Termination for Default – the Government's Burden

Construction and Procurement Law News, Q3 2019

Authored Article


In Alutiiq Manufacturing Contractors, LLC v. United States, the U.S. Court of Federal Claims ruled that the Government had improperly terminated a construction contract for default and ordered that the default termination be converted into a termination for convenience.

Under FAR 52.249-10, the Government may “terminate the right to proceed with [a contract] that has been delayed.” However, a contractor can avoid termination if the delay “arises from unreasonable causes beyond the control and without the fault or negligence” of the contractor and the contractor “notifies the Contracting Officer in writing of the causes of delay” within 10 days from the beginning of such delay.

Moreover, under FAR 49.402-3, the Contracting Officer must consider the following factors before terminating a contract for default: (1) the terms of the contract and applicable laws and regulations; (2) the specific failure of the contractor and the excuses for the failure; (3) the availability of the supplies or services from other sources; (4) the urgency of the need for the supplies or services and the period of time required to obtain them from other sources, as compared with the time delivery could be obtained from the delinquent contractor; (5) the degree of essentiality of the contractor in the Government acquisition program and the effect of a termination for default upon the contractor’s capability as a supplier under other contracts; (6) the effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments; and (7) any other pertinent facts and circumstances.

Additionally, under the so-called Lisbon standard, to justify a termination for default, the Government must demonstrate a “reasonable belief on the part of the contracting officer that there was no reasonable likelihood that the [contractor] could perform the entire contract effort within the time remaining for contract performance.” A termination for default must be based on “tangible direct evidence reflecting the impairment of timely completion.” Further, “a court’s review of default justification does not turn on the contracting officer’s subjective beliefs, but rather requires an objective inquiry.”

In Alutiiq, the Court determined that even though the contractor had failed to perform its work properly in certain respects and was responsible for some project delay, the Government improperly terminated the contractor for default. The default termination was based on an analysis by the Contracting Officer’s Representative (“COR”) of a recovery schedule that the contractor submitted prior to the default termination. In the Court’s view, the COR’s “quick glance” and “cursory” assessment of the recovery schedule was inadequate. The COR’s conduct during the project did not help the Government’s cause. The Court found that the COR’s “history of dishonesty and hostility towards [the contractor]” undercut the Contracting Officer’s ability to “form an independent and reasonable belief” as to whether the contractor could complete the contract on time.

Ultimately, the termination for default was overturned because the Contracting Officer’s decision was not based on a reasonably held belief as to the contractor’s inability to complete the project in a timely manner. The Contracting Officer failed to assess all seven of the FAR 49.402-3 factors, including considering excusable delay, the urgency of the project, or the period of time required for other sources to complete performance. Additionally, the Contracting Officer ignored other pertinent facts and circumstances, such as steps taken by the contractor to improve its performance, and certain design issues that were not the contractor’s responsibility.

This recent decision reflects the gravity of a potential default termination. Regardless of a contractor’s performance deficiencies, the Government must support a decision to terminate a contractor’s right to proceed under a contract for default by showing that the Contracting Officer considered all of the FAR factors and that an objective review of the facts demonstrates that the contractor could not have completed the project on time.