The email arrives at 2:14 PM on a Tuesday. Subject line: “Termination for Convenience, Contract No. GS-07F-XXXX.” Your $1.2 million janitorial services contract with the General Services Administration is done. Effective immediately.
Your crew is already on-site at a federal building. You have $47,000 in cleaning supplies sitting in a warehouse. Two employees were hired last month specifically for this contract. Payroll is due Friday.
The government does not owe you an explanation. Under FAR Part 49, the federal government terminates contracts for its own convenience with no requirement to justify the decision. Since January 2025, the Department of Government Efficiency (DOGE) has triggered terminations on over 10,000 federal contracts worth $329.8 billion in total obligated value. Small contractors, construction firms, security companies, and professional services providers are absorbing the hit without the legal departments or accounting teams to respond correctly.
A termination for convenience does not mean you walk away with nothing. Federal law entitles you to recover costs already incurred, certain continuing costs you cannot immediately stop, settlement preparation expenses, and a reasonable profit on completed work. The catch: your accounting team must take specific actions in the first 30 days, or you risk losing thousands in recoverable dollars.
What a Termination for Convenience Means (and What It Does Not)
FAR 49.101 gives the government an almost unlimited right to end a contract when continued performance no longer serves the public interest [FAR 49.101]. The contractor has no right to challenge the decision itself. This is not a breach. It is not a default. The government is exercising a clause written into every federal contract.
Here is what the termination does and does not do:
| What It Does | What It Does Not Do |
|---|---|
| Stops all future work on the terminated portion | Cancel your right to payment for work already performed |
| Triggers your duty to reduce costs immediately | Erase costs you have already incurred |
| Starts a one-year clock for your settlement proposal | Prevent you from recovering profit on completed work |
| Assigns a Termination Contracting Officer (TCO) | End the entire contract (if only partial termination) |
The distinction matters because too many small contractors treat a termination notice like a pink slip: pack up, eat the loss, move on. The FAR creates a structured recovery process. Contractors who follow it recover significantly more than those who do not.
Days 1 Through 5: Stop the Bleeding
FAR 49.104 imposes immediate duties on the contractor the moment a termination notice arrives [FAR 49.104]. These are not suggestions. Failure to comply weakens your settlement position and creates cost exposure the government will not reimburse.
Stop all work on the terminated portion of the contract. Pull your crews off-site. Stop ordering materials. Cancel pending purchase orders. Every dollar spent after the effective termination date is a dollar you will not recover unless you have written authorization from the TCO to continue.
Notify your subcontractors. If you have subcontractors performing work under the terminated contract, issue written stop-work notices immediately. You are responsible for terminating those subcontracts, and their settlement costs become part of your claim.
Freeze your records. Do not alter, delete, or reorganize any financial records related to the contract. Lock down your QuickBooks file, your timesheets, your purchase orders, and your job cost reports. The TCO will need original, unmodified documentation.
Your accounting action items for the first five days:
- Identify the effective termination date and confirm it with the Contracting Officer
- Run a job cost report for the contract through the termination date
- List all open purchase orders and subcontracts tied to the terminated work
- Calculate outstanding payroll obligations for employees assigned to the contract
- Photograph and inventory all materials, supplies, and equipment purchased for the contract
Days 6 Through 15: Build Your Cost Picture
FAR 31.205-42 defines the categories of costs recoverable in a termination settlement [FAR 31.205-42]. Understanding these categories before you start assembling numbers keeps you from leaving money on the table.
| Cost Category | What It Covers | Example |
|---|---|---|
| Costs already incurred | All allowable direct and indirect costs for work performed before termination | Labor, materials, travel charged to the contract |
| Continuing costs | Costs that cannot be stopped immediately despite reasonable efforts | Lease payments, employee severance, insurance premiums |
| Initial/startup costs | Pre-production costs not yet fully absorbed over the contract life | Training, mobilization, equipment setup |
| Settlement expenses | Accounting, legal, and clerical costs of preparing your settlement proposal | CPA fees, attorney review, document preparation |
| Profit | Reasonable profit on costs incurred for completed work (not on settlement expenses) | Calculated per FAR 49.202 |
Notice the last row. The government owes you profit on the work you completed. Many small contractors miss this entirely. They submit claims covering only out-of-pocket costs and forfeit the profit they earned on finished deliverables.
During this phase, your accounting team should pull every invoice, timesheet, receipt, and subcontractor billing tied to the terminated contract. Organize costs by the categories above. Use your indirect rate calculations to apply the correct fringe, overhead, and G&A rates to direct costs. The settlement proposal requires actual rates, not provisional ones, so reconcile your pools now.
Days 16 Through 30: Prepare Your Settlement Proposal
FAR 49.206-1 requires you to submit a settlement proposal within one year of the effective termination date [FAR 49.206-1]. One year sounds generous. It is not. Contractors who wait six months or longer to start their proposals lose access to key personnel, misplace documentation, and submit weaker claims. The strongest settlements come from contractors who begin the proposal within 30 days.
Your proposal uses one of two formats:
| Format | Form | When to Use |
|---|---|---|
| Inventory basis | SF 1435 | Preferred method. Itemizes materials, work-in-process, and finished goods at cost. |
| Total cost basis | SF 1436 | Used when inventory basis is impractical. Requires advance TCO approval. |
For most small contractors (construction, janitorial, security), the inventory basis works best because you have tangible materials and supplies to account for. The total cost basis is more common for professional services firms where the primary cost is labor.
