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What Every Supplier Needs to Know About Supply Chain Disruptions and Contractual Obligations in the Wake of Natural Disasters

Austin, TX
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There are a lot of words that can be used to describe supply chain disruptions: expensive, embarrassing, and downright frustrating for suppliers and customers alike. However, we shouldn’t forget that many supply chain disruptions are often unpredictable, and they are not always preventable. That means that, sometimes, they are excusable. At least by federal, state and local government agencies that procure goods and services per Federal Acquisition Regulation (FAR) guidelines.

Though a failure to meet contractual obligations is often attributed to poor business practices, there are many risk factors outside of a company’s control that can disrupt the flow of goods and services to government agencies. Know the difference between excusable and inexcusable delays.

Though hurricanes, earthquakes and other natural disasters are notorious for wreaking havoc far beyond the communities on which they bear down, they are also considered “acts of God” per Government business regulations. That means that related supply chain disruptions – and missed deadlines – are considered “excusable delays” per the FAR. Strikes, quarantines and freight embargoes also fall into this “excusable delays” category among other incidents that occur beyond a contractor’s control. (See FAR 52.249-8 for the Fixed Price Supply and Service excusable delay clause and FAR 52.249-10 for the Fixed Price Construction default clause.)

Plainly put, you are protected from government repercussions if you are unable to fulfill your contractual obligations in these “excusable” situations – so long as there’s no evidence that “the failure to perform” was the result of negligence or fault on your part. And, as long as you notify them immediately of any issues.

Now, that doesn’t mean that you’re shielded from any government action. 

No Right to Cancel Due to Excusable Delays – But a “Termination for Convenience” Is Possible

While agency customers can’t hold you “liable for any excess costs” or do anything detrimental to your performance record in the case of a natural disaster, they are not obligated to just sit around and wait for you to deliver promised commodities or services either. They have options for handling delays if necessary. For example, they can:

  1. Renegotiate terms to extend the delivery schedule: This is the best-case scenario for any government contractor impacted by a natural disaster or other “excusable” factor. Many government agencies will be willing to accommodate delays as long as they are not sourcing essential goods or services for their own recovery efforts or requiring the contracted items for other critical missions. It’s easier to secure the customer’s agreement to new contract terms if you can confidently provide a new delivery date. Just don’t overpromise, as you’ll need to meet that new deadline to stay in compliance.
  2. Request a unilateral contract “termination for convenience”: This typically occurs when the government agency needs the item or service faster than you can deliver it given the unforeseen circumstances. They will then seek an alternate source capable of meeting the tight deadlines. If this happens, your contract will be terminated, but you won’t owe the government any concessions and you won’t be penalized in any way. In fact, you may be in a position to request compensation from the government agency via bilateral settlement in the following months. It may be in the form of a restocking fee or other reimbursement for “lost expenses” due to their cancellation action. Just be ready to prove that the compensation is warranted (i.e. it was already in route, but just stopped in transit due to the extenuating event.)
  3. Cancel at no cost to both parties: This type of contract cancellation will require some concession on your part, as it requires mutual agreement by both you and the government agency to part ways without any resulting compensation. You won’t owe the government anything, but they won’t owe you anything either. While this is rare, it could benefit you as a contractor if you anticipate an extended recovery period or don’t have confidence that you will be able to fulfill your obligations in a reasonable period of time. For example, if your supplier is on back order for six months and you haven’t incurred any expenses, it will expedite the contract cancellation process and potentially win you favor with that contracting officer for future opportunities. This is considered a good faith gesture on both sides because it reduces the amount of administrative burden on both the government contractor and government buyer.

Don’t forget: You must notify the customer as soon as you realize that you will not be able to meet the contract terms, regardless of the reason. If you delay notification, then you could be held accountable for a negligent default or “at fault” breach of contract. This is true even if the root cause is uncontrollable, such as a hurricane-caused supply chain disruption.

For more guidance on how to handle emergency situations, contact your assigned procurement official or refer to the terms of your specific contract.

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