GAO: NASA Needs to Better Assess Contract Termination Liability Risks and Ensure Consistency in Its Practices

GAO-11-609R July 12, 2011

Full Report (PDF, 18 pages)

NASA’s policy on management and funding of contract termination liability is to rely on the FAR’s limitation of funds or limitation of cost clauses, which act as a mechanism to limit the government’s liability in the event of a contract termination to the amount of funds currently allotted to a contract.

We found that NASA’s acquisition professionals generally do not monitor or track the potential termination liability costs of its contractors nor does the FAR require them to do so. The agency has not issued detailed instructions or provided guidance to direct contracting officers and others on how to monitor or track termination liability and to supplement the reliance on the relevant FAR provisions. As a result, resource analysts and financial managers inconsistently monitor and fund potential termination liability across the projects we reviewed.

According to NASA acquisition professionals, contractors are ultimately responsible for tracking their potential termination liability and ensuring that they reserve sufficient funds to cover any potential termination liability out of funds that NASA allots to the contract. Several contractors reported that their potential termination liability was covered in their allotted funds, while other contractors reported that NASA did not provide sufficient funds to cover potential termination costs.

In some cases, NASA contractors said they did not view insufficient potential termination liability funding as a risk because NASA’s past practice on contract terminations was to provide additional funding to the contract to cover the agreed-upon termination settlement costs and they assumed this would be the continuing NASA practice. While allowed under the FAR, NASA’s inconsistent practices for funding potential termination liability costs can still have negative consequences for NASA’s long-term relationships with its contractors, especially if the agency decides to terminate a major project.

Moreover, as the federal government deals with its fiscal limitations, NASA’s contractors may perceive contract termination as a greater risk in the future and may be less willing to continue contract performance without full funding of their potential termination liability. We are recommending that the NASA Administrator review the agency’s current practices regarding termination liability and, as appropriate, establish guidance to ensure consistency among NASA’s projects.