The election of President Joe Biden and Vice President Kamala Harris will, almost certainly, bring drastic changes to publicly-funded construction in this country. Government spending on infrastructure projects will likely increase, perhaps even dramatically. At the same time, this federal funding will come with more strings attached due to the tightening of Buy America, labor and environmental rules.
Perhaps equally significant, however, the change in administrations will bring a definite and, for some government contractors, harsh change in the Government’s priorities. While President Biden is promoting, among other projects, renewable energy and projects utilizing new technologies, he will also be pulling the proverbial plug on many projects, such as the Keystone XL Pipeline and US/Mexican border wall contracts, on the basis that these contracts do not meet the national interest.
Many construction contractors, who happen to be on the wrong side of the Trump “summer,” will have their contracts terminated—sometimes with little notice. These terminated contractors need to have a firm understanding of the applicable rules and procedures for the termination of a federal contract – particularly where the reason for this termination is a change in the Government, rather than the fault of the contractor.
First, the good news is that the President and his Cabinet are promising a significant increase in funding for infrastructure-related construction projects. President Biden’s “Build Back Better” proposal provides for a $2 trillion investment in infrastructure. Pete Buttigieg, the new Secretary of Transportation, stated in his confirmation hearing that Biden’s major infrastructure package represents a “generational opportunity to transform and improve America’s infrastructure.” Although similar promises were made by their predecessor, it seems likely that the Biden-Harris administration will have more success in increasing infrastructure spending due to the democratic control of Congress and the recognized need to stimulate an economy that has been devastated by the pandemic.
Additional funding, however, will hardly be divvied out according to the same priorities applied by the Trump/Pence administration. In fact, quite the opposite. Numerous contracts to build the U.S./Mexican border wall have essentially been stopped dead in their tracks, President Biden having announced that his administration would not build “another foot of wall.” In fact, such border wall contracts were placed on suspension status in one of the President’s first acts, with all contractors told to stop all work, subject to safety concerns, by January 28, 2021. See, Proclamation on the Termination of Emergency with Respect to the Southern Border of The United States and Redirection of Funds Diverted to Border Wall Construction.
President Biden also terminated the permit for the Keystone XL Pipeline, and, even more significantly, the cancelation of the Keystone XL Pipeline permit is but one aspect of a wide-ranging directive from President Biden entitled Executive Order On Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crises. This Executive Order identifies as national “commitments,” including the protection of public health, the environment, and national monuments. The Executive Order mandates that all federal agencies and executive departments review all Federal actions taken by the Government during the last four years. To the extent these actions conflict with the stated “commitments,” the agencies are to take actions to remedy these conflicts. The Executive Order specifically mentions the cancellation of the Keystone XL Pipeline, and gas and oil leases in the Artic Refuge, but the broad language potentially applies to nearly every industry and federal project. The almost inevitable result of this Executive Order and other Biden mandates could be the cancellation of a multitude of federal agency construction contracts.
The vast majority of federal contracts cancelled in the wake of President Biden’s executive orders will be terminated by invoking a contract device known as a “termination for convenience.” A clause allowing such a termination is included in nearly all federal contracts providing that a termination for convenience is governed by Part 49 of the Federal Acquisition Regulations (“FAR”). With such a contract clause (and probably even without one), the Government is given near carte blanch discretion to terminate any federal contract for its own “convenience,” meaning the Government may terminate any federal contract at any time the Government believes that such a termination lies in its best interests.
Contractors that entered into federal projects during the last four years may consider consulting with an attorney and/or accountant with expertise in government contracting. This is particularly the case if the project is politically charged (e.g., the border walls), or was permitted by the Government after a loosening by the Trump/Pence administration of environmental regulations.
The Government initiates a termination for convenience by sending written notice to the contractor defining the scope, the type, and date of the termination, as well as the steps the contractor should take to minimize impact upon the contractor’s personnel. The termination may be a full or partial termination. Upon receipt of this notice, the contractor must abide by the instructions in the termination notice; and, also provide notice to their subcontractors and suppliers to do the same.
A contractor terminated for convenience is required to negotiate a settlement with the Government for (1) the work performed prior to the termination, and (2) the costs incurred as a result of the termination (e.g., for buttoning up the project site and preparation of a settlement proposal), and any allowable profit.
When possible, settlement with the Government is supposed to be “fair and prompt.” The settlement does not require the type of precise accounting found in federal cost reimbursable contracts. Fair treatment of a terminated contractor seems appropriate, given that such a termination for convenience is not necessarily caused by the fault of the contractor. Nevertheless, contractors terminated for convenience must comply with a plethora of rules and procedures in Part 49 and elsewhere in the FAR, many of which rules and procedures pose significant pitfalls for the unwary contractor.
For a construction project terminated in its entirety, the contractor must prepare a settlement proposal based upon the contractor’s “total costs” as of the termination date, and any additional costs incurred, as a result of the termination. These costs must be allowable, reasonable and allocable to the contract. The contractor is entitled to recovery of overhead, and, to the extent the contract would have been profitable, profit on the costs incurred prior to the termination. If, however, the Government can show that the contractor would have suffered a loss on the project, the contractor does not recover a profit on its costs, and, in fact, the Contractor may be subject to a so-called “loss adjustment” reducing the Contractor’s recoverable pre-termination costs. The contractor is never entitled to anticipated profit on work not performed due to the termination of the project.
Subcontractors and suppliers working on a terminated contract are obviously also affected by a termination for convenience. Settlement with subcontractors and suppliers is generally governed by the terms of their subcontracts or purchase orders, although prime contractors generally flow down the FAR termination for convenience clauses into their subcontracts. Prime contractors can generally pass on to the Government settlement amounts paid to subcontractors and suppliers, provided the settlements are reasonable.
Where the terminated contractor and Government cannot reach agreement on a termination settlement, the Government is entitled to make its own determination of the settlement amount. To the extent the contractor disagrees with the Government regarding the settlement amount, the Contractor can certify its claim under the Contract Disputes Act and file an appeal with the Board of Contract Appeals or Court of Federal Claims. State and local governments also generally include termination for convenience clauses in their construction agreements, and these terminations need to be settled or enforced according to their own terms.
Politics aside, the change in administrations will undoubtedly affect contractors differently depending upon the type of work and individual contract. Many contractors will benefit from increased funding as well as opportunities that arise from new industries. On the other hand, contractors terminated by the change in Government priorities need to ensure that they are not damaged by the termination by availing of federal policies intended to fairly treat contractors removed from projects through no fault of their own.
If you are in need of an experience litigator specializing in the termination of government contracts, please contact the firm of Rogers, Joseph O’Donnell, a firm specializing in construction disputes, government contracts, environmental law, retail trade, white collar crime and general litigation.