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Termination Fee or Minimum Guarantee

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A termination fee is pre-negotiated into an IDIQ contract. The fee addresses the contractor’s entitlements in the event the Government fails to order the contract’s minimum guarantee (FAR 16.504(a )(1) and (2)).

What is the extent of the government’s liability? The termination fee? The minimum guarantee? If you don't believe the termination fee is sufficient, why not?

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The question as posted is ridiculous. The implications of the said "termination fee" are a matter of contract interpretation, which depends on the language of the termination fee provision in the context of the contract in its entirety. The only thing more unprofessional than asking such a question would be answering such a question.

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The question as posted is ridiculous. The implications of the said "termination fee" are a matter of contract interpretation, which depends on the language of the termination fee provision in the context of the contract in its entirety. The only thing more unprofessional than asking such a question would be answering such a question.

Talk about unprofessional. Your comment is yet another of your typical efforts to passively and/or agressively belittle others for no apparent reason. Were you not loved as a child? Or adult?

A bit of constructive criticism or request for clarification would have much more appropriate. Thanks anyways. I guess I should have expected no less from you.

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The implications of the said "termination fee" are a matter of contract interpretation, which depends on the language of the termination fee provision in the context of the contract in its entirety.

No kidding. I'm asking a generic question, not one specific to a given contract.

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By the way, it’s posts like this –

The question as posted is ridiculous. The implications of the said "termination fee" are a matter of contract interpretation, which depends on the language of the termination fee provision in the context of the contract in its entirety. The only thing more unprofessional than asking such a question would be answering such a question.

that keep many more people from asking questions and/or otherwise contributing to WIFCON.

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Well, it should keep people from asking stupid questions.

Is the termination fee clause an authorized deviation from the applicable termination for convenience clause?

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Is the contract cost-reimbursement, fixed-price, or T&M?

If it's cost-reimbursement, is the termination "fee" supposed to compensate the contractor for costs and fee or just fee?

If it's fixed-price or T&M, just what is the "fee" supposed to compensate the contractor for?

Does the termination fee apply even if the contract is properly terminated for convenience, or does it apply only if the government breaches the contract?

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No kidding. I'm asking a generic question, not one specific to a given contract.

If this isn't specific to a given contract, what did you mean when you said that a "termination fee" is negotiated into an ID/IQ contract? If you are implying that a guaranteed minimum order amount represents a termination fee, it isn't.

Please clarify.

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When the Government enters into an IDIQ contract a “minimum guarantee” is established. I think most people agree that the dollar amount associated with the minimum guarantee must be (1) made available to the KO prior to the obligation, and (2) recorded as an obligation at the time the IDIQ is established. I’m trying to figure out if it’s possible to reduce the amount of the government’s initial obligation while still including the minimum guarantee in the contract.

Perhaps an example would better illustrate what I think may be possible:

IDIQ.

CLIN 1, quantity of 1, minimum guarantee, value $10,000.

CLIN 2, quantity of 49, total value $490,000.

CLIN 3, pre-negotiated termination fee (maybe “settlement fee” would be more appropriate verbiage), value $3,000.

Contract language. “CLIN 3 may be ordered in lieu of CLIN 1.”

What is the government’s initial obligation? $3,000? $10,000?

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The initial obligation is $500,000, $10,000 + $490.000.

CLIN 1 is a promise to buy a minimum of one unit. When the Government enters into an IDIQ contract, its obligation is the price for the minimum amount it promises to buy. It must record an obligation in that amount. The obligation is made at the time of award, even if the order won't be issued until a later time.

Your thought is to establish CLIN 3 to give the Government the option to pay a "termination fee" in lieu of buying the minimum amount. Presumably, that option would be exercised after award, but before the expiration of the ordering period. Since CLIN 3 is an option, it is not an obligation unless and until it is exercised. Thus, the amount of the obligation would be $10,000, not $3,000. If the option is exercised, you would have to deobligate $7,000 from CLIN 1.

