Lessons on Contractor Termination for Default

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The U.S. Court of Federal Claims recently overturned an agency’s decision to terminate a government contractor for default. The case serves as an important reminder that, when reviewing such a termination, the court gives little credence to the government’s subjective beliefs regarding the contractor’s ability to perform.

In 2014 the National Guard Bureau awarded a firm-fixed price construction contract to Alutiiq Manufacturing Contractors LLC to repair asphalt roads at an Air Force base. From the outset, AMC experienced performance issues on the project: its key personnel were not staffed on the project; it had difficulty finding a qualified subcontractor; and it failed to timely submit required contract documentation.

While these deficiencies would not have prevented the contractor from timely completing the contract, they apparently did not endear the company to the government’s contract management personnel. The bureau issued a letter of concern and multiple cure notices to the contractor. In response, AMC adopted corrective measures to help move the project forward, including developing a recovery schedule that would allow it to complete work two days ahead of the original contract deadline.

At the same time the company was working to get the project back on schedule, however, bureau personnel were holding discussions on when and how to terminate AMC’s contract for default. Ultimately, an onsite agency representative looked at the contractor’s proposed recovery schedule and determined it was not viable. The agency did not conduct a critical path analysis of the recovery schedule, but nevertheless terminated the contract. AMC then challenged the government’s grounds for termination at the Court of Federal Claims.

In reviewing the termination decision, the court applied the standard set forth in Lisbon Contractors, Inc. v. United States, 828 F.2d 759, under which 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.”

It also relied on McDonnell Douglas Corp. v. United States, 323 F.3d 1006, which clarified that the inquiry is an objective one “focus[ing] on the events, actions, and communications leading to the default decision.”

Finally, the court looked to the factors in Federal Acquisition Regulation 49.402-3(f) that must be considered by a contracting officer prior to issuing a termination for default.

The court ultimately found the termination decision was unreasonable. It dismissed the bulk of the agency’s reasons for action — including subcontractor retention issues, personnel gaps, and failure to submit various project records, drawings, documents and photos — as either a “red herring” or insufficient to justify the agency’s subjective belief that AMC could not complete the project on time, particularly since AMC’s new management had greatly improved these processes since the beginning of the project.

The court noted that, under both Lisbon and McDonnell Douglas, the government “cannot satisfy its burden by merely showing that the contractor was behind schedule.” Rather, the issue was “whether AMC could have met the goals of its recovery schedule in order to fulfill performance in a timely manner.” On this key point, the court held that “the Agency’s default termination was so defective that it seems impossible that the contracting officer’s decision was based on a reasonably held belief that AMC could not finish the project.” In so holding, the court cited the contract performance improvements that had been made by AMC; the agency’s failure to thoroughly consider the contractor’s proposed recovery schedule; and the onsite government personnel’s “history of dishonesty and hostility towards AMC throughout the course of performance.”

The decision provides several helpful reminders for contractor and agency personnel who encounter performance problems on a government project.

First, termination for default is viewed appropriately by the court as a drastic remedy that must be fully justified by the government. The court applies a relatively high standard of proof in such cases and will look to the FAR to determine if an agency has followed proper procedures in making its termination decision. The government cannot support a default termination based solely on its subjective belief that a project is incurably off course.

Second, clear communication is integral to avoiding costly, time-consuming performance disputes — particularly when it comes to developing a “get well plan” on a troubled project. In the Alutiiq case, both the contractor and the government could have done a better job of communicating with their counterparts to set expectations and raise concerns.

But when the contractor proposed a recovery schedule to get the project back on track, the court found that agency personnel did not take the time to objectively evaluate it. That fact alone was apparently enough for the court to rule against the government.

Third, evidence of government bias against a contractor will always loom large in a termination for default case. Therefore, government personnel should remember to focus on the facts and make every attempt to work with the contractor before taking steps to terminate for cause. 

Alex Sarria is of counsel and Carl Wiersum is an associate at Covington & Burling LLP.

Topics: Government Collaboration, Government Policy, Contracting, Defense Contracting