A recent decision by the Armed Services Board of Contract Appeals (ASBCA) reinforces the FAR part 49 provisions governing terminations for convenience, which provide that contractors are entitled to fair compensation and that settlements for such terminations should not rigidly rely on cost and accounting data. In D-STAR Eng’g Corp., ASBCA Nos. 62075, 62780 (Apr. 28, 2025), the government had terminated the contractor’s cost-plus-fixed-fee research and development contract for convenience. Following the contractor’s submission of its termination settlement proposal (TSP), the government questioned certain costs claimed, disputed the fee owed to the contractor, determined it had overpaid the contractor, and issued a debt demand claim for disallowed costs. The contractor then submitted its own, affirmative claim incorporating its TSP and seeking additional costs and interest. The most interesting portion of the ASBCA’s decision is its discussion of the methods available to the parties to calculate the amount of fee to which the contractor was entitled following the termination for convenience, which we describe below. However, the ASBCA also addressed the allowability and allocability of various cost types that may be of interest, including termination settlement costs, direct labor, engineering overhead, and G&A.

Regarding the disputed fee amount, the contract’s pertinent FAR clauses stated that the contractor was entitled to a fee percentage equal to the percentage of completed work on the contract, less any previous fee payments made by the government. In its TSP, the contractor proposed its fee by using the double-declining accounting method, which effectively awards a higher fee rate during the earlier contract work, with the fee rate declining as performance proceeds. The contractor explained that the R&D work completed early in the contract was more technically challenging and that the contract required significant upfront investment. The government argued – and the ASBCA rejected – that the FAR required the use of the straight-line accounting method, which consistently applies fee throughout performance of the contract work. The contractor argued – and the ASBCA agreed – that the use of the straight-line method would prevent the contractor from fully recovering the financial investments it incurred and had anticipated recovering over the full performance of the contract.    

Quoting FAR 49.201, the ASBCA explained, “[t]he use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement” of terminations for convenience and “[c]ost and accounting data may provide guides, but are not rigid measures, for ascertaining fair compensation.” The ASBCA held that the government’s narrow interpretation of the FAR provisions governing fee ignored other provisions that require consideration of many factors when determining fee, including “the extent and difficulty of the work performed by the contractor.” FAR 49.305-4(a). 

This decision is a reminder that fair compensation to contractors is at the heart of recovery for terminations for convenience. In particular, the FAR does not mandate the use of a specific method to determine the fee owed to contractors. Instead, the focus should be on determining a fee that results in “fair compensation” for the work performed.