The Trump administration’s directives to “pause” grant funding and to terminate certain grants and contracts sent shock waves through the government contracts and non-profit sectors. Although the “pause” in grant funding has been temporarily halted by a federal court (as of January 28), other terminations and suspensions have not been blocked. We summarize below the steps entities can take to preserve their rights as they navigate these emerging directives.
But First: What Happened?
Immediately after his inauguration on January 20, President Trump began ordering federal agencies to pause funding for certain projects or initiatives. A January 20 Executive Order (“EO”) titled “Unleashing American Energy” encouraged energy exploration and production and eliminated electric vehicle mandates. It directed agencies to “immediately pause” all disbursements under the Inflation Reduction Act of 2022 and the Infrastructure Investment and Jobs Act.
Another EO titled “Ending Radical and Wasteful Government DEI Programs and Preferencing” directed the Office of Management and Budget to terminate DEI programs (see our prior analysis of this EO here). Consequently, the new Department of Government Efficiency announced on January 24 that approximately $420 million in current or impending contracts, most of which related to DEI programs, were cancelled.
Consistent with these orders, the Office of Management and Budget (“OMB”) on January 27 directed federal agencies to pause, as of January 28 at 5:00 PM ET, all payments and obligations to disburse any federal financial assistance, including financial assistance for nongovernmental organizations. The two-page OMB policy memo stated that the paused programs will be assessed to determine whether they are consistent with the administration’s new policy objectives. This directive has led to widespread chaos, prompting the administration to issue additional guidance on January 28 regarding the scope and purpose of the January 27 funding freeze. The freeze on grant funding was then temporarily halted by a federal district court later in the day.
Federal contractors performing contracts or projects subject to these EOs or OMB instructions have or likely will soon receive stop work orders or, in some cases, notices that the government is terminating for convenience. A “suspension of work” or “stop-work” order pauses performance for a period of time, after which the government may decide either to resume performance or terminate the contract. A notice of termination for convenience, as its name suggests, is the mechanism by which the government unilaterally terminates the contract as of right.
Is This Legal?
The breadth and speed of the administration’s directives are unprecedented and raise novel questions regarding both the breadth of the president’s power and whether these actions pass the “arbitrary and capricious” test against which many governmental actions are judged. The U.S. District Court for the District of Columbia has already issued an administrative stay blocking the OMB directive to freeze funding for federal grant programs. If the EOs during the COVID-19 pandemic serve as any guide, we can expect these issues to ultimately make their way to the Supreme Court for resolution.
Beyond the constitutional and administrative law challenges to the Trump administration’s authority to unilaterally halt federal programs, contractors, and non-profits are wondering whether they have any rights under their agreements to challenge a termination. Several bedrock government contracts principles are relevant to this analysis:
- With respect to agreements that are terminated, it is important to understand the distinction between the regulations and contract provisions that govern most federal contracts, and the guidance that applies to grants. Federal contracts are governed by the Federal Acquisition Regulation (“FAR”), which recognizes the government’s authority to terminate a contract for convenience (and describes the procedures that follow). As a general rule, the federal government may terminate a contract for any reason, so long as it does not act in bad faith. The authority to terminate a contract for convenience is a nod to the government’s unique position as sovereign. For contractors, challenging a termination for “bad faith” presents a high bar, especially since the law presumes that government officials operate in good faith. In the present circumstances, however, contractors may have success in challenging these directed terminations as based on bad faith, on the theory that the terminations were politically motivated and/or contrary to statutory mandates.
- Grants, on the other hand, typically are subject to Uniform Guidance published by OMB and any agency supplements to that guidance. The Uniform Guidance provides that a grant may be terminated “to the extent authorized by law, if an award no longer effectuates the program goals or agency priorities.” 2 C.F.R. § 200.340(a)(4) (emphasis added). In light of the far-reaching impacts on contractors, non-profits, and their workforces and suppliers, Courts may find the “extent authorized by law” caveat a basis to reject arguments that a new Administration has carte blanche to suspend or terminate programs authorized by Congress.
- With regard to stop work orders, these orders are generally legal and not uncommon. Here, the focus will be on the breadth of the administration’s stop work orders and their far-reaching impact on companies and their workforces, the policies that the programs were designed to support, and the economy more broadly. We expect to see more litigation with respect to both stop work orders and terminations in the coming weeks, particularly for programs that are mandated by statute.
