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Whether you're thinking about working with the government or have a contract already, never forget: the government holds the power as a sovereign entity. That means that the agency can decide to change, for example, how many items are shipped or how they are packed – and your contract can even be terminated. If you're facing a contract termination, here are a few things you should know:

Most federal contracts contain a clause that allows contract termination for convenience on the agency's part. Contracts in excess of $25,000, for example, contain a clause that covers a contract termination due to default (i.e., if the agency feels that the contractor failed to meet the obligations that were specified in the contract).

A Termination for Convenience ("T for C") permits the agency to cancel part or all of a contract to accommodate current needs. This protects the agency's interest when a product becomes obsolete or there's no longer a need for a service. In these cases the contract isn't terminated by fault of the contractor.

If the agency decides to terminate your contract, you will receive a communication in writing that indicates your termination date, the length of the termination and any special procedures to follow. The termination notice typically instructs you to immediately stop working on the portion of the contract being terminated and dissolve any subcontracts affected. If some portions of the contract are not terminated, you will receive instructions on how to proceed. If you fail to follow the instructions in the notice, it's at your own expense and risk.

After the contract termination, the government is required to provide a prompt and fair settlement usually negotiated between both parties; the goal is to compensate you fully for any work you have done for the contract or in preparation for the portion of the terminated contract. A reasonable amount of money for profit will also be allowed.

While settling a Termination for Convenience, you are able to recover all allowable costs that you incurred, including costs for claims preparation and presentation, subcontracts settlement and termination, and Storage, protection, transportation, and disposition of property that was produced or acquired for the contract.