Each new presidential administration brings a wave of changes that significantly impact government contractors. These changes often include shifts in policies, regulations, and priorities, which can affect various aspects of federal contracting. Notably, contractors may experience an increase in Requests for Equitable Adjustment (REA) and Terminations for Convenience (T4C) as new priorities and budget constraints emerge.
Federal Contracting Post-Election
Federal contracting post-election often undergoes significant changes as new administrations implement their policies and priorities. Contractors should be prepared for shifts in regulations and industry-specific guidelines, which can positively or negatively impact their operations and compliance requirements.
For example, executive orders issued by the president can have immediate effects on environmental standards, labor laws, or cybersecurity mandates, necessitating quick adaptation by contractors.
Staying informed about these changes is crucial for maintaining compliance and identifying new opportunities to align with the administration's priorities. Additionally, contractors must remain aware of current policies and initiatives that may be decreased or revised as the new administration implements its agenda for the next four years.
Federal Budget and Funding Priority Changes
Federal budget adjustments and shifts in funding priorities frequently occur following an election where a new presidential administration is put in place. These changes, driven by differing sectoral focuses, can redistribute resources and influence various industries.
For instance, an administration prioritizing defense may increase the Department of Defense's budget, creating more opportunities for contractors in aerospace, cybersecurity, and logistics. Conversely, an administration focused on climate action might channel resources toward renewable energy projects and environmental protection initiatives. Below is a table that showcases the average budgets of various federal categories and their relative changes from President Trump’s first administration to President Biden’s administration.
As shown above, during Trump’s first administration, a higher emphasis was placed onto categories such as National Defense where, in turn, during the Biden administration that emphasis saw a significant shift to categories such as Veterans Benefits, Education, and transportation. Budgetary shifts as noted above can be very significant for government contractors, especially those who have a significant presence in the industries where shifts are likely to occur.
These budgetary shifts increase the likelihood of new contract opportunities in areas where the allocation of government funding will rise. Conversely, the areas where budget cuts are imminent are more likely to experience contract terminations or requests for equitable adjustment to the remainder of their existing contracts. In the next sections, we will cover both events and how government contractors can be prepared if either situation is encountered.
Effects of Administration Changes to Government Contracting
Terminations for Convenience
What is Termination for Convenience?
A termination for convenience clause under the Federal Acquisition Regulation (FAR), often known as a T4C, grants the government the authority to fully or partially terminate a contractor's work under a contract when deemed beneficial to the government.
This right to terminate contracts for convenience has been in place since approximately the Civil War era. The key principles of a T4C include: i) the government has significant discretion, exercised in good faith, to terminate contracts for convenience, ii) such termination is not regarded as a breach of contract, provided the government acts in good faith, and iii) the contractor whose contract is terminated is typically entitled to recover certain limited costs.
The contractual authority used to terminate a contract for convenience resides in the following FAR clauses –
1. 52.249-1 Termination for the Convenience of the Government (Fixed-Price) (Short Form)
2. 52.249-2 Termination for the Convenience of the Government (Fixed-Price)
3. 52.249-4 Termination for the Convenience of the Government (Services) (Short Form)
4. 52.249-6 Termination (Cost Reimbursement)
5. 52.212-4(l) Commercial Products and Commercial Services, Termination for the Government’s Convenience.
Additionally, termination of government contracts is governed by Part 49 of the FAR.
Reasons why the Government would institute a Termination for Convenience
Common and uncommon reasons for the government to terminate contracts for convenience include:
- Changes in need following the contract award, such as the conclusion of a war leading to a diminished need for supplies
- Developments or enhancements in technology or capabilities occurring after the contract has been awarded
- Challenges or inability to fulfill contract obligations due to contract requirements, e.g., flaws in contract scope of work regarding design or specification
- Insufficient funding
- Protests regarding the bidding process
- Termination of the stop work period without any guidance from the government to continue operations
- Domestic political environment and agendas
- Global geo-political conflicts
In the new post-election landscape for Government contractors, it is expected that there will be a temporary increase in T4Cs. While the reasons listed above are the most historically prevalent, federal budget changes as noted above will increase the likelihood that a lack of funding, or domestic political environment agendas will cause a T4C. Nonetheless, the overarching objective of a T4C settlement proposal is to ‘fairly’ compensate the contractor for the work performed and related activities arising from the termination.
As a government contract, T4C is not a regular or routine transaction. Contractors may face costs during the settlement process that are atypical in nature.
