Since the inauguration in January, President Donald Trump has issued many executive orders (EOs) impacting companies that provide goods and services to the federal government. Over the past few weeks, our professionals have received a constant stream of questions from contractors about terminations for convenience (T4C), settlement proposals, and stop work orders under both contracts and grants.
Over the past several weeks, announcements and articles on deep spending cuts have filled the news. Each executive agency seeks ways to cut federal spending in addition to the staff reductions already happening. For example, the Pentagon announced that it will cut 8%, or roughly $50 billion, from nonlethal programs and redistribute the funding to President Donald Trump’s America First priorities. Per Defense Secretary Pete Hegseth, those priorities are “border protection, fighting transnational criminal organizations, nuclear modernization, submarine programs, missile defense, drone technology, cybersecurity, core readiness and training and the defense industrial base among them.” Any contracts outside those priorities could be impacted with T4Cs.
As government contractors face disruption and termination of contracts, our professionals continue to get questions on what a company needs to do to protect its financial interests. In this article, we will include some of the frequently asked questions (FAQs) we believe are beneficial to pass along. If you have additional questions you think we should address or need targeted assistance with navigating these directives, please reach out to the GovCon Consulting team at Forvis Mazars.
FAQs #1 through #6 were originally published on February 21, 2025. FAQs #7 through 16 are current as of March 28, 2025.
FAQ #1: We just received a letter from the government telling us to “stop work” on one (or more) of our federal contracts. What does this mean? What should we do?
A stop work order (SWO) is commonly issued in a letter format by the government’s contracting officer when there is a funding issue, a change to the project’s scope that cannot be easily adjusted through a change order, or for a variety of administrative reasons. Most recently, SWOs have been issued to some federal contractors based on EO guidance regarding funding freezes and reductions to government spending and workforce.
If you receive a SWO, it is a formal notice directing you to stop working on the tasks identified and, in many circumstances, the entire effort required under the contract or grant. In general, we recommend taking the following steps promptly:
- Review the SWO – Work with your contracts and legal teams to understand what parts of the contract are impacted;
- Communicate with your contracting officer – Get clarification and rationale for the SWO and potential next steps;
- Notify subcontractors and suppliers in writing, providing them guidance on what you need them to do;
- It is extremely important to specifically track and document your costs incurred during the SWO period. The contract clauses generally provide guidance on requests for equitable adjustment and documentation will be critical for successful compensation. This process should include segregated charge accounts for labor, materials, overhead, and any other costs specifically incurred due to the SWO;
- Evaluate the SWO’s impact on the schedule, staffing, subcontractors, and any notices you may be required to provide;
- Review existing insurance policies to see if you have coverage; and
- Begin thinking through strategies for:
- Plans for remobilizing and restarting if the SWO is lifted; or
- Settlement proposals and close-out activities in the event the contract is terminated.
FAQ #2: Can the government really tell us to stop working if we have a contract?
In most circumstances, yes; however, this is a contracts/legal issue, and you should coordinate with your contracts/legal team.
They will likely look into the agreement for terms and conditions that will answer the question. For negotiated contracts issued under Federal Acquisition Regulation (FAR) Part 15, the contracting officer (CO) will generally issue a SWO. The clause at FAR 52.242-15, Stop Work Order, authorizes the CO to require the contractor to stop all or part of the contracted work for a period of 90 days after the order has been provided to the contractor and may be canceled, or extended, as needed. Alternatives to the SWO include FAR 52.242-14, Suspension of Work, for construction or architect-engineer contracts, terminating the contract for convenience or, if warranted, terminating the contract for default.
For grants recipients, the grant administrator can issue a “suspension,” which has a similar impact as a SWO. A suspension of a grant is in reality a temporary halt in the funding provided by a grant. Under a suspension, the grant recipient is not allowed to use the funds for a period of time and may need to pause project activities related to the suspended portion.
