One Federal Clause Allows DOGE To Cancel Contracts at Will
The Federal Acquisition Regulation requires the right for the government to terminate any federal contract "for convenience."
President Donald Trump won a nonconsecutive second term promising to cut government waste to the bone. He formalized the Department of Government Efficiency (DOGE) as a governmental organization in an executive order on his first day back in office.
Since then, the department and its leader in all but name, Elon Musk, have persistently made news for big moves against federal spending. For one, Musk routinely claims his department has uncovered huge savings, only for subsequent reporting to find any actual savings were much more modest.
But the government does seem to have canceled thousands of federal contracts on DOGE's recommendation, using a provision of federal law that gives the government the ability to cancel commitments largely at its pleasure.
Under the Federal Acquisition Regulation (FAR), most federal agency contracts must include a "termination for convenience" clause, which it defines as "the exercise of the Government's right to completely or partially terminate performance of work under a contract when it is in the Government's interest." A separate FAR provision directs agencies to include a clause by which they can "require the Contractor to stop all, or any part, of the work" in the contract for up to 90 days.
Between January 20 and February 25, the government terminated 2,425 federal contracts for convenience and issued stop-work orders on 205 others, totaling nearly $150 million in de-obligated funds, according to data compiled by GovSpend. (It should be noted that, as the Associated Press reported at the time, from a selection of 2,300 federal contracts, "more than one-third of the contract cancellations, 794 in all, are expected to yield no savings.")
In one example, the official DOGE account on X posted earlier this month that it had enacted "247 cancellations of wasteful contracts today," saving around $390 million, including a $3.5 million Department of Veterans Affairs contract for mail management services "which the agency determined could be handled internally." The post included a screenshot showing this particular contract had been "terminate[d] for convenience (complete or partial)."
Termination for convenience is more complex than simply allowing the government free and unfettered power to walk away from its obligations, but it's still much broader than many in the private sector are likely to get.
"Most people…are used to contracting in the commercial space, in which both parties are basically on equal footing," says Jessica Tillipman, associate dean for Government Procurement Law Studies at George Washington University Law School. "But when the government contracts with a private party, it's effectively like one party is a superpower, and it has all of these types of authorities and powers that you wouldn't normally see in a commercial contracting relationship. And in this particular instance, one of those powers is the right to unilaterally cancel a contract…if it's in the government's interest."
It is that authority that DOGE has used to great effect in its first few weeks, canceling thousands of contracts seemingly on a whim.
This authority is not absolute, but pretty close. The government cannot act in bad faith or abuse its discretion. But this is quite difficult to prove: "Government officials are presumed to act in good faith, and 'it requires "well-nigh irrefragable proof" to induce the court to abandon the presumption of good faith dealing,'" the U.S. Court of Appeals for the Federal Circuit affirmed in 1999's T.M. Distributors, Inc. v. United States.
A termination for convenience can also be hard on a contractor. Unless they manage to prove the government acted in bad faith, contractors with canceled contracts are allowed to recoup costs for work performed, as well as profits on that work and any costs associated with winding down the contract, but they can't be compensated for lost profits as a result of the canceled contract. The process is lengthy: Law firms list the numerous steps on their websites.
Tillipman says termination for convenience clauses serve a legitimate purpose, especially as governments' needs change: "If you're at war and you're buying tons of ammunition, and the war ends, you need to have that ability to stop those contracts, so you're not buying crazy amounts of excess ammunition." Besides, if a private corporation's needs change and its existing contracts are no longer necessary, only its shareholders' money is at stake: In the case of the federal government, it's the taxpayers' money on the line.
In that sense, canceling a large number of federal contracts is certainly a positive step in the direction of fiscal rectitude. But the process of contractors seeking compensation for their terminated contracts could cause an administrative logjam.
"There's so many happening at once right now, I can't even fathom what the [appeal boards] and the Court of Federal Claims are going to look like for the next [few] years," Tillipman tells Reason. "I think this is going to create a significant amount of work for federal agencies to handle all of the terminations, it's going to create a significant amount of work for the judicial and administrative bodies that hear these cases, and it's going to be challenging for companies that are going to have to wait longer than usual to obtain payment that they're owed for many of these contracts."