The relevant regulations acknowledge and permit reimbursement for specific costs associated with T4C government contract activities. Below is a summary of the different types of costs and profits, along with the underlying FAR Part 49 Termination of Contracts and FAR 31.205-42 concerning Termination Costs requirements, which should be taken into account when formulating a termination settlement proposal as follows:
- Performance Costs
- Other Costs (e.g. overhead)
- Settlements with Subcontractors
- G&A Expense
- Settlement Expenses
- Request for Equitable Adjustment
- Profit or Fee
For additional detail and information regarding T4Cs, visit Capital Edge Consulting’s article – “Analysis: What is a FAR Termination for Convenience and What Costs are Allowable?” (How Does a FAR Termination for Convenience Clause Work?).
T4C Trends
T4C trends following presidential elections often see an uptick as new priorities and budget constraints come into play. T4C clauses allow the government to terminate contracts without penalty, which can be used more frequently during periods of transition. Contractors should be aware of the potential for increased termination actions and understand the procedures for negotiating settlements. Being prepared for potential contract terminations can help mitigate financial impacts and ensure smoother transitions.
Request for Equitable Adjustments (REAs)
A request for equitable adjustment, often abbreviated as REA, is a request made by a contractor to the government seeking a unilateral modification of the contract price, schedule, or both. This request is warranted when additional expenses are incurred due to changes that occur during the execution of the contract, which were not part of the original contract scope or anticipated during the price negotiation process.
Reasons for REAs
Equitable adjustments may be authorized in response to unforeseen, unknown, or unpredictable changes to the contract's scope of work that occur during the execution of the contract. If such changes negatively impact a contractor's capacity to fulfill their contractual obligations within the agreed pricing, performance, and delivery parameters, contractors may be entitled to submit an REA.
This serves as a mechanism for contractual relief to address increased costs that have been incurred or are anticipated, as well as any delays or accelerations in schedule commitments. Common factors that may prompt a request for equitable adjustment include:
- A formal request from the Contracting Officer to take on additional or fewer tasks beyond the original contract scope
- An instruction from the Contracting Officer to stop or pause work
- Inaccurate specifications, drawings, or work instructions that were relied upon and formed the foundation of the work scope
- Site conditions that differ from those anticipated at the time of contract award
- Work delays or accelerations resulting from government actions or lack of action
- A partial termination of a contract for convenience
For further details and information concerning REAs, please refer to the following article by Capital Edge Consulting – “Request for Equitable Adjustment (REA) under Government Contracts” (Request for Equitable Adjustment (FAR) - What is an REA?).
Administration Changes and REA Trends Development
A potential increase in REAs may occur following an administration change due to shifts in funding allocation between the existing and entering administrations. Contractors should familiarize themselves with the REA process to recover additional costs incurred from these changes. Understanding the criteria for approval and the necessary documentation can help contractors navigate the REA process more effectively.
Contractor Preparedness for Upcoming Changes
T4Cs, while considered extraordinary, and changes during contract performance, most notably REAs, have the potential to increase in frequency with shifting priorities of a new presidential administration. Contractors can proactively prepare for these occurrences to mitigate risks and ensure smoother resolution processes.
Ways Contractors Can Enhance Preparation
1) Strengthen Financial and Record-Keeping Systems
Contractors should maintain meticulous and up-to-date financial records that align with FAR requirements. Formal accounting systems should capture incurred costs, unpaid costs, and incremental costs related to potential terminations or changes. By ensuring that records are comprehensive and organized, contractors can readily support termination settlement proposals and REAs.
2) Anticipate Policy and Priority Shifts
A new administration may introduce changes to sectoral funding and project priorities. Contractors should monitor policy announcements and budgetary changes to anticipate potential contract adjustments or terminations. Engaging in scenario planning based on likely changes can help contractors prepare for various outcomes.
3) Develop Clear Communication Protocols
Establishing open lines of communication with government representatives ensures better collaboration during contract modifications or terminations. Contractors should designate key personnel for communicating with contracting officers and provide regular updates on contract performance.
4) Maintain Constant Documentation
Contractors should document all contract performance aspects, including changes, delays, and costs incurred, as they occur. Real-time documentation strengthens the basis for REAs and termination settlement proposals by demonstrating a clear link between the event and its cost impact.
5) Conduct Preemptive Cost Analysis
Familiarity with costing methods and their application to REAs is essential. Contractors should evaluate the most appropriate costing methods for different scenarios and maintain detailed records of assumptions and bases of estimates to justify calculations.
6) Engage Experts When Necessary
Regular consultation with legal and contractual experts can help contractors navigate complexities related to T4Cs and REAs.
Prepare For Government Contract Changes After The Election With Help from GovCon Experts
By taking these steps, contractors can improve their preparedness for T4Cs and REAs, ensuring they can respond effectively to the shifting priorities following the election of a new administration. Capital Edge Consulting’s team of highly experienced Federal Contracting Consultants provide unmatched regulatory compliance expertise to government contractors. To schedule a consultation, please contact us today or call us at (855) – CAP – EDGE.