circumstances in each case, such a preliminary notice (1) shall call the contractor's attention to his contractual liabilities should the contract be terminated for default under subparagraph (a) (i) of the clause, (2) may request an explanation of the contractor's failure, (3) may state that failure of the contractor to present such explanation may be taken as an admission that no valid explanation exists, and (4) may invite the contractor to discuss the matter at a conference.

(b) Subparagraph (a)(ii) of the Default clause covers situations in which the contractor fails to perform any of the other provisions of the contract (such as not furnishing a required performance bond) or so fails to make progress as to endanger performance of the contract in accordance with its terms. In either of such situations, the contracting officer must formally notify the contractor of such failure and allow at least 10 days for cure of the failure before issuing a termination notice. Such notification shall set forth in concise but complete form all of the provisions of the contract which the contractor has failed to meet, or a summary of the findings which have demonstrated that the contractor has failed to make acceptable progress in the performance of the contract, or both. The extent of detail to be included will vary depending upon the nature and amount of previous correspondence with the supplier; but any such previous correspondence relied upon shall be specifically referenced in the preliminary notice. The preliminary notice (1) shall state that a notice of termination for default may be issued upon expiration of the 10-day (or longer) period unless the failure to perform or to make adequate progress toward performance has been cured, (2) shall call the contractor's attention to his contractual liabilities in the event the contract is terminated for default, (3) shall request an explanation of the contractor's failure to perform the contract, (4) may state that failure of the contractor to present such explanation may be taken as an admission that no valid explanation exists, and (5) may invite the contractor to discuss the matter at a conference.

(c) The contracting officer shall consider the following factors in determining whether to terminate a contract for default:

(1) The provisions of the contract and applicable laws and regulations;

(2) The specific failure of the contractor and the excuses, if any, made by the contractor for such failure;

(3) The availability of the supplies or services from other sources;

(4) The urgency of the need for the supplies or services and the period of time which would be required to obtain the supplies or services from other sources as compared with the time in which delivery could be obtained from the delinquent contractor;

(5) The degree of essentiality of the contractor in the Government procurement program and the effect of a termination for default upon the contractor's capability as a supplier under other contracts;

(6) The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments;

(7) The availability of funds to finance repurchase costs which may prove to be uncollectible from the defaulted contractor, and the availability of funds to finance termination costs if the default is determined to be excusable; and

(8) Any other pertinent facts and circumstances.

(d) If, after compliance with the procedures in (a) through (c) of this § 1-8.602-3, the contracting officer determines that termination for default is proper, he shall issue a notice of termination which shall:

(1) Set forth the contract number and date;

(2) Describe the acts or omissions constituting the default;

(3) State that the contractor's right to proceed further with performance of the contract (or a specified portion of the contract) is terminated;

(4) If the contracting officer has not determined whether the failure to perform is excusable, state that the supplies or services terminated may be procured against the contractor's account, and that the contractor may be held liable for any excess costs;

(5) If the contracting officer has determined that the failure to perform is not exclusable, state that the notice of termination constitutes such decision and state that the contractor will be held liable for any excess costs, and also state that the contractor has the right to appeal such decision under the Disputes clause;

(6) State that the Government reserves all rights and remedies provided by law or under the contract, in addition to charging excess costs; and

(7) State that the notice constitutes a decision that the contractor is in default as specified and that the contractor has the right to appeal under the Disputes clause.

(e) The same distribution shall be made of the termination notice as was made of the contract. In addition, a copy shall be furnished to the surety, if any, and the procuring activity's fiscal office shall be advised to withhold further payments under the terminated contract pending additional instructions which shall be given when sufficient information is available.

(f) If the contracting officer determines before issuance of the notice of termination that the contractor's failure to perform arose from causes beyond his control and without his fault or negligence and that termination is in the best interest of the Government, the contracting officer shall either terminate the contract for convenience where the contract contains a termination for convenience clause or terminate the contract for default, without assessing excess costs, where the contract does not contain a termination for convenience clause.