If a SWO clause is not in your contract, notify the issuing official immediately for clarification of the authority under which the SWO is being directed. If you ignore the SWO and continue working, the risk of nonpayment and potentially catastrophic penalties is high. Some of these penalties may include termination for default due to a breach of contract, financial penalties, legal disputes, and suspension or debarment. The best avenue to take if you don’t understand or disagree with the SWO is to work with your legal team and then contact your CO or the issuing official immediately for clarification of the order.
FAQ #3: Will we still get paid for the work we have done?
Yes, you should, though this often leads to a two-pronged answer:
- First, the amount for many contracts will be fairly straightforward for work that is completed before the SWO was issued and for any work not impacted by the SWO. For example:
- For fixed-priced services or products completed and delivered, while most likely slower than normal, the process for being paid for the work completed and delivered prior to the SWO would likely not change;
- For a cost-type contract, allowable costs incurred to date can generally be vouchered and paid through FAR 52.216-7, Allowable Cost and Payment.
- Second, for additional costs incurred after receiving a SWO, you will most likely need to prepare a recap of your costs incurred, known as a request for equitable adjustment (REA). (See FAQ #4 below.)
For grants, the ability to get paid for the work performed is found at 2 CFR Section 200.343, Effects of suspension and termination. This guidance states that costs are not allowable unless the federal agency or pass-through entity expressly authorizes them in the notice of suspension or termination or subsequently. However, costs during suspension or after termination are allowable if:
- The costs result from financial obligations that were properly incurred by the recipient or subrecipient before the effective date of suspension or termination, and not in anticipation of it; and
- The costs would be allowable if the federal award was not suspended or expired normally at the end of the period of performance in which the termination takes effect.
For both contracts and grants, several keys to success are understanding your agreement, the SWO, termination clauses, their requirements, and of course, documentation, documentation, and documentation.
FAQ #4: What happens after the SWO is over?
When a SWO is canceled, or the period of the order expires, the contractor should immediately go back to work and the CO should be prepared to make an equitable adjustment to the delivery schedule, the contract price, or both. FAR 52.242-15 clearly states that the CO shall modify the contract accordingly. It is extremely important to remember that the SWO clause requires a contractor to assert its right for adjustment within 30 days after the SWO is canceled or expires.
This is also the time to prepare, assess, and submit an REA. Based on our recommended steps above, the REA should be prepared using the amounts accumulated in the segregated charge accounts for labor, materials, overhead, and any other costs specifically incurred due to the SWO. Prompt and thorough action at this point can help to deter scenarios that can delay negotiations and subsequent collection of amounts owed.
In some cases, the SWO will be lifted through the issuance of a termination for convenience. In the event of a contract termination, the accounting and segregation of directly related costs is critical to being reimbursed appropriately with a termination settlement proposal.
When working with REAs and termination settlement proposals, make sure to leverage adequate professional assistance. This is especially astute since the cost of preparing the proposals is often allowable as an element of the amount recoverable. Forvis Mazars has significant experience in preparing, supporting, and negotiating REAs, settlement proposals, and supporting potential claim prosecution.
FAQ #5: With the turmoil currently in place, will my REA be honored and paid?
REAs have been an integral element in the realm of government contracting, often reviewed and negotiated in the normal course of business. There is no way to predict the long-term effect that the current wave of SWOs and suspensions will have on the processes we outlined above. If your REA is not resolved in a timely manner, your contract should provide the process for dispute resolution.
Our experience shows that if the CO receives an REA without detailed costs and associated documentation, there is a high likelihood they will reject the proposal. In addition, since the CO is not required to review and act upon an REA proposal until final payment under the contract is due, depending on the contract, years can pass before resolution.
If you are facing what you consider to be a significant delay in hearing from your CO, consider working with legal counsel to evaluate opportunities to pursue your REA through the judicial system through the Contract Disputes Act (CDA). In the event you pursue this avenue and file a claim under the CDA, the costs associated with prosecuting the claim, however, would not be allowable costs.
FAQ #6: What should I do right now if I haven’t received a SWO or termination?
