Has Your Contract Been Terminated?

In recent years, the Defense Logistics Agency awarded a number of large, multi-year contracts. Under these contracts, contractors committed to provide supplies at fixed prices that were negotiated years earlier when prices were more stable. In 2007 and 2008, before the current economic slump, commodity prices escalated at rates few could have predicted. Many contractors found themselves under water, with fixed prices quoted to the government that failed to cover even their out-of-pocket costs. The options for many small businesses were bleak: either perform at the fixed prices and lose thousands of dollars or default on their contract obligations. Many contractors chose to default, and their contracts were terminated.

What consequences will such contractors suffer for their contracts being terminated for default?

Legally, for bilateral contracts, such contractors are responsible for the government’s repurchase costs. That means that, if the contractor’s price was far below the market price at the time of the order, and if the government goes out and repurchases at highly escalated prices under current market conditions, the contractor is liable for the difference. However, indications are that some contracting activities are not intending to recover these damages, in part, because the number of defaults are simply too massive.

In the case of the Defense Supply Center Columbus, DSCC, located in Columbus, Ohio, the government witnessed many instances of prime contractors no longer willing, or able, to provide supplies at the prices they negotiated years earlier. In one instance, DSCC terminated 150 delivery orders from just one prime contractor. But DSCC saw so many defaults in 2007 and 2008 that it does not intend, and does not have the manpower, to go after each contractor for repurchase costs. Instead, DSCC has used the terminations for default as a means to reflect poorly on the contractors’ Automated Best Value System – ABVS – score. In short, the contractors can choose to avoid the financial hit by refusing to provide supplies at below-market prices – i.e., they can take the termination for default – but then their ABVS score will go down and their chances of receiving future contracts will be diminished.

With the current economic slump, the conditions that led to these defaults and terminations should ease. However, contractors concerned about receiving future contracts should consider challenging the terminations for default, if possible, to save their ABVS score and their chances of receiving future contracts.

March 2009