The Civilian Board of Contract Appeals (CBCA or the Board) recently issued a notable decision interpreting the often-litigated commercial products and services termination for convenience clause in Federal Acquisition Regulation (FAR) 52.212-4(l) (Termination for the Government's Convenience). In the decision, the CBCA joined the Court of Federal Claims (COFC) and Armed Services Board of Contract Appeals (ASBCA) in holding that FAR 52.212-4(l) entitles a terminated contractor to be paid (1) all or a portion of the contract price for "work performed," and (2) any "reasonable charges" the contractor has incurred in connection with contract performance that it was otherwise unable to recoup (e.g., unrecovered start-up, preparatory, and running expenses, costs of preventive maintenance, termination settlement charges). 

The CBCA's decision is important for commercial products and services contractors because, among other things, it creates further unanimity on the meaning of FAR 52.212-4(l) and makes clear that the fundamental goal in a termination for convenience is to make the contractor whole, which includes the payment of a reasonable profit. At the same time, the CBCA's decision is an example of the challenges a terminated contractor can face when deciding whether to pursue its incurred costs under the "work performed" prong (prong one) versus the "reasonable charges" prong (prong two) of FAR 52.212-4(l).

Background

The facts of Ben Holtz Consulting, Inc. dba California Avocados Direct, CBCA No. 7637 (Nov. 17, 2023) present an all-too-familiar scenario for commercial products and services contractors. In April 2020, the Department of Agriculture issued a request for proposals (RFP) for the delivery of boxed food to Americans impacted by COVID-19. In addition to delivering food boxes, awardees would be responsible for purchasing food, establishing a network of recipient entities (e.g., food banks, schools, churches), and executing all supply chain and logistics activities. See California Avocados Direct at 2. The RFP instructed offerors to propose a "comprehensive" unit price for each box of food, inclusive of "all [cost] components (including but not limited to freight)." Id. It also incorporated FAR 52.212-4(l), the termination for convenience clause applicable to contracts for commercial products and services. See id. at 3.

On May 8, 2020, California Avocados Direct (CAD) was awarded a contract to deliver one million boxes of fresh fruit and vegetables at a price of $40/box. Four days later, at a post-award conference, CAD was authorized to begin contract performance. On May 15, however, the contracting officer ordered CAD to stop work due to concerns about the company's financial capability. The government terminated the contract for convenience under FAR 52.212-4(l) on May 20. By that date, CAD had delivered nearly 30,000 boxes of food and been paid $1.1 million. See id.

CAD submitted a termination settlement proposal and certified claim under the Contract Disputes Act (CDA) seeking to recover approximately $13 million under prong one of FAR 52.212-4(l). The claim characterized the RFP delivery instructions as establishing five "performance requirements": (1) establish a network of qualified recipient non-profit entities; (2) source 18 million pounds of produce for food boxes; (3) purchase produce and food boxes; (4) package and prepare one million food boxes for delivery; and (5) transport and deliver the one million food boxes. CAD's claim assigned relative contract values to each of the alleged requirements and estimated the percentage of work CAD had performed under each. CAD also claimed about $1.75 million in costs under prong two of FAR 52.212-4(l). See id. at 4 n. 7.

The contracting officer issued a final decision awarding CAD $146,508.37, but denying all other costs. CAD appealed the decision to the CBCA, where the parties filed cross-motions for partial summary judgment concerning CAD's entitlement to costs under prong one of FAR 52.212-4(l). See id. at 4-5.

The CBCA's Decision

Noting that neither the CBCA, nor the Federal Circuit, had "directly addressed how to distinguish between prongs one and two" of FAR 52.212-4(l), the CBCA looked to decisions by COFC and the ASBCA as providing "persuasive guidance." See id. at 6.

According to the CBCA, those decisions demonstrate that the term "work performed," as used in prong one, encompasses not only work tendered and accepted by the government, but also work that is partially completed. See id. (citing TriRAD Technologies Inc. v. Department of the Air Force, ASBCA 58855, 15-1 BCA ¶ 35,898). The CBCA also found that the term "reasonable charges" in prong two refers to "costs separate from those charges associated directly with the completed work," including "such things as 'start-up costs; unrecovered running expense; preventive maintenance; settlement charges; and other charges that are normally paid pursuant to a long form termination [under FAR part 49] for convenience provision to fairly compensate a contractor.'" Id. (citing ACLR, LLC v. United States, 157 Fed. Cl. 324, 332-33 (2021)). 

Finally, the CBCA cited COFC's decision in Value Recovery Holding, LLC as supporting the proposition that prong two of FAR 52.212-4(l) covers costs incurred "prior to performance" to satisfy "necessary" contract requirements (e.g., obtaining required licenses and permits), but not if the costs are incurred to provide a "contract deliverable with a specified [contract] price." Id. at 7 (citing Value Recovery Holding, LLC v. United States, No. 21-1467, 2022 WL 3641779, at *8-*9 (Fed. Cl. Aug. 23, 2022)). Rather, the CBCA found that costs associated with such priced deliverables are recoverable only under prong one. See id. 