All of this assumes that CLIN 0003 is a permissible contract term. I think it would be a FAR deviation requiring approval. It would deviate from the terms of the termination for convenience clause. Not necessarily a bad idea, but a departure from FAR Part 49 and the termination clause.

You apparently think that without the termination (settlement) fee the Government's failure to order the minimum automatically entitles the contractor to the amount of the minimum. If that's what you think, you're wrong. The settlement would be based on the T for C clause, assuming that you terminate before expiration of the ordering period. If you don't terminate before the expiration of the ordering period the contractor would be entitled to compensatory breach damages. See White v. Delta Construction International, Inc., 285 F.3d 1040 (Fed. Cir. 2002). Rather than pay $3,000, you might do better to breach the contract and pay compensatory damages, which might be merely nominal.

You see, jwomack -- given half a chance and a little motivation, you can ask a (more or less) intelligent question and get a (halfway) decent answer.

In response to your Post #3, I was raised in an orphanage, beaten daily by the Sisters of Mercy, and sent to work in a Pennsylvania coal mine when I was 17. Then I joined the Army and was sent to the infantry. No love, but I was taught a valuable lesson: We have a moral obligation -- to ourselves and to each other -- to be intelligent.

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Why couldn’t funding be provided for CLIN 3 instead of CLIN 1? The government’s choice between these CLINs is equal; the government will order CLIN 1 or CLIN 3 (or, as you have noted, choose to breach).

Agree that a FAR deviation would probably be required. And no, I don’t think the contractor is entitled to the amount of the “minimum guarantee”. I think failure to order the minimum in a standard IDIQ contract constitutes breach and the contractor may be entitled to something as a result.

----

Post #8. A stupid question is a matter of perspective. Keep that in mind when you’re assisting people who don’t have 30-plus years in the business.

Post #12. The moral obligation to be intelligent also applies to social interactions.

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Why couldn’t funding be provided for CLIN 3 instead of CLIN 1? The government’s choice between these CLINs is equal; the government will order CLIN 1 or CLIN 3 (or, as you have noted, choose to breach).

Because FAR requires that you specify a minimum quantity or dollar value and because you set a quantity for CLIN 1 of 1 something or other, for which the price is apparently $10,000. If you promise to buy 1, and if the price of 1 is $10,000, there you go. Now, you either promise to buy 1 or you don't. Which is it?

Agree that a FAR deviation would probably be required. And no, I don’t think the contractor is entitled to the amount of the “minimum guarantee”. I think failure to order the minimum in a standard IDIQ contract constitutes breach and the contractor may be entitled to something as a result.

Failure to buy the minimum could be the result of a T for C if you terminate before the ordering period expires, in which case the contractor would be entitled to its cost up to that time and a profit. But since the contract appears to be a fixed-price supply IDIQ contract, and since the contractor is not supposed to perform until it gets an order, I assume that if the Government Ts for C before it orders anything the contractor's cost would be $ 0, unless there are different facts. (It's more complicated for services, but your scenario suggests that you're buying supplies.)

Post #8. A stupid question is a matter of perspective. Keep that in mind when you’re assisting people who don’t have 30-plus years in the business.

Post #12. The moral obligation to be intelligent also applies to social interactions.

What I did was tell you the truth, which is that your question was so thoughtless that it was worthy of ridicule and was unprofessional. You are apparently so sensitive that you couldn't take the truth, so you decided to get very personal. I didn't take that to heart, because I am tougher-minded than you. If I had reacted like you every time some boss or colleague of mine had told me that my thinking or actions were ridiculous, I wouldn't be where I am now, I'd be where you are, asking poorly-thought-out questions of strangers at a website, instead of thinking things through for myself and then asking colleagues what they thought of my thinking.

When I was a GS-05 trainee, I had a CO tell me that my work was crap and to get the hell out of his office and never bring crap like that into his office again. Everyone in the office heard what he said. I was chastised and embarrassed, but not because of what he said, but because I had done something stupid. I turned out to be one of that CO's favorites. One of the long-standing posters here, Napolik, had a famous, high-ranking contracting official hand him his file and call it "bullshit." He brags about having had his file reviewed by the guy, and I am in awe of his experience. If either one of those things had happened to you, you probably would have developed PTSD. Anyone who is so easily shocked and hurt shouldn't go into contracting.