(g) If the contracting officer has not been able to determine, prior to issuance of the notice of termination, whether the contractor's failure to perform arose from causes beyond his control and without his fault or negligence, he shall make a written decision on that point as soon as practicable after issuance of the notice of termination. Such decision shall be delivered promptly to the contractor with a notification that he has the right to appeal the decision as specified in the Disputes clause. (See § 1-8.601(b) with respect to the situation where the contract contains a termination for convenience clause and the causes of the failure to perform are excusable.)

§ 1-8.602-4 Procedure in lieu of termination for default.

The following courses of action, among others, are available to the contracting officer in lieu of termination for default, when in the best interest of the Government:

(a) Permit the contractor, his surety, or his guarantor to continue perform

ance of the contract under a revised delivery schedule;

(b) Permit the contractor to continue performance of the contract by means of a subcontract or other business arrangement with an acceptable third party, provided the rights of the Government are adequately preserved; or

(c) If the requirement for the supplies and services specified in the contract no longer exists and the contractor is not liable to the Government for damages as provided in § 1-8.602-7, execute a nocost termination settlement agreement utilizing the formats set forth in §§ 18.806-6 and 1-8.806-7 as a guide. § 1-8.602-5

file.

Documentation in contract

(a) Where the supplies or services are still required after termination and the contractor is liable for excess costs, repurchase of supplies or services which are the same as or similar to those called for in the contract shall be made against the contractor's account as soon as practicable after termination. Such repurchase shall be at as reasonable a price as practicable considering the quality required by the Government and the time within which the supplies or services are required. The contract of repurchase may be made for a quantity in excess of the undelivered quantity terminated for default, when such excess quantity is needed (so long as this does not result in paying a higher unit price than available for the undelivered quantity) but excess cost may be charged against the defaulting contractor for no more than the undelivered quantity terminated for default (including variations in quantity permitted by the terminated contract).

(b) If the repurchase is for a quantity not in excess of the undelivered quantity terminated for default, the legal requirements with respect to formal advertising are inapplicable. However, the contracting officer shall use formal advertising procedures except where there is good reason to negotiate. If the contracting officer decides to negotiate the repurchase contract, he shall note the

reason in the contract file and shall identify the procurement as a repurchase in accordance with the provisions of the Default clause in the defaulted contract. If the repurchase is for a quantity in excess of the undelivered quantity terminated for default, for the purpose of determining whether advertising or negotiation should be used, the entire quantity shall be treated as new procurement.

(c) If repurchase is effected at a price in excess of the price of the supplies terminated, the contracting officer shall make a written demand on the contractor for the total amount of such excess, giving due consideration to any increases or decreases in other ascertainable costs such as transportation and discounts. If the contractor fails to make payment, the contracting officer shall follow agency procedures for collecting claims in favor of the Government.

§ 1-8.602-7 Other damages.

(a) If a contract is terminated for default or if a course of action in lieu of termination for default is followed (see § 1-8.602-4), the contracting officer shall promptly ascertain and make demand for any liquidated damages to which the Government may be entitled under the contract. Pursuant to the contract provisions for liquidated damages in § 1-1.315-3, such damages are in addition to any excess cost of reprocurement.

(b) If the Government has suffered any other ascertainable damages as a result of the contractor's default, the contracting officer shall, on the basis of legal advice, take appropriate action to assert the Government's claim for such damages.

[33 F.R. 14287, Sept. 21, 1968]

§ 1-8.603-1 Termination of the contractor's right to proceed.

Under contracts containing either of the Termination for Default-Damages for Delay-Time Extensions clauses set forth in § 1-8.709, the Government has the right, to the extent provided in such clauses, to terminate the contractor's right to proceed with the work, or any separable part thereof, if the contractor does not prosecute the work required by the contract with such diligence as will insure its completion, or fails to com

plete it, within the time specified in the contract or any extension thereof.

§ 1-8.603-2 Effect of termination for default.

