For a Termination for Convenience Settlement Proposal, can the Contractor get compensated for Start-Up Costs?

Let's say this is a FAR Part 12 commercial services contract. The Contract contains FAR 52.212-4. FAR Part 12 says that FAR Part 49 does not apply, but it can be taken as guidance. FAR Part 49 says to look to FAR Part 31 to figure out allowability of costs. FAR 31.205-32 says Pre-Contract Costs are allowable, but only when they are necessary to comply with the proposed contract delivery schedule (Precontract costs means costs incurred before the effective date of the contract directly pursuant to the negotiation and in anticipation of the contract award when such incurrence is necessary to comply with the proposed contract delivery schedule. These costs are allowable to the extent that they would have been allowable if incurred after the date of the contract). FAR 31.205-42 says Termination Costs includes Initial Costs, which includes Preparatory Costs for things like "management and personnel organization." However, if these are direct charges in the Settlement Proposal, "such costs shall not also be included in overhead." FAR 31.205-34 Recruitment Costs says that the costs of help-wanted advertising, costs of maintaining the HR office, travel costs for recruiting, etc, are allowable. FAR 31.205-13 Employee Morale Costs says that costs incurred on activities "designed to improve working conditions, employer-employee relations, employee morale" are allowable.

Let's say the Contractor wants to get compensated for the following: interviewing and hiring employees during the Bid Proposal Preparation Stage to work on the Contract if they win the Contract Award. Are these costs allowable?

Does the firm normally perform these activities when competing for contracts, whether or not the firm wins the contract?

If so, it would seem that these costs would appropriately be accounted for as bid and proposal costs and included in an overhead account, not as a direct cost…

If so, charging as a direct cost for the settlement, then applying the applicable overhead to those direct costs would be duplicative, would it not?

Edited January 16Jan 16 by joel hoffman

Here is what FAR 52.212-4(l) says:

(l) Termination for the Government's convenience. The Government reserves the right to terminate this contract, or any part hereof, for its sole convenience. In the event of such termination, the Contractor shall immediately stop all work hereunder and shall immediately cause any and all of its suppliers and subcontractors to cease work. Subject to the terms of this contract, the Contractor shall be paid a percentage of the contract price reflecting the percentage of the work performed prior to the notice of termination, plus reasonable charges the Contractor can demonstrate to the satisfaction of the Government using its standard record keeping system, have resulted from the termination. The Contractor shall not be required to comply with the cost accounting standards or contract cost principles for this purpose. This paragraph does not give the Government any right to audit the Contractor's records. The Contractor shall not be paid for any work performed or costs incurred which reasonably could have been avoided.

Emphasis added.

@govt2310 I don't think start-up costs result from a T for C. Do you?

But is start-up part of the "work performed" after contract award? If you think so, consider it in the settlement.

9 minutes ago, Vern Edwards said:

Here is what FAR 52.212-4(l) says:

Emphasis added.

@govt2310 I don't think start-up costs result from a T for C. Do you?

But is start-up part of the "work performed"? If you think so, consider it in the settlement.

If the firm typically performs these activities when competing for contract awards, it would seem appropriate to account for them as bid and proposal costs or a similar, indirect cost pool, not as a direct cost. To pay as a direct cost then apply indirect costs would be duplicative.

I would simply ask the contractor if the start-up work was done after contract award. If it was, then it is part of the percentage of the work performed, notbid and proposal cost, and that percentage is applied to the contract price when calculating the settlement. If it was done before contract award, then it is not part of the contract work performed.

I see no need to go to the cost principles.

It's commercial. Keep it simple and fair.

Just trying to say, don’t pay twice, if those costs are part of any markup applied to direct costs incurred…

Commercial or not, same business principle, as if one is privately buying something. Please- Don’t get hung up on “the cost principles” in FAR. It’s a question of duplication of costs.

As an example, when I negotiated for a new car in the past, I always checked to see if the manufacturers sticker price, before dealer add-ons, included an allowance for “dealer prep” and/or “undercoating”.