I've been posting what I think in plain English since this site was created. I often say what other people think, but won't say. Wifcon is famous and well-attended. It isn't famous and well-attended because of posters like you. I bet you think before you post another question, and I bet your questions get better, unless you're unintelligent, which I don't think you are. You owe me your thanks. I take it for granted.

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“Because FAR requires…”

Agree and never denied this. FAR 16.504(a )(2) appears to identify the sole reason why – “To ensure that the contract is binding…”

Is there another way to ensure an IDIQ contract is binding that FAR has not addressed? For example, could a pre-negotiated termination/cancellation/settlement fee be considered adequate enough to bind the contract?

---

For someone who claims (at least through implication) to be professional, intelligent, and knowing of your “stuff”, you sure have made a lot of incorrect assumptions about my thought processes, stress level, and ability to ignore meaningless commentary. And you’re also incorrect with regards to who attends this site. This site is well-attended by, and exactly because of, posters (and lurkers) like me. Who do you think you’d be addressing if the lesser experienced didn’t come here? And, as stated before, there would [likely] be many more posters if they didn’t have to deal with, as another poster put it, “the wrath of Vern”. It just happens that I, and a few others, are not afraid to call you out when you directly violate this website’s Rule #1. “No personal attacks…Personal attacks include such things as calling a poster ignorant, unprofessional, etc.”. We call you out, not because we are personally offended, but because your commentary/actions are degrading this website’s value. Since you like citations:

Your Post #2The question as posted is ridiculous…The only thing more unprofessional than asking such a question would be answering such a question.

Your Post #8Well, it should keep people from asking stupid questions

Your Post #14 “…your question was so thoughtless that it was worthy of ridicule and was unprofessional…I am tougher-minded than you…I'd be where you are, asking poorly-thought-out questions…If either one of those things had happened to you, you probably would have developed PTSD”.

By the way, your contract knowlege and plain English responses are appreciated.

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I assume the motivation for most posts at WIFCON is the hope of gaining or sharing information and/or insight.

But ridicule is not always the best instructor.

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Is there another way to ensure an IDIQ contract is binding that FAR has not addressed? For example, could a pre-negotiated termination/cancellation/settlement fee be considered adequate enough to bind the contract?

No. The FAR only authorizes one way to ensure an IDIQ contract binding--a promise to purchase a minimum that is more than a nominal amount. All IDIQ contracts must contain such a promise. If a contract did not contain such a promise, it would not be an IDIQ. FAR 16.504(a) could not be clearer.

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jwomack:

You ask:

Is there another way to ensure an IDIQ contract is binding that FAR has not addressed? For example, could a pre-negotiated termination/cancellation/settlement fee be considered adequate enough to bind the contract?

I have some thoughts about that.

1. FAR 16.504(a)(1) assumes that the IDIQ contract stands alone and that it is not combined with another type. Thus, a minimum is needed to provide consideration to bind the parties. However, in your example you appear to have both an IDIQ CLIN and a non-IDIQ CLIN. In that case, the promise to buy the non-IDIQ CLIN items should be sufficient consideration to bind the parties to both CLINS. I say that you would not need a minimum for the IDIQ CLIN. No minimum, no obligation to buy. No obligation to buy, no need to obligate funds, and no need for an advance termination settlement agreement. The only duty associated with the IDIQ CLIN would be the contractor’s duty to deliver upon receipt of a government order. As long as such consideration is acceptable to the parties, it should be acceptable to the boards and courts. (You would still need a maximum quantity.) I don’t think such an arrangement would constitute a deviation or otherwise violate FAR.

2. A termination settlement agreement might provide consideration, but that is not the problem. You have a termination settlement agreement because you have a minimum and might not buy it. But a minimum means that you will have obligated the government to buy something (even thought you might later decide that you won’t), and you will have to record that obligation in the amount of the minimum. The termination settlement agreement amount, if less than the amount of the minimum would not suffice.