The CBCA summarized its interpretation of FAR 52.212-4(l) as follows:

[W]e find that prong one of FAR 52.212-4(l) covers work for which the contractor is entitled to be paid under the terms of the contract. Where a contract provides for payment of deliverables at unit prices, prong one permits compensation for completed or partially completed deliverables. Prong one does not permit the contractor to recover separately for work performed or work partially performed that was contractually required to be included in the unit price for deliverables, including startup or preparatory activities. We also find that prong two provides for recovery of reasonable costs that "resulted from the termination," including preparatory or startup activities that are not separately priced under the contract and not otherwise covered by prong one.

Id.

Applying these principles, the CBCA held that CAD was not entitled to recover under prong one of FAR 52.212-4(l) because, while the Board agreed with CAD that the contract contained five performance requirements, it found that those requirements were not separately priced and were covered instead by the contract's "comprehensive" per-box price. See id. at 3, 8. The CBCA left open the possibility, however, that CAD may be eligible to recover under prong two for any "other startup costs [it] was not able to recoup through performance of the contract." Id. at 8.

Key Takeaways

The CBCA's decision in California Avocados Direct is a notable addition to the jurisprudence interpreting the differences between the "work performed" and "reasonable charges" prongs of FAR 52.212-4(l). Though arguably limited to its facts in several respects, a few important takeaways do emerge from the decision:

1. The CBCA, ASBCA, and COFC Largely Agree on How to Interpret FAR 52.212-4(l) (Termination for the Government's Convenience), But will the Federal Circuit Agree? In California Avocados Direct, the CBCA largely adopted and reiterated the views of the ASBCA and COFC on the line between prongs one and two of FAR 52.212-4(l). This should be welcome news for both contractors and the government because it adds further certainty on what has been a contested legal issue. That said, the Federal Circuit, whose decisions are binding on both the Boards and COFC, has not yet addressed this issue. 

   As a matter of jurisprudence, the consensus amongst the Boards and COFC makes both good sense and good law. The termination for convenience clause at FAR 52.212-4(l) embodies the fundamental principle that a "contractor is not supposed to suffer as a result of a termination for convenience of the Government, nor underwrite the Government's decision to terminate." Jacobs Eng'g Group, Inc. v. United States, 434 F.3d 1378, 1381 (Fed. Cir. 2006). As such, if and when it is presented with the issue, the Federal Circuit should interpret FAR 52.212-4(l) according to the clause's plain design, i.e., as entitling a terminated contractor to be paid for "work performed" as specified in the agreed-upon pricing terms of its contract, and to otherwise make the contractor "whole" through the payment of any necessary, reasonable costs that it could not recoup in performance (e.g., unrecovered start-up, preparatory, and running expenses, plus a reasonable profit on those expenses).  

2. Determining How to Recover Your Costs Under FAR 52.212-4(l) (Termination for the Government's Convenience) Is Not as Simple as It Looks. Though not entirely clear from the CBCA's decision, it seems CAD may have put all its avocados (incurred costs) in the "work performed" basket of FAR 52.212-4(l). If it did, then there was likely a good reason for that approach — for example, it is possible that CAD's potential recovery may have been higher if it based its quantum calculation on a percentage of completion relative to the contract price (under prong one), as opposed to a calculation based purely on its actual costs (under prong two). 
    
   But, while a terminated contractor should always look for ways to maximize its recovery, it should also be strategic in its approach. For example, in California Avocados Direct, CAD could have elected to proceed exclusively under prong two or it could have argued that it should recover under prong one, or in the alternative under prong two, for its execution of the five performance requirements in the contract. Again, it is unclear from the CBCA's decision if CAD did state alternative bases for its claim, and the Board did say CAD may still be able to recover under prong two, but either way the lesson is clear: because the line between prongs one and two is dependent upon the contract's scope of work and pricing terms, a terminated contractor must carefully select its entitlement and quantum theories to fit the facts of the case. Reaching for the highest-dollar theory is not always the most effective approach and, at the very least, contractors should consider making alternative arguments to avoid adverse decisions and inefficiency. 

If you have any questions about the California Avocados Direct decision or terminations for convenience generally, please contact one of the Miller & Chevalier attorneys listed below:

Alex L. Sarria, asarria@milchev.com, 202-626-5822

Connor W. Farrell, cfarrell@milchev.com, 202-626-5925

Jason N. Workmaster, jworkmaster@milchev.com, 202-626-5893

Scott N. Flesch, sflesch@milchev.com, 202-626-1584

Alexandra S. Prime, aprime@milchev.com, 202-626-5940

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