DoD Contract Termination Liability: An Analysis of the Special Termination Cost Clause (STCC)

Abstract

This research paper explores the Department of Defense (DoD) policies and practices for managing contract termination liability. The specific purpose of the research is to review current policies, practices, and procedures for funding and managing contract termination liability within the DoD. The research proposes alternative approaches for improving the DoD's ability to manage contract termination liability and discusses the resulting effect of each alternative on defense acquisition practices. First, we provide a brief review of regulatory and policy guidance on contract termination liability as reflected in the Federal Acquisition Regulation (FAR) and the Financial Management Regulations (FMR). We then discuss the current practices and procedures for funding and managing contract termination liability and identify results from interviews and document reviews with various Air Force, Navy, Army, and other DoD agencies. Next, we present program management challenges and preliminary observations and findings based on our research of current contract termination liability policies and real-world practices. A discussion of alternative approaches to funding contract termination liability is then presented, including the use of Special Termination Cost Clauses (STCC). Finally, this research concludes with a summary and recommendations on how the DoD can improve the policies and practices for managing contract termination liability.