Will the “Sovereign Acts Defense” Bar Contractors and Grantees from Recovering the Costs Incurred From These Sudden Stop-Work and Termination Notices?
We do not anticipate that the “sovereign acts defense” will prevent contractors and grantees from recovering added costs incurred because of suspensions and terminations we have been seeing this week. The sovereign acts defense is where the government claims that its “general and public” acts as a sovereign made it impossible for the government to perform its obligations as a contractor. The government used this argument successfully to deny many additional costs that contractors bore in response to the COVID-19 crisis, when government lockdowns and health directives impacted contract performance and price. Here, though, the suspensions and terminations directly target federal contracts and grant agreements, and thus, are unlikely to be viewed as “general and public” sovereign acts. The government is also unlikely to be able to assert that its own performance (continued payment of funds previously committed) is impossible.
What Can Contractors and Non-Profits Do Now to Preserve Their Rights?
- Monitor court actions blocking terminations or stop-work orders. Contractors should not agree to a termination or stop-work order if it is blocked by a court.
- Do not agree to waiver or release language without consulting counsel. Contractors should review stop-work orders, termination notices, and contract modification documents and avoid signing any documents containing waiver or release language that might preclude recovery of costs in the future. Consult legal counsel regarding alternative options. For more on the topic of waivers, please see our prior post here.
- Consider whether to bring a legal challenge to the suspension or termination. We recommend consulting legal counsel regarding whether to challenge a suspension or termination based upon the specific impact to the contractor or non-profit.
- Provide prompt notice to the government to preserve rights. Pursuant to FAR 52.242-14(c)(1), contractors are not technically required to provide notice of increased costs stemming from a formal suspension order. However, a best practice for FAR-based contracts would be to submit prompt notice (i.e., within 20 days) regardless. This will ensure maximum flexibility in shaping future claims.
- Maintain professional communications with government counterparts. Although it may be tempting to commiserate with or seek relief from government counterparts, companies should ensure their communications remain professional as they navigate these transitions. Companies should also consider requesting clarification from their contracting officers in writing (with delivery receipts and read receipts) when ambiguities arise.
- Evaluate legal obligations to employees. Employers considering layoffs should evaluate any potentially applicable notice requirements to employees, including under the federal Worker Adjustment and Retraining Notification Act (“WARN Act”), state or local laws, host nation laws for overseas work, or collective bargaining agreements.
- Assess the allowability of any new or ongoing costs stemming from the termination. For grant recipients, the Uniform Guidance provides that costs incurred during a suspension or after a termination are not allowable unless expressly authorized in the notice of suspension or termination (or are subject to a limited exception for certain costs that have already been incurred). See 2 C.F.R. § 200.343. This is in contrast to the FAR, which provides that costs “which cannot be discontinued immediately after the effective date of termination are generally allowable” so long as the contractor exercises “reasonable efforts” to discontinue such costs. FAR 31.205-42. Companies should carefully evaluate the applicability of these and other provisions.
- Document additional incurred costs and all cost-mitigation efforts. Contractors should carefully document their costs, and all cost-mitigation efforts associated with a stop-work order or termination, including for costs such as idle labor, facilities, and equipment. The analysis will vary depending upon whether the agreement was terminated versus suspended and whether the idle labor, facilities, and equipment are expected to be absorbed by other portions of the business. Contractors should consider engaging legal counsel to conduct a privileged review of the potential recoverability of any such continuing costs based upon the unique facts and circumstances faced by the contractor.
- Determine whether inventory can be used elsewhere. While common inventory can sometimes be absorbed by other projects, this may not be the case for entities that are highly reliant upon federally funded work that has been suspended or terminated.
- Document compliance costs (g., employee return travel) and prepare to submit a termination settlement proposal, request for equitable adjustment, or claim as applicable. Contractors should maintain detailed records for any new costs they incur as a result of the suspension or termination notice – for example, travel costs to return workers to their country of origin for overseas work, costs of securing idle facilities and equipment, cost of legal and accounting services to ensure compliance with government directives, etc. For agreements that are terminated, the contractor has the right to submit a termination settlement proposal. For agreements that are temporarily suspended, the contractor should plan to submit a request for equitable adjustment and/or claim pursuant to the changes clause and Contract Disputes Act. Note that there is no centralized “board of contract appeals” for grant disputes, so legal options should be evaluated on a case-by-case (and agency-by-agency) basis.