Considering recent government activity, we recommend reviewing all of your contracts, subcontracts, and grants to develop an understanding of incorporated clauses relating to SWOs, suspensions, and terminations. In addition, any terms related to change orders, requests for equitable adjustments, or claims should also be reviewed and understood. Once you have reviewed and assessed your contract terms, focus on your accounting policies and processes for identification and segregation of costs and maintain adequate documentation to be ready to react decisively if a SWO or termination comes your way.
FAQ #7: What is a T4C?
A T4C is the government’s sovereign and contractual right to terminate a contract for any reason, or without cause. T4Cs were first used to end massive procurement efforts that were no longer needed following World War I and II. This contract action gives the government the flexibility to determine whether it is in the government’s best interests to discontinue certain contracts without initiating a breach of contract.
To initiate a T4C, the contracting officer (CO) will issue a notification of termination to the contractor, in writing, with details such as the effective date, the extent of the termination, and the authority (the clause) under which the termination is being executed.
FAQ #8: I received a T4C notification. What do I do?
- Look for the effective date of the termination, the extent of the termination, and any special instructions that were provided.
- Get your internal and external team together – make sure that your team is familiar with termination requirements, including Federal Acquisition Regulation (FAR) Part 49, Termination of Contracts.
- Look at the clauses in your contract and read the applicable termination clause(s) to determine how they apply to the affected contract scope (see FAQ #13).
- Stop all impacted work and terminate all related subcontracts.
- Notify the termination contracting officer (TCO) of any circumstances precluding the stoppage of work.
- Protect and preserve the government’s property.
- Notify the TCO in writing of any legal proceedings resulting from any subcontract or other related portion of the termination.
- Settle outstanding liabilities and proposals resulting from the termination.
- Within one year of the effective termination date, submit your own settlement proposal and supporting documentation (see FAQ #14 for information regarding the various settlement proposal forms).
FAQ #9: What if I received a partial T4C?
Follow the steps from FAQ #8 for the partially terminated scope of your contract. Continue to work the rest of the contract and carefully segregate costs between the terminated and not terminated scope. If the termination causes you to incur additional costs, evaluate the situation, identify changes to the contract scope, and consider pursuing a request for equitable adjustment (REA) under the contract.
FAQ #10: What can I recover from a T4C?
In general, a contractor will recover allowable costs incurred prior to the T4C and those resulting from actions required to execute the T4C. These costs will likely include settlements with subcontractors and costs incurred in preparing and submitting the termination settlement proposal.
Guidance on allowable costs associated with terminations are included in FAR 31.205-42, Termination Costs. This cost principle covers common items, costs continuing after termination, initial costs, loss of useful value, rental under unexpired leases, alterations of leased property, and settlement expenses.
Settlement expenses, such as internal and external accounting, fees for external settlement proposal preparation services (such as those Forvis Mazars provides increasing the likelihood of a positive outcome for your company), legal and clerical costs associated with handling the termination, settling subcontracts, and completing and presenting the termination settlement proposals are all allowable costs and should generally be included in your termination settlement proposal.
Some clauses require the use of specific formats such as the Standard Form (SF) 1435 – Settlement Proposal (Inventory Basis) or the SF 1436 – Settlement Proposal (Total Cost Basis). It is important to understand what format will be required to help minimize delays in receiving payment for the costs of the termination.
Profit on work completed under the contract prior to the termination is generally allowed, but anticipatory profits are not. Regardless of the actual expenses incurred by the contractor, the claimed termination costs plus profit must not exceed the contract price less payments made or to be made.
FAQ #11: Who are the key government players in a termination?
Although the current administration is driving the termination of contracts and grants across the federal government, the following government personnel are those that you can reasonably expect to interact with if your contract is terminated for convenience.
- Contracting officer – issues the notice of termination
- TCO – responsible for examining the settlement proposal and negotiating any settlement agreement with the contractor
- Auditors and TCOs – schedule and complete audit reviews and negotiations
FAQ #12: I’m a subcontractor and received a notice of T4C from my prime contractor. What do I do now?