Every settlement proposal must include the Schedule of Accounting Information (SF 1439). This form details your accounting system, cost allocation methods, and indirect rate structure. If your accounting system is not set up to produce this information cleanly, the settlement process stalls.
Three elements that strengthen your proposal:
- Tie every dollar to a document. Invoices, timesheets, payroll records, lease agreements. The TCO will audit your claim. Unsupported costs get denied.
- Separate allowable from unallowable costs before submission. Do not force the TCO to find your entertainment expenses or personal charges buried in the claim. Remove them proactively. A clean submission builds credibility and speeds settlement.
- Include settlement expenses in the proposal. The CPA and legal fees you pay to prepare the proposal are themselves recoverable costs under FAR 31.205-42(e). Track these hours from day one.
The Five Mistakes That Cost Contractors the Most Money
Redstone Government Consulting, a firm specializing in government contract termination proposals, identifies patterns that repeat across hundreds of settlements. The average contractor recovers only 60 to 70 percent of their entitled compensation because of avoidable errors.
- Continuing to spend after the termination date. Every purchase order placed, every hour of labor charged after the effective date without TCO authorization becomes an unrecoverable cost. Stop spending immediately.
- Failing to terminate subcontracts. Your subcontractors’ costs roll into your settlement, but only if you formally terminate those subcontracts and include their claims in your proposal. Verbal stop-work orders are not sufficient.
- Submitting a lump-sum claim without detail. The TCO needs line-item detail supported by accounting records. “Materials: $47,000” gets questioned. “Cleaning supplies per PO #4521, received 12/15/2025, warehouse inventory attached: $47,000” gets paid.
- Forgetting to claim profit. FAR 49.202 entitles you to a reasonable profit on work completed before termination. This is not a bonus. It is compensation for performance delivered. Calculate it. Claim it.
- Waiting too long to file. After one year, the TCO determines your settlement amount unilaterally under FAR 49.109-7. You lose your ability to negotiate. The clock starts on the effective termination date, not the date you received the notice.
Partial Terminations: A Different Problem
Not every termination kills the entire contract. A partial termination ends specific line items, task orders, or option periods while the rest of the contract continues. DOGE-driven terminations frequently fall into this category, cutting specific scopes of work rather than canceling entire contracts.
Partial terminations create a unique accounting challenge. You must simultaneously close out the terminated work, file a settlement proposal for the terminated portion, and continue performing and billing on the surviving portion.
FAR 49.208 gives you an additional right in partial terminations: an equitable adjustment to the price of the continuing work [FAR 49.208]. If the termination increased your costs on the remaining work (because you lost volume, because overhead allocation changed, because you cannot hit the same efficiencies at lower scale), you are entitled to a price adjustment. File this request promptly and support it with before-and-after cost data from your accounting system.
A common scenario: a security contractor has a contract covering three federal buildings. The government terminates service for one building. The contractor’s G&A rate now spreads across a smaller cost base, raising the per-building cost of the two surviving locations. The equitable adjustment covers this difference.
Frequently Asked Questions
How long do I have to submit a termination settlement proposal?
One year from the effective termination date [FAR 49.206-1]. After that deadline, the Termination Contracting Officer sets your settlement amount without your input. Start your proposal within 30 days to produce the strongest possible claim.
Do I get paid for work already completed before the termination?
Yes. You recover all allowable costs incurred before the termination date, plus a reasonable profit on completed work [FAR 49.202]. You also recover certain costs that continue after termination, such as lease payments and severance, if you took reasonable steps to stop them.
Are my CPA and legal fees for preparing the settlement proposal recoverable?
Yes. FAR 31.205-42(e) classifies accounting, legal, and clerical costs of preparing and negotiating your settlement proposal as allowable “settlement expenses.” Track these costs separately from day one. They are recoverable but do not carry a profit allowance.
What happens to materials and supplies I already purchased for the contract?
Include them in your settlement proposal at purchase cost. The government will either direct you to deliver the materials, sell them (with proceeds credited against your claim), or retain them. Inventory and photograph everything before submitting your proposal.
Is a DOGE-driven termination different from a regular termination for convenience?
The legal mechanism is identical. DOGE-driven terminations follow the same FAR Part 49 procedures, the same settlement proposal forms, and the same recovery rights as any other termination for convenience. Your accounting response should be the same regardless of the political context.
Key Takeaways
- Stop spending the day the notice arrives. Every dollar spent after the effective termination date without TCO authorization is a dollar you will not recover.
- Freeze and preserve all contract records immediately. Timesheets, invoices, purchase orders, subcontractor agreements, and job cost reports are your evidence. Lock them down.
- Claim everything you are owed, including profit. Recoverable costs include work performed, continuing costs, startup costs, settlement expenses, and a reasonable profit on completed work [FAR 49.202].
- Start your settlement proposal within 30 days, not 30 weeks. Early submissions produce stronger claims with better documentation and higher recovery rates.
- Track your settlement preparation costs from day one. CPA fees, legal review, and document preparation are themselves recoverable under FAR 31.205-42(e).
Government contract terminations are increasing. The accounting decisions you make in the first 30 days determine whether you recover what you are owed or leave money on the table. If a termination notice has hit your inbox, or if you want to prepare before one does, our team provides CPA-managed support for the entire settlement process.
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