discussed and approved the construction of the plant, so the TCO disallowed most of the facility's costs.

(137.) FAR, supra note 2, at 31.205-42(e) states: Rental costs under unexpired leases, less the residual value of such leases, are generally allowable when shown to have been reasonably necessary for the performance of the terminated contract, if-

(1) The amount of rental claimed does not exceed the reasonable use value of the property leased for the period of the contract and such further period as may be reasonable and;

(2) The contractor makes all reasonable efforts to terminate, assign, settle, or otherwise reduce the cost of such lease.

(138.) This may be because Government contractors negotiate favorable leases including termination for convenience clauses, or more likely because TCO's allow reasonable lease expenses past the termination in order to give contractors an opportunity to wind-up operations and remove equipment. The phrase "reasonable use value of the property leased for the period of the contract and such further period as may be reasonable" gives the TCO broad latitude to allow post-termination lease costs.

(139.) CAM, supra note 55, at 12-305.5.

(140.) Southland, ASBCA No. 16,830, [para] 10,994.

(141.) Id. at 52,362.

(142.) Sundstrand Turbo v. U.S., 389 F.2d 406, 415 (Ct.Cl., 1968).

(143.) TDC Mgmt, DOTBCA No. 1802, [para] 24,091 at 120,574.

(144.) Qualex Int'l, ASBCA No. 41,962, [para] 25,517 at 127,090.

(145.) Id. at 127,088-9.

(146.) CIBINIC & NASH, supra note 1, at 1113 (summarizing Southland, ASBCA No. 16,830, [paragraph] 10,994.

(147.) General Elec. Co., ASBCA No. 24,111, 1982 WL 7083, 82-1 B.C.A. (CCH) [paragraph] 15,725 (1982) (stating computer hardware rental costs continuing after termination were allowable where cancellation would have entailed substantial additional charges).

(148.) Bos'n Towing and Salvage Co., ASBCA No. 41,357, 1992 WL 40,703, 92-2 B.C.A. (CCH) [paragraph] 24,864 (Feb. 27, 1992)(holding that whether FAR 31.205-42(e) or subcontract rules applied to rental costs of chartered tugboat, the principle of reasonableness in either is guiding principle in settlements).

(149.) FAR, supra note 2, at 31.205-42(f): "Alterations of leased property. The cost of alterations and reasonable restoration required by the lease may be allowed when the alterations were necessary for performing the contract."

(150.) Before being FAR 31.205-42(f), it was Defense Acquisition Regulation 15.205-42(E)(II) and before that it was Armed Services Procurement Regulation 15-205.42(E)(II). The language, however, has not changed substantially from one regulation to the next.

(151.) CAM, supra note 55, at 12-305.5(b).

(152.) Id. At 12-305.5(b).

(153.) Southland, ASBCA No. 16,830, [paragraph] 10,994.

(154.) Energy Compression Research Corporation, ASBCA No. 46,560, 1999 WL 727949, 99-2 B.C.A. (CCH) [paragraph] 30,564 (A.S.B.C.A., 1999).

(155.) Southland, ASBCA No. 16,830, [paragraph] 10,994 at 52359.

(156.) Energy Compression, ASBCA No. 46,560, [paragraph] 30,564 at 150,944.

(157.) FAR 31.205-42(g) defines settlement expenses as:

(1) Settlement expenses, including the following, are generally allowable:

(i) Accounting, legal, clerical, and similar costs reasonably necessary for-(A) The preparation and presentation, including supporting data, of settlement claims to the contracting officer; and (B) the termination and settlement of subcontracts.

(ii) Reasonable costs for the storage, transportation, protection, and disposition of property acquired or produced for the contract.

(iii) Indirect costs related to salary and wages incurred as settlement expenses in (i) and (ii); normally, such indirect costs shall be limited to payroll taxes, fringe benefits, occupancy costs, and immediate supervision costs.

(2) If settlement expenses are significant, a cost accountant or work order shall be established to separately identify and accumulate them.

FAR, supra note 2, at 3 1.205-42(g).

(158.) Id. at 3 1.205-6. See also CAM, supra note 55, at 12.309(a)-(b).

(159.) Id.

(160.) CAM, supra note 55, at 12.309(a).

(161.) Id. at 12.309(b).

(162.) Id. at 12.309(c).

(163.) Id. at 12.309(f).

(164.) Id. at 12.309(i).

(165.) Id. at 12.309(j).

(166.) Id. at 12.309(k).

(167.) Id. at 12.309(m). The distinction between a proposal and a claim is defined as follows: A termination proposal submitted under a termination clause is not a claim because it is submitted for the purpose of negotiation. However, a termination proposal becomes a claim under the Contract Disputes Act (CDA) upon the occurrence of one of three events: (I) the contractor's submission indicates that the contractor desires a final decision and the contracting officer does not accept its proposed terms, (2) negotiations between the TCO and the contractor are at an impasse, thus implicitly requiring the TCO to issue a final decision, or (3) the TCO issues a final decision.

Id. At 12.101(i).

