Usage of Termination Clauses for Commercial Contracts

Abstract

Classification: Viewpoint Purpose: The objective is to identify a way to calculate the present value of actual costs completed in order to value commercial item contracts. Within this primary objective is the secondary objective to value commercial item contracts dealing with unique commercial items such as aircraft. The usage of present value is proposed as a solution to the Section 809’s panel’s concern in fair compensation of commercial item terminations. Design/Methodology/Approach: Current literature is examined to determine what methodologies should be employed to valuate the present value of actual costs completed in contracts terminated for convenience. A lack of empirical evidence or current best practices necessitates a literature review. Findings: Contracting officers should consider using estimated cash flow to value the present value of actual costs completed in contracts terminated for convenience as well as to employ other valuation methodologies when valuating unique commercial item contracts. Such unique items may include aircraft. Originality/Value: The application of FASB Concept Statement No. 7 to calculate present value of actual costs completed to determine the amount of cost to be recovered is not current practice. The usage of FASB concept statements is a deