In the turbulent landscape of government contracting under the Trump Administration, mastering the complexities of stop-work or termination orders has never been more crucial. These directives can drastically alter project timelines, inflate costs, impose stringent compliance demands, and affect the overall business. This article explores the stages of a stop-work or termination order, providing invaluable insights from legal, contractor, and auditor perspectives to equip those in the industry with the knowledge needed to navigate these challenging processes effectively.

Issuance of notice to stop-work/terminate

The first phase involves the issuance of the notice to stop work or terminate. A stop-work order is issued to temporarily suspend work on a project, while a termination order is issued to permanently end work on a project. A stop-work order states the contractor must stop all or any part of the work called for by the contract by a period of up to 90 days. The notice will outline the current work to be stopped or terminated, the reasons, and the effective date. From a legal standpoint, the entity issuing the notice must have the legal right to do so based on regulation, and the government award terms and conditions. 

Contractors must follow several steps, specifically:

Step 1: Acknowledge receipt of the order in writing

Step 2: Focus on immediately complying with terms of the order, including stopping all affected work and securing the worksite

Step 3: Promptly flow the notice down to subcontractors

Step 4: Set up cost capture mechanisms, as costs must be properly classified as allowable or unallowable in any future request for equitable adjustment (REA) or claim submissions

Step 5: Maintain open communication with customers and subs

Stop-work/De-mobilization period

During the stop-work period, the legal team will look at what obligations must be followed and make sure the contractor is aware and in full compliance with these obligations.

Contractors will want to ensure they have taken several key actions during this period, including:

• Securing government property
• De-mobilizing project operations
• Staying vigilant for potential re-starts or terminations
• Protect and preserve any ongoing work, materials, tools, and documents
• Accumulate any costs incurred due to the suspension, including what costs are allowable and what costs are unallowable, and segregate from the costs of the original award accordingly

Contractors should also consider transferring employees on the project where work is being stopped to other projects to reduce stop-work order costs. Communication with legal counsel is important to make sure this will not violate any obligations during the stop-work period and to remain in the ready state.

Once the stop-work order is lifted, the contractor should be able to immediately restart project operations. They will want to make sure they communicate with the government regarding the receipt of the order lifting the suspension and seek any clarifications. An overall assessment of the stop work period should take place to understand the impact on project timelines and the project cost budget, and seek an equitable adjustment if impacted.

Claim preparation and audit

Once the project restarts, the contractor will need to verify that the costs from the stop-work order are documented properly. This will aid in preparing a REA or claim. Contractors must decide whether to submit a REA for the contract adjustment they believe the government owes. If they do, they need to justify the adjustment and be able to provide supporting documentation. The supporting documentation should include:

• Records of unforeseen circumstances and their impact on costs or timelines
• Documents detailing costs estimates and schedules
• Correspondence with the government

There are also several reasons the contractor might decide not to submit a REA, such as:

• The REA will only have a minor impact on the business
• The cost of preparing the REA outweighs the potential benefit
• The risk of a dispute with the government outweighs the potential benefits

If the REA is denied, the contractor should submit a claim for payment, contract adjustments, or other relief. For claims over $100,000, certification per FAR clause 52.233-1 is required. Claims must be written and submitted within six years of accrual to the contracting officer. The legal team will likely play an active role in filing the REA or claim, ensuring all paperwork is correctly assembled.

Note that if a project is fully or partially terminated, contractors will likely be working with a Termination Contracting Officer (TCO) who is often the same person as the original award contracting officer. The above process still applies in this situation.

During this process, contractors should be cognizant that their REA or claim may be subject to audit. Recognize that from a government audit perspective, the auditor’s main focus will be related to understanding and opining on who is impacted by the stop work order or termination. The audit will consist of:

• Evaluating the method of accounting used to compute the impact period (e.g., Eichleay formula)
• Verifying compliance with TINA
• Evaluating the reasonableness of claimed costs in the REA or claim, especially allowable and unallowable costs
• Ensuring proper cutoffs, for example, costs continuing after the notice (e.g., shipments in transit) are allowable, while pre-notice losses and overruns are unallowable. (i.e. FAR 31.205-42)
• Issuing an audit report 

Settlement and closeout

During the settlement and closeout period for the REA, claim or termination proposal, negotiations will occur between the legal team, contractor, and customer. This may involve providing additional documentation and clarifying details. Contractors will likely need to certify any claim using the current, accurate, and complete language from the Truthful Cost or Pricing Data Act, formerly known as the Truth in Negotiations Act (TINA), to help ensure fair pricing, if above $2 million. Effective communication and negotiations with the customer will be key in this stage.

If negotiations fail, the REA, claim, or termination proposal may lead to a court decision on the situation. This can lead to further legal fees and/or other subject matter experts to be brought in to assist in making the case. 

Auditors may again be considered during this stage to work with the Contracting Officer/Termination Contracting Officer (TCO) to manage the termination process, respond to inquiries, and support negotiations. 

Next steps

Understanding the phases of a stop-work, claim, or termination order from multiple perspectives is essential for contractors; and ensuring compliance with regulations and effective communication with all stakeholders is key. For more guidance on legal, contractor, and auditing aspects of stop work and termination orders, and additional advice to help you navigate these challenging situations smoothly, watch the full webinar: “Trump Administration actions: Stop-work and termination considerations”.