In that particular case, it did. Then the dealer added both of those costs to the price writeup. I called their hand and they agreed to remove it…

.

Edited January 16Jan 16 by joel hoffman

3 hours ago, Vern Edwards said:

Here is what FAR 52.212-4(l) says:

Emphasis added.

@govt2310 I don't think start-up costs result from a T for C. Do you?

But is start-up part of the "work performed" after contract award? If you think so, consider it in the settlement.

According to the Ben Holtz CBCA decision in November 2023, yes, Start-Up Costs can be costs that "result from the termination."

Here is an article about the Ben Holtz CBCA decision, https://www.millerchevalier.com/publication/cbca-adopts-common-sense-interpretation-far-52212-4l-contractors-should-not-put-all.

Here is the Ben Holtz CBCA decision posted on the CBCA.gov website, https://www.cbca.gov/files/decisions/2023/KANG_11-17-23_7637__BEN_HOLTZ_CONSULTING_INC_DBA_CALIFORNIA_AVOCADOS_DIRECT%20(DECISION).pdf.

In the Ben Holtz CBCA decision, the CBCA said that "costs resulting from the termination" can include "such things as start-up costs; unrecovered running expense." The CBCA said that "costs resulting from the termination" can include "preparatory or startup activities that are not separately priced under the contract." The CBCA cited as persuasive some decisions by ASBCA and COFC. In particular, the CBCA cited the Value Recovery Holding, LLC COFC decision, where COFC said that FAR 52.212-4(l), under the "costs resulting from the termination" phrase, covers costs incurred "prior to performance" to satisfy "necessary" contract requirements, e.g., obtaining required licenses and permits, etc.

If a contractor has to get licenses and permits in the Start-Up Phase, how is that different than the contractor's duty to get employees in place to work on the contract? And if the hiring and interviewing work is considered part of Overhead, how can the Contracting Officer discern for sure whether this task was covered or not covered by Overhead, other than by taking the Contractor's pinky swear promise that wasn't?

Edited January 16Jan 16 by govt2310
Fix typos

So, think about this. How does the contractor account for such costs when they don’t win a contract? Where would they charge these type costs to?

I’d think that it would be in some overhead account spread over its contracts… assuming that this wasn’t a specific effort only performed for this contract competition in hopes of winning it. Even if it was, where did they charge these type costs to?

@govt2310 ,  When was the contract terminated for convenience? Before starting performance or sometime during performance? 

18 hours ago, joel hoffman said:

So, think about this. How does the contractor account for such costs when they don’t win a contract? Where would they charge these type costs to?

I’d think that it would be in some overhead account spread over its contracts… assuming that this wasn’t a specific effort only performed for this contract competition in hopes of winning it. Even if it was, where did they charge these type costs to?

Thank you, Joel, yes, I see your point. It does seem likely that a contractor would have to categorize these costs as overhead, as they don't know for sure if they will win the contract award or not.

18 hours ago, joel hoffman said:

@govt2310 ,  When was the contract terminated for convenience? Before starting performance or sometime during performance? 

Another good point by Joel. Well, let's say the T4C happened during contract performance. This is making me think that, probably the only Start Up Costs that a contractor could get are costs that happened AFTER the contractor won the contract award, but before the contractor had to begin contract performance. Thoughts?

Thanks for your clarification, @govt2310 . Yes, I agree with you. The contractor can include a markup for overhead costs on appropriate direct termination costs incurred due to the Termination. Note too, that the overhead allocation is presumed to be in the contract price and in payments for portions of work performed in the termination settlement.

It's commercial.

All this delving into cost principles is exactly what Part 12 is not supposed to be about.

Keep it simple and fair. The CO has the power to do that.

Get it over with.

7 hours ago, Vern Edwards said:

All this delving into cost principles is exactly what Part 12 is not supposed to be about.

Agree. Always felt so and the RFO supports this position at FAR 12.403(a) and (c).

Makes me wonder if the agency has adopted the RFO? And if the agency has adopted the RFO but the contract was awarded pre RFO what FAR guidance applies?

