Your prime contracts with the Government (and probably Government-funded subcontracts) include clauses that allow your customer to Terminate the contract for (their) Convenience – or T4C. After receiving notice of a T4C, (the remainder of) the award becomes a cost-reimbursable contract, regardless the contract-type (e.g., Fixed Price, CPFF) before the T4C. The cost proposal for the remainder owed by the customer follows most of the best practices for any (pre-award) cost proposal; however, the T4C has some significant differences.
Often, the contractor (or subcontractor) must complete a Standard Form showing each cost by element. Forms used for a T4C include:
- SF1435 – Fixed Price award with proposed costs on an Inventory Basis
- SF1436 – Fixed Price award with proposed costs on a Total Cost Basis
- SF1437 – Cost-reimbursable award
- SF1438 – Fixed Price award with proposed costs of less than $10,000
- SF1439 – Accounting Information (methodology, calculation of indirect rates, etc.)
All costs (and profit or fee) already billed are excluded from the proposal. Costs are shown for two, separate time-periods.
First, propose all costs incurred – but not yet billed – for performance or the contract, up to the notice of Stop Work or Termination. These costs earned profit or fee.
Second, propose all costs incurred related to the Termination. The accounting system sets up a separate Project for the Termination Costs of each terminated contract. Costs incurred for the benefit of – or that are caused by – the termination are recorded in this separate Project. These are direct costs of the T4C Project. Direct Labor costs include administrative employees’ labor to:
- Calculate/negotiate final payments, then close, purchase orders (and lower-tier subcontracts)
- Calculate costs and gather supporting documents for the T4C proposal
- Complete forms
Note that the labor of employees, who normally charge their time to G&A, charge time (instead) to the T4C Project for this contract.
These (direct costs) also include:
- Severance pay[1], where required by law or when consistently implemented by company policy or (substantiated) practice
- Vendor restocking charges for purchases
- Contractually required fees for terminating (lower-tier) subcontracts, especially where such termination fees are standard in that market
- Costs of outside consultants to assist with the T4C cost proposal and forms
- Other costs to wind-down activities covered by the T4C
Unlike a typical cost proposal, these also include unavoidable on-going costs. For example, Project ABC required a non-cancellable, one-year lease of office space dedicated to Project ABC. The T4C occurred four months into the lease; the remaining eight months of rent is an allowed cost, even though the cash has not yet been paid. The “future” rent is a direct cost of the ABC T4C Project.
Indirect rates, such as G&A, apply to the direct costs of the T4C Project. Profit/Fee does not apply.
[1] This excludes pay-out of Paid Time Off, because accrual basis accounting already recorded the expense for earned PTO, which was billed as earned, and may not be billed again.