(168.) Nolan Bros. v. United States, 437 F.2d 1371, 1390-91 (Ct.Cl., 1971).

(169.) Metered Laundry, ASBCA No. 21,573, [paragraph]13,206 at 64,606 (allowing legal fees for work on ASBCA appeal); Information Systems and Networks Corp., ASBCA No. 42,659, 1999 WL 1049634, 00-1 B.C.A. (CCH) [paragraph] 30,665 (Nov. 18, 1999); Qualex Int'l, ASBCA No. 41,962, [paragraph] 25,517 at 127,090 (holding legal fees for participating in ADR is participating in prosecution of claim against the Government). But see Bos'n Towing and Salvage, ASBCA No. 41,357, [paragraph] 24,864 at 124,034 (holding GAO and SBA proceedings brought by contractor were not within the FAR 31.205-33(d) definition of "claims or appeals" against the Government, so legal fees allowable).

(170.) Dairy Sales. Corp., 593 F.2d ($4100 claim for legal and accounting fees reduced to $900 because bulk of fees spent pursuing anticipatory profits).

(171.) Hugo Auchter, ASBCA No. 39,642, [paragraph] 23,645 at 118,444 (holding that evidence established that attorney would be paid the claimed fee only after appellant has been paid by the Government and appellant introduced no evidence of hours billed under other type of arrangement). But see Fiesta Leasing and Sales, Inc., ASBCA No. 29,311, [paragraph] 19,622 at 99,294 (allowing legal fees where Government alleged but did not prove a contingency fee arrangement).

(172.) Southland, ASBCA No. 16,830, [paragraph] 10,994 at 52,365.

(173.) Fiesta Leasing and Sales, Inc., ASBCA No. 29,311, [paragraph] 19,622 at 99,294 (stating salaried employee's compensation should be through overhead rates in absence of evidence that another employee was hired to cover his other work or he recorded overtime on the termination).

(174.) Hugo Auchter, ASBCA No. 39,642, [paragraph] 23,645 at 118,444 (holding company president Auchter's DM 200/hr termination settlement rate should have been his DM 92/hr salary rate); Tubergen, ASBCA Nos. 34,106, 34,107, [paragraph] 23,058 at 115,766-7 (holding Mr. Tubergen's claimed 150 hours was excessive and reducing it to 50 hours).

(175.) McDonnell Douglas, 40 Fed.Cl. at 554.

(176.) Energy Compression, ASBCA No. 46,560, [paragraph] 30,564 at 150,945.

(177.) FAR, supra note 2, at 31.205-42(h):

Subcontractor claims. Subcontractor claims, including the allocable portion of the claims common to the contract and to other work of the contractor, are generally allowable. An appropriate share of the contractor's indirect expense may be allocated to the amount of settlements with subcontractors; provided, that the amount allocated is reasonably proportionate to the relative benefits received and is otherwise consistent with 31.201-4 and 31.203(c). The indirect expense so allocated shall exclude the same and similar costs claimed directly or indirectly as settlement expenses.

(178.) This primer will not go into the rules for submission of subcontractor settlements, as they are listed at FAR, supra note 2, at 49.108.

(179.) FAR, supra note 2, at 49.108-7 (discussing government assistance in settling subcontracts).

(180.) Id. at 49.108-8, (discussing assignment of rights under subcontracts).

(181.) CAM, supra note 55, at 12-310(a).

(182.) Id. at 12-310(b).

(183.) Bos'n Towing and Salvage, ASBCA No. 41,357, [paragraph] 24,864 at 124,031.

(184.) General Electric, ASBCA No. 24,111, [paragraph] 15,725 at 77,806 (stating termination settlement with subcontractor arrived at after arm's length bargaining without collusion and reflected sound exercise of business judgment).

(185.) Bos'n Towing and Salvage, ASBCA No. 41,357, [paragraph] 24,864 at 124,032 (finding subcontractor was not truly independent from prime and disallowed substantial portion of termination settlement relating to tugboat improvements.); See also, Joint Venture G.C.D., ASBCA No. 47,285, [paragraph] 28,976 at 144,310 (holding contractor's "Private Contract Agreement" amongst joint venture partners to reimburse for unperformed work not one that a prudent businessman would enter into, so settlement disallowed.)

(186.) CIBINIC & NASH, supra note 1, at 1116 (citing McDonnell Douglas Corp., 1968 WL 867, NASABCA 467-13, 68-2 B.C.A. (CCH) [paragraph] 7,316 (Oct. 7, 1968)).

(187.) McDonnell Douglas, 40 Fed.Cl. at 536-542 (Numerous subcontractor settlement claims made before and after Government convenience termination found allowable.).

Major Graeme S. Henderson *

* Major Graeme S. Henderson (B.A., University of California; J.D., University of Utah College of Law; L.L.M., The Army Judge Advocate General School) is Chief Surety Law Branch, Contracts Law Division, Air Force Legal Services Agency in Rosslyn, Virginia. He is a member of the State Bar of Utah.
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Title Annotation:military contracts
Author:Henderson, Graeme S.
Publication:Air Force Law Review
Date:Mar 22, 2002
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