The first few months of the Trump administration have brought major changes to Federal contracting including numerous contract terminations. But what actually happens when the Federal government decides to end a contract?
The Government Accountability Office (GAO) offered a primer on that question in a blog post on April 17. The government watchdog explained that while the Federal government can terminate contracts, contractors are entitled to certain payments following that termination.
Federal contracts can only be terminated by the government, which is able to end an agreement for convenience, or “when it is in the government’s interest,” according to GAO.
Other reasons the Federal government can end a contract include a contractor’s failure to perform based on the contract’s terms or schedule, which GAO noted results in different post-termination processes that can “pose serious consequences for a contractor.”
When a contract termination occurs, the agency is required to provide written notice to the contractor including the effective date of termination and whether the move constitutes a full or partial termination.
Following the notification of termination, contractors could receive costs already incurred and reasonable profits above those costs, costs associated with the termination, and settlement expenses. GAO added that contractors have one year from the effective date of termination to submit a settlement proposal.
“When coming to an agreement on these costs, the government can either pay the proposed amount or negotiate a final settlement,” wrote GAO. “If the agency’s contracting officer does not extend the period for submitting a proposal or if the parties can’t reach agreement, the contracting officer may unilaterally determine the settlement amount.”
Contractors can also appeal an agency’s decision to the Board of Contract Appeals or to the United States Court of Federal Claims, which GAO noted have generally upheld agencies’ right to terminate contracts for convenience. Contractors must provide evidence that the government acted in “bad faith” otherwise.
GAO said that in fiscal year 2024 there were about 40,000 contract terminations, which have since been followed by major changes to Federal contracting under the Trump administration. Some of those recent changes have included class deviations to the Federal Acquisition Regulation, rolled back Biden-era minimum wage requirements for Federal contractors, and a pause on some Federal technology-related contracts.
The Department of Defense, which is the agency holding the most Federal contracts according to GAO, announced in late March that the U.S. Army would be pausing its technology contracting to review alignment with new guidelines. The Army holds the second highest number of contracting dollars, just behind the Navy.