As to your other comments:

I never made any assumptions about you personally. I did not say that YOU were ridiculous. I said that your question was ridiculous, and it was. I indicated that you acted unprofessionally by asking it, and you did. But I don’t know whether you are professional or not. You might be the epitome of professionalism, but lapsed in this case. In which case I should have been more critical than I was.

It was you who said personal things, and deeply personal at that. Your outburst about whether or not I was loved as a child or an adult justified my assumptions (speculations, really) about your thought processes, stress levels, ability to endure criticism, and susceptibility to PTSD. I might have been upset had I not been laughing so hard. You should have heard the things people called me when I was a cop in L.A., and to my face, especially at the rock concert riots.

August:

I did not ridicule jwomack. I rebuked him, and I did not do that in order to instruct him. I did it in order to, well, rebuke him.

A CONTRACTING person, even one fairly new to the field, but presumably with business college credits, should have realized that an answer to the question about the Government’s liability would depend on several regulatory and contractual factors and that no decent answer was possible without more information. A pro should have tried to provide that information initially, rather than require people to post a series of inquiries in order to respond.

Of course, such thoughtless questions are a risk when people decide to hop on the website and post something that they have not thought through. We’re not kindergarteners here. As a pro, I expect other pros to think and to provide some background to their questions and support for their answers. (Does Bob have to develop an Ask A Professor type format for question/answer posts?) One would think that after reading posts here people would begin to realize that thinking is part of the job description.

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If a FAR deviation was obtained/approved, would a contract arrangement such as what I'm suggesting be legal?

What "contract arrangement" are you talking about? You've mentioned several things. What specific arrangement are you asking about?

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However, in your example you appear to have both an IDIQ CLIN and a non-IDIQ CLIN. In that case, the promise to buy the non-IDIQ CLIN items should be sufficient consideration to bind the parties to both CLINS. I say that you would not need a minimum for the IDIQ CLIN. No minimum, no obligation to buy. No obligation to buy, no need to obligate funds, and no need for an advance termination settlement agreement. The only duty associated with the IDIQ CLIN would be the contractor’s duty to deliver upon receipt of a government order. As long as such consideration is acceptable to the parties, it should be acceptable to the boards and courts. (You would still need a maximum quantity.) I don’t think such an arrangement would constitute a deviation or otherwise violate FAR.

That's not how I understood jwomack's example in his post #11. I understood his CLIN 0002 to be IDIQ as well.

jwomack,

Please clarify.

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jwomack,

It appears your only concern is not having to obligate the $10,000 and just wanting to obligate a lesser amount. Don't know what the particulars of your case are or what you are intending to procure under the IDIQ, but why not just make the $3,000 the minimum guarantee?

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Don:

If CLIN 2 is IDIQ, then my idea won't work.

Martin:

The way jwomack posed the problem, CLIN 1 was for a quantity of 1. If the minimum is 1 and the price of the 1 is $10,000, then he must obligate $10,000, He say he'll buy 1 and make the minimum $3,000.

There are two problems. The first problem is that you need a minimum to provide consideration. The minimum could be anything of value. The second problem is what to make the minimum. If the contract is for supplies, then I think one would make the minimum based on a quantity of the supplies. If so, then the value of the minimum would be the price of the specified minimum quantity of supplies.

But it may be that you can make the minimum a dollar amount without promising to buy a quantity of supplies. If the price of 1 item is $10,000 and you set the minimum at $3,000, you would be promising to pay that amount instead of buying 1 item, but what would you get for it? It's an interesting idea, and I think it could work if you could sell it to your agency.

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Vern, in one of your earlier posts you wrote: "...your question was so thoughtless that it was worthy of ridicule..."

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August, I don't want to discuss this further with you. You're, shall we say, sticking your nose in someone else's business and prolonging a useless discussion while you're at it. jwomack and I are working things out. I suggest that you leave it alone.

Would you care to contribute to the topic at hand? Any ideas?

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