Federal Contractors Focus on Limiting Losses as DOGE Cuts Arrive

Companies providing goods and services to the federal government have few legal avenues to challenge potentially hundreds of billions of dollars of contract cancellations coming as soon as Friday.

President Donald Trump in February issued an executive order tasking agency heads to work with Elon Musk’s Department of Government Efficiency to review all agency contracts by March 28, and terminate or modify them “where appropriate.”

The federal government generally has wide latitude in ending contracts. Even if a company thinks its contract termination was illegal, it has to weigh what it would get out of pushing back and what that would cost, said Robert Nichols, a partner at Nichols Liu.

“If your whole business is going under, you’re kind of fighting a Pyrrhic victory,” he said. When earlier rounds of terminations hit, many contractors “very quickly saw the writing on the wall and said, ‘Lock the doors. Let’s just minimize the cost. Let’s try to get some severance to our people,’” Nichols said.

The government can end any contract using a termination for convenience, a right that lets it stop a contract because it’s no longer interested in the project, rather than because the contractor failed to do its job.

Terminations cannot be on bad faith grounds—for example, the government can’t enter a contract it doesn’t intend to honor. But attorneys said bad faith arguments are extremely hard to win on. And while the US Agency for International Development terminations were challenged for their blanket nature, Trump’s executive order on cost-cutting, EO 14222, instructs agency heads to review each contract.

Contractors largely will focus on recouping as much money as they can—such as costs they’ve already incurred and severance payments for workers they’ll lay off when government projects end, attorneys said.

The executive order carves out military, intelligence, law enforcement, immigration enforcement, and critical or emergency spending. That still leaves hundreds of billions of dollars in government contracts potentially on the chopping block, according to an analysis by Bloomberg Government.

“This is one of the more important, I would say, executive orders in terms of the impact it’s going to have,” said Craig Leen, who ran the Labor Department’s federal contractor watchdog during Trump’s first administration and is now a partner at K&L Gates.

Preparing for Terminations

The wave of terminations is expected to spark litigation, but those cases will more likely be challenges to the numbers the government is offering in a termination settlement than to the legal grounds of the termination itself, said Josh Mullen, a partner at Womble Bond Dickinson.

Contracting attorneys said they’ve seen waves of terminations for federal contracts related to diversity, equity and inclusion work and foreign aid since Trump took office—products of prior executive orders. But the full impact of this order hasn’t hit yet, and is poised to affect contracts across industries and agencies.

Attorneys are advising clients to be ready to prepare the information that will go into a termination settlement proposal, the channel for getting government payment for costs after a termination.

Companies worried about losing their contracts should be looking at two main categories of costs, said Alex Sarria, vice chair of litigation at Miller & Chevalier.

First, “What are the costs that we have incurred that are unpaid as yet?”, he said. Almost every termination for convenience clause entitles the contractor to be paid for costs already incurred. The second category is costs connected with the termination itself, such as severance payments to laid-off employees or a fee for breaking the lease on office space leased for that project.

It’s critical that contractors inventory all their costs, and document their reasons for incurring them and the reasonable steps they’re taking to minimize them, Sarria said. “You are always entitled to be made whole” after a termination, he said.

The order also instructs agencies to modify contracts—for example, narrowing the scope or value of the work. Standard clauses for commercial products and services contracts say modifications must be bilateral—meaning the contractor can negotiate with the government, Sarria said.

“Be very careful about what you sign, because the fine print matters,” he said. “You could be signing what is a bilateral modification, thinking that it is unilateral, because you have to. That’s a very big mistake if you make it.”

Potential Backlog

Meanwhile, it’s unclear to what extent the Trump administration’s widespread layoffs across the federal workforce have hit contracting officers, the agency employees in charge of managing federal contracts.

Thousands of contract terminations from USAID need to be settled or litigated, Nichols said.

A backlog of termination settlement proposals could in turn create a backlog at the Court of Federal Claims, which hears contract disputes. The government could save money and avoid clogging the courts by setting up a claims processing unit for quick close-outs, Nichols suggested.

Termination settlements can take years to play out, though six months is more typical and they can go as quickly as a few weeks, said Tracye Howard, a partner at Wiley.

For companies and organizations that relied very heavily on government contracts that are being cut, spending even a few months to recoup costs could be devastating.

The Trump administration is being sued for failing to pay contractors for work done as far back as October. Some members of the Professional Services Council, an industry group for contractors, have gone out of business due to unpaid invoices, president and CEO David Berteau said during a Thursday press briefing.