Defaulting on a contract will likely have a substantial negative impact on your business beyond the losses experienced for the terminated contract. The standard default clause in a government contract states that the government can terminate a contract for default if a contractor fails to deliver supplies or to perform the services or work within the time specified in the contract. However, any number of issues may impact a contractor’s ability to deliver within the agreed-upon schedule. When late delivery seems inevitable despite best efforts, there are actions a contractor can take to defend against a possible termination for default.
Contracting officers are encouraged to work with the contractor to come to a solution that satisfies the government requirement and minimizes the impact and cost to the government. Contractors should make every effort, regardless of the circumstances, to communicate schedule delays as soon as they are known, even if the delivery date has not passed yet. If possible, the best course of action is usually to reach an agreement on a new delivery schedule and have it incorporated into the contract via modification. If the contractor misses the delivery date and the government does not immediately act after being notified of the delay, has the government waived its right to terminate the contract for default? The due diligence required by FAR Part 49 before a contracting officer makes a default determination is considerable and takes time. For this reason, courts have found that the government must be afforded a reasonable period of time or “forbearance” to review the facts before issuing a default determination. A reasonable period of forbearance depends on the circumstances of the particular case. Generally, if the government knows that the contractor is continuing to perform and incurring costs to do so, the acceptable period of forbearance is shorter.
By and large, inaction or silence on the part of the government is not deemed an affirmative intent to permit continued performance. But if the government has led the contractor to believe that the delivery schedule has been waived, it may be determined that the government has also waived their right to default the contractor solely for failing to deliver or to perform the services “within the time specified in the contract.” In DeVito v. United States, 413 F. 2d 1147 (Ct. Cl. 1969), the court established three primary items a contractor must prove to demonstrate that the government waived the delivery schedule in defending a default determination: (1) failure of the government to terminate within a reasonable time after default on the delivery; (2) reliance by the contractor on the failure to terminate through continued performance; and (3) the government knew, either by express or implied consent, that the contractor was continuing to perform.
In order for government actions to be considered as intended to waive delivery, the government must not only be aware that the contractor has continued to perform but also, through its conduct, actively encourage or promote the continued performance of the contractor. The time originally specified for performance may then be held to have been extended and the contract cannot be terminated for failure to deliver by the previous due date. Once the government has waived the original contract schedule, there must either be an agreement to establish a new schedule or delivery date or the contracting officer may unilaterally establish a revised due date provided that notice of this date is given to the contractor and the date is reasonable under the circumstances of the case.
It is always preferable to avoid a default than defend against one. It is the government’s burden to prove, by a preponderance of the evidence, that a termination for default is proper (Lisbon Contractors, Inc. v. United States, 828 F.2d 759 (Fed. Cir. 1987)). FAR Part 49, among other things, instructs contracting officers to evaluate the urgency for the supplies or services and the period of time required to obtain the supplies or services from other sources and compare them with the delivery that could be obtained from the delinquent contractor. In many instances, the government will consider a contract delivery extension, provided that the contractor is not in default for some other reason. Keep detailed records of these discussions, and if negotiating a new delivery date is unsuccessful, you may be able to claim a schedule waiver, depending on the circumstances.
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