First, review your subcontract and look for any clauses that address termination of the subcontract. If you have such a clause, it probably requires you to follow steps similar to those outlined in FAQ #8. If you do not have a termination clause in your subcontract, work with your legal team to determine your rights and potential settlement options as they may be quite different from those spelled out in FAR Part 49.
If your subcontract does have a termination for convenience clause, FAR Part 49 and associated clauses may provide guidance to address the prime contractor’s and subcontractor’s (or lower tier subcontractor’s) roles and responsibilities. For instance, FAR 49.107(c)(1)(i) provides direction in the case that a subcontractor has reason to refuse an accounting review of their settlement records by the prime contractor due to competitive reasons. In this case, the TCO might engage an audit agency to perform a review of the subcontractor’s settlement proposal.
FAQ #13: What are the T4C clauses and when do they apply to my contract?
- FAR 52.212-4(l) – Commercial Products and Services
- Generally included in contracts awarded pursuant to FAR Part 12, Acquisition of Commercial Products and Commercial Services.
- The instructions in this clause and FAR Part 12.403, Termination, take precedence over FAR Part 49, Termination of Contracts.
- No requirement to comply with Cost Accounting Standards (CAS) or contract cost principles in FAR Part 31, but shall be the “percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination” and “charges the contractor can demonstrated directly resulted from the termination.” The clause also references that these charges should be demonstrated through the company’s “standard record keeping system.”
- FAR 52.249-1 – T4C - Fixed Price (Short Form)
- Generally applies to fixed price contracts that do not exceed the simplified acquisition threshold (currently $250,000) except for research and development (R&D) work with no-profit contracts, architect-engineer services, or services.
- Rights, duties, and obligations of the parties, including compensation, shall be in accordance with FAR Part 49 in effect on the date of the contract.
- FAR 52.249-2 – T4C - Fixed Price
- Generally applies to the terminated portion of fixed price incentive contracts and fixed price contracts exceeding the simplified acquisition threshold except for contracts which are also exempted from FAR 52.249-1 and 52.249-3.
- The clause includes extensive termination instructions; inventory, cost, and proposal requirements; and submission timelines such as 120 days for a termination inventory and one year for a termination settlement proposal.
- FAR 52.249-3 – T4C for Dismantling, Demolition, or Removal of Improvements
- This clause includes similar instructions and requirements as those listed under FAR 52.249-2, but applies to fixed price contracts for dismantling, demolition, or removal of improvements that exceed the simplified acquisition threshold.
- FAR 52.249-4 – T4C - Services (Short Form)
- Generally applies to fixed price services contracts where the contractor will not incur substantial charges in preparation for and in carrying out the contract and, therefore, limits the termination settlement charges to those rendered before the date of termination.
- FAR 52.249-5 – T4C – Educational and Other Nonprofit Institutions
- Applies to R&D contracts with educational or nonprofit institutions on a no-profit or no-fee basis. The applicable cost principles are at Subpart A of the OPM Uniform Guidance at 2 CFR 200.
- FAR 52.249-6 – Termination (Cost-Reimbursement)
- This clause provides for both termination for default and convenience of cost reimbursement contracts.
- Generally provides for reimbursement of all allowable costs, not previously paid, and incurred prior to the termination date. Continued costs may be paid with the approval of the contracting officer.
- Allowable costs include settlement with terminated subcontracts and reasonable settlement costs of the work terminated including a portion of the fee payable under the contract.
- FAR 52.249-7 – Termination (Fixed Price Architect Engineer)
- This clause provides for both termination for default and convenience of architect-engineer contracts.
- A T4C would provide for an equitable adjustment to the price but no anticipated profit on unperformed services.
FAQ #14: How do I prepare and submit a settlement proposal?
For a T4C under a federal contract, there are various standard forms to use when preparing and submitting a settlement proposal. The proper form to use is based upon the contract type, the basis used for computing the proposal, and the value of the proposal.