In commercial contracting , the principle is the same. Don’t pay twice for the same costs. Thats pretty darned “simple”.

11 hours ago, joel hoffman said:

In commercial contracting , the principle is the same. Don’t pay twice for the same costs. Thats pretty darned “simple”.

@joel hoffman It's not simple if you're going to thumb your way through FAR Part 31 in order to determine whether you would pay twice.

If you don’t have any idea what the contractor is asking for, you shouldn’t be negotiating these type settlements or new purchases.

I worked successfully in the design and construction world for nine years before being exposed to FAR.Part 31. I estimated contract and mod prices and negotiated both during those nine years.

When govt2310 said that the contractor incurred such costs in the hope of winning the contract, it appears that, if this is normal practice, they would account for such costs somewhere, including when they don’t win a contract.

Unless they just eat such costs on unsuccessful bids, they would probably want to spread them over all their contracts in some indirect cost account. So, they would probably include a way to recover those costs in the contract price.

Govt2310 said the contract was terminated during performance, so if the govt pays a portion of the contract price for actual work performed, etc. the payments will already include some of those costs.

The TfC clause considers direct costs plus applicable indirect cost markups incurred due to the termination. These are not such direct costs.

Govt2310 is on the right track.

Just now, joel hoffman said:

If you don’t have any idea what the contractor is asking for, you shouldn’t be negotiating these type settlements or new purchases.

That's not hard under the circumstances at issue. The contractor is asking for a sum of money. You don't need to do a cost analysis to determine if the sum is fair and reasonable.

It's commercial. Look at the contract price. Then look at the amount being asked for as a percentage of that price. Consider the circumstances of the T for C and make a fair decision. Negotiate if necessary.

Again, unless we're talking millions, I would made decision without any cost analysis whatsoever--a strictly bottom line settlement.

27 minutes ago, Vern Edwards said:

That's not hard under the circumstances at issue. The contractor is asking for a sum of money. You don't need to do a cost analysis to determine if the sum is fair and reasonable.

It's commercial. Look at the contract price. Then look at the amount being asked for as a percentage of that price. Consider the circumstances of the T for C and make a fair decision. Negotiate if necessary.

Again, unless we're talking millions, I would made decision without any cost analysis whatsoever--a strictly bottom line settlement.

The contractor included specific pre-contract costs in addition to other price aspects, which may represent a representative percentage of the contract price.

Just now, joel hoffman said:

The contractor included specific pre-contract costs in addition to other price aspects, which may represent a representative percentage of the contract price.

Joel, I don't understand that sentence.

In addition to a representative portion of the contract price, the contractor is asking for specific pre-contract costs. govt2310 wants to determine if those costs are applicable, fair and reasonable, etc.

I’m not sure what “representative portion” means.

I’m not sure what “applicable” means in this context.

What I would do is look at the bottom line amount asked for in the context of the termination and decide if it’s a fair and reasonable amount. If I thought it was too much I’d ask for details and then might negotiate. I would not get into allowability as defined in Part 31. I would exercise CO discretion. It’s commercial.

Vern, I never said “allowable”., nor did I rely on Part 31.

The question is whether the specifically identified cost is applicable to the termination as it appears to be part of the bid and proposal process in case they won a contract.

I’m saying that I think it would normally be be accounted for as an indirect cost and probably considered in overhead that would be applied to payments for direct costs or a percentage of the contract price if that is the basis for a settlement.

Thus, to include this as a direct settlement cost and then mark it up or otherwise pay for the portion of the contract performed prior to TFC would result in a duplication of payment for those costs.

It’s simply a matter of not duplicating the requested cost as both direct and indirect costs.

It’s not dependent upon application of FAR Part 31 to the contract settlement.

@joel hoffman I've said how I would handle it, and nothing you've said has changed my mind.

On 1/19/2026 at 8:59 AM, Vern Edwards said:

Consider the circumstances of the T for C and make a fair decision.

Agree. Also, consider that FAR 49.201 is a guiding principle even in terminations of contracts for commercial items/services.