Effect of termination for default
After a default termination, contractors are not paid for undelivered work, must transfer completed items as directed, and remain liable for excess costs and damages to the Government.
Overview
FAR 49.402-2 details the consequences and procedures following a termination for default in fixed-price contracts. When a contract is terminated for default, the Government is not responsible for the contractor’s costs on undelivered work and can recover any advance or progress payments related to that work. The Government may also require the contractor to transfer title and deliver completed supplies or manufacturing materials, provided it does not already have title under another contract provision. Payment for completed supplies or materials is made at the contract price or an agreed amount, but only after ensuring the Government is protected from potential liens or overpayment. The contracting officer must take specific steps to mitigate the risk of outstanding claims from laborers or suppliers before making payments. Additionally, the contractor remains liable for any excess costs or damages incurred by the Government in acquiring replacement supplies or services.
Key Rules
- No Liability for Undelivered Work
- The Government is not liable for costs on undelivered work after default termination and can recover advance/progress payments.
- Acquisition of Completed Supplies/Materials
- The Government may require delivery of completed supplies/materials, but only if it does not already have title.
- Payment for Acquired Items
- Payment is made for completed supplies at contract price and for materials at an agreed amount, subject to lien protection.
- Lien Protection Measures
- The contracting officer must ensure the Government is protected from liens before payment, using bonds, lien waivers, agreements, or withholding funds.
- Contractor Liability for Excess Costs
- The contractor is liable for excess costs and damages resulting from the Government’s need to acquire replacement supplies/services.
Responsibilities
- Contracting Officers: Must verify title, ensure lien protection, determine payment, and pursue recovery of excess costs or damages.
- Contractors: Must transfer title/deliver completed items as directed, provide lien waivers/statements, and are liable for excess costs/damages.
- Agencies: Oversee compliance with termination procedures and ensure Government interests are protected.
Practical Implications
- This section protects the Government from financial loss and legal claims after a default termination.
- Contractors must be prepared to transfer completed work and resolve any outstanding claims from suppliers or laborers.
- Failure to comply can result in withheld payments, legal liability, and additional costs for contractors.