- For fixed price contract settlement proposals, prepare a:
- SF 1435, Settlement Proposal (Inventory Basis) if computing settlement proposal on an inventory basis;
- SF 1436, Settlement Proposal (Total Cost Basis) if computing settlement proposal on a total cost basis; or
- SF 1438, Settlement Proposal (Short Form) if the total settlement proposal is less than $10,000.
- For cost reimbursement contract settlement proposals, use SF 1437, Settlement Proposal for Cost-Reimbursement Type Contracts.
In addition, there are two more forms used for preparing documentation to support a termination settlement proposal. FAR 49.602 provides specific details on when to use these forms.
- SF 1438 Inventory Disposal Schedule plus SF 1439 Continuation Sheet
- SF 1439 Schedule of Accounting Information
Finally, there are forms that can be used to request partial payment, if the contract provides for one, associated with a settlement proposal:
- SF 1440 – Application for Partial Payment
The FAR does provide for a specific calculation to determine the amount of a proper, reasonable partial payment that may be authorized at the discretion of the TCO.
FAQ #15: What are the bases for preparing termination settlement proposals?
The two methods for preparing termination settlement proposals identified in FAR Part 49, Termination of Contracts, are the inventory basis and the total cost basis. The inventory basis is the preferred method per the regulation, and it requires the contractor to categorize proposed settlement costs into categories such as raw materials, purchased parts, work in process, finished parts, etc.
The total cost basis requires approval in advance by the TCO, and this method is intended for use when the inventory basis is not practical or will unduly delay settlement, such as when the contract does not specify unit prices or the contractor’s accounting system cannot readily establish unit costs for work in process and finished products. The contractor proposes actual costs by cost element, i.e., direct labor, materials, other direct costs, applied indirect costs, etc.
Both methods include application of General and Administrative (G&A) expenses, termination settlement expenses, and an allowance for profit or adjustment for loss. In addition, both methods may require detailed cost accounting information to support proposed settlement expenses, but the goal is to determine fair compensation for work performed and preparations made for the terminated portions of the contract. FAR Part 49 acknowledges: “Fair compensation is a matter of judgment and cannot be measured exactly. In a given case, various methods may be equally appropriate for arriving at fair compensation. The use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.” (FAR 49.201(a))
FAQ #16: Should I get outside assistance?
The answer is often yes. Termination settlement proposals specifically address the opportunity to include preparation costs—both internal and external. Whether it’s legal costs to help ensure your basis for potential entitlement is sound, or accounting support on the computation of quantum and completing the required forms, the use of a team with experience in preparing the documentation can be beneficial.
In addition to the notification and mitigation efforts, and preparing a termination settlement proposal and/or an REA for the unterminated effort under a partial termination, you should also evaluate any other changes resulting in costs that were not anticipated in the proposal cost estimate. If these costs were incurred due to changes or delays caused by the government, you may have another basis for potential recovery of compensation.
Preparing termination settlement proposals can be quite complex. When confronted with the task of having to determine the proper forms, prepare and summarize the accounting data and the numerous other actions necessary to support a settlement proposal prior to the 12-month deadline, many companies have found that their internal teams are already fully engaged in running the day-to-day business operations of the company.
At Forvis Mazars, our team can help you work through the process of segregating costs, considering the basis for calculating and proposing settlement costs, and preparing the settlement proposal. Remember, if you engage Forvis Mazars to assist in forming and submitting your termination proposal, our fees are, in many situations, recoverable as an allowable cost. An additional advantage of engaging Forvis Mazars to assist is that our professionals stay current on federal regulations and the ever-changing defense industry base climate, and are well equipped to advise our clients on how to proceed if and when confronted with a T4C.
Conclusion
Our goal is to keep this posting current and active over the next several months. If you have questions regarding contract actions received based on new guidance being issued, please reach out to a professional at Forvis Mazars. The FAQs provided are for general informational purposes only and are not intended to be legal advice. Companies are also advised to seek legal counsel to understand your rights if you are affected by a SWO. The Government Contract Consulting group at Forvis Mazars can advise with options, legal referrals, and assistance to your team on creating processes for tracking and maintaining detailed records or preparing REAs, termination settlement proposals, or claims.