If a contractor's right to proceed is terminated for default, the Government may take over and complete the work or cause it to be completed and the contractor and his sureties shall be liable to the Government for any increased costs caused thereby. If the contract contains the clause set forth in § 1-8.709-1, the contractor and his sureties shall, in addition to increased costs in completing the work, be liable for liquidated damages if liquidated damages are provided in the contract, or for actual damages if liquidated damages are not so provided.

§ 1-8.603-3 Procedure in case of default.

(a) The contracting officer shall consider the following factors in determining whether to terminate a contract for default:

(1) The provisions of the contract and applicable laws and regulations;

(2) The specific failure of the contractor and excuses, if any, made by the contractor for such failure;

(3) The period of time which would be required for the Government or another contractor to complete the work as compared to the time required for completion by the delinquent contractor;

(4) The effect of a termination for default on the ability of the contractor to liquidate guaranteed loans, progress payments, or advance payments;

(5) The availability of funds to finance the increased cost to complete, to the extent that such costs may not be covered by surety protection, and the availability of funds to finance termination costs should it subsequently be determined that the delay was excusable; and

(6) Any other pertinent facts and circumstances.

(b) If the contracting officer determines that the contractor's failure to perform arises from causes which are excusable under the terms of the contract, the contracting officer shall not terminate the contractor's right to proceed, nor shall he charge the contractor with liquidated damages (or if no liquidated damages, then actual damages) because of any delays occasioned by such causes. See (b) and (c) of § 1-8.601

regarding action to be taken if the default is determined to be excusable after issuance of the notice of termination.

(c) If the contracting officer determines that termination for default is in the best interest of the Government, he shall promptly send a written notice to the contractor terminating his right to proceed. The notice shall:

(1) Set forth the contract number and date;

(2) Describe the act or omissions, and the extent of the resultant delay, constituting the default;

(3) State that the contractor's right to proceed further with performance of the contract (or of a specified portion of the contract) is terminated;

(4) State that the Government may cause the contract to be completed and that the contractor will be held liable for any increased costs;

(5) State that the Government reserves all rights and remedies provided by law or under the contract, in addition to charging increased costs;

(6) State that the notice constitutes a decision, pursuant to the Disputes clause, that the contractor is in default as specified and that the contracting officer has determined that the delay is not excusable; and

(7) State that the contractor has the right to appeal as specified in the Disputes clause.

(d) The same distribution shall be made of the termination notice as was made of the contract. In addition, a copy shall be furnished to the surety, and the procuring activity's fiscal office shall be advised to withhold further payments under the terminated contract pending additional instructions which shall be given when sufficient information is available.

(e) Promptly after issuance of the termination notice, the contracting officer shall determine the manner in which the work is to be completed and whether the materials, appliances, and plant which are on the site will be needed.

§ 1-8.603-4 Dealings with surety-takeover agreements.

(a) By reason of the surety's liability for damages resulting from the contractor's default, the surety has certain rights and interests in connection with the completion of the contract work and the application of the undisbursed funds available therefor. An expenditure in

excess of the amount reasonably necessary for completion or a diversion of funds to other use may result in reducing the surety's liability. Because of such interests of the surety, proposals by the surety concerning the completion of the work should be given due consideration, and the decision as to the action to be taken shall be made on the basis of the best interest of the Government, including the possible effect of such action upon the Government's rights against the surety.

(b) Where the surety desires to complete the contract work, completion by the surety should normally be permitted unless the contracting officer has reason to believe that the persons, firms, or corporations by whom the surety proposes to have the work done are so incompetent or unqualified that the interests of the Government would be substantially prejudiced by their efforts.

(c) Because of the possibility of conflicting claims to unpaid prior earnings (retained percentages or amounts representing unpaid progress estimates) of the defaulting contractor, the surety may condition its offer of completion upon the execution by the Government of a "takeover" agreement fixing the surety's rights to payment from such funds. In that event the contracting officer may in his discretion (but not before the effective date of termination) enter into a written agreement with the surety. Further, consideration should be given to having the agreement include both the surety and the defaulting contractor in order to eliminate any disagreement as to the contractor's residual rights, such as claims to unpaid prior earnings. The agreement shall provide that the surety will undertake to complete the work required by the contract in accordance with all the terms and conditions of the contract, and that the Government will pay the surety in the manner provided by the contract, but not in excess of the surety's costs and expenses, the balance of the contract price unpaid at the time of default; subject, however, to the following conditions:

(1) Any unpaid earnings of the defaulting contractor, including retained percentages and progress estimates for work accomplished prior to termination, shall be subject to claims by the Government against the contractor, except to the extent that the amount thereof may be required to pay to the completing

surety its actual costs and expenses incurred in the completion of the work, exclusive of its payments and obligations under the payment bond given in connection with the contract.

(2) Such agreement shall not waive or release the Government's right to liquidated damages for delays in completion of the work, except to the extent that such delays may be excused under the provisions of the contract.

(3) If the contract proceeds have been assigned to a financing institution, the surety may not be paid from retained percentages or amounts representing unpaid progress estimates earned by or payable to the contractor unless the assignee shall consent in writing to such payment.

(4) In no event shall the surety be entitled to be paid any amount in excess of its total expenditures necessarily made in completing the work and discharging its liabilities under the payment bond of the defaulting contractor. Furthermore, payments to the surety to reimburse it for discharging its liabilities under the payment bond of the defaulting contractor shall be only on authority of (i) mutual agreement between the Government, the defaulting contractor, and the surety, or (ii) determination of the Comptroller General as to payee and amount, or (iii) order of a court of competent jurisdiction.

§ 1-8.603-5 Procedure in lieu of termination for default.

If, after due consideration, the contracting officer determines that termination is not in the best interest of the Government although the contractor is in default, the contracting officer may permit the contractor to continue the work, and the contractor and his sureties shall be liable to the Government for liquidated damages, as specified in the contract, or if liquidation damages are not so specified, to any actual damages occasioned by the failure of the contractor to complete the work in accordance with the terms of the contract. § 1-8.603-6

file.

Documentation in contract

In all cases where a contractor's right to proceed is terminated for default or where the procedure authorized by §1-8.603-5 is followed, the contract file shall be well documented to explain fully the reasons for the action taken.

§ 1-8.603-7 Liquidation of liability.

In accordance with the provisions of the contract, the contractor and his surety are liable to the Government for resulting damages. All retained percentages of progress payments previously made to the contractor and any progress payments due for work completed prior to the termination of the right to proceed shall be used for the purpose of liquidating the liability of the contractor and his surety to the Government for such damages. Where the retained and unpaid amounts are insufficient to liquidate such liability, steps shall be taken to recover the additional sum from the contractor and his surety.

§ 1-8.604

Default termination of costreimbursement type contracts.

(a) Under cost-reimbursement type contracts containing the Termination for Default or for Convenience of the Government clause in § 1-8.702, the Government has the right to terminate the contract for default for the reasons contained in paragraph (a)(1) of the clause.

(b) Settlement of a cost-reimbursement type contract terminated for default is subject to the principles set forth in Subparts 1-8.2 and 1-8.4 and is performed in the same manner and with the same consequences as when the contract is terminated for convenience except:

(1) The costs of preparing the contractor's settlement proposal are not allowable (see paragraph (e) (1) (iii) of the clause in § 1-8.702); and

(2) The fixed fee, if any, is paid only with respect to articles delivered and accepted (see paragraph (e) (1) (iv) (B) of the clause in § 1-8.702).

(c) In order that the best interests of the Government will be served, the procedures set forth in §§ 1-8.602 and 1-8.603 shall be used to the extent appropriate in considering the termination for default of a cost-reimbursement type contract; however, a cost-reimbursement type contract does not contain any provision for recovery of excess costs of reprocurement after termination for default.

§ 1-8.605 Default termination of certain fixed-price research and development contracts.

(a) Under fixed-price research and development contracts containing the Default clause in § 1-8.710, the Government has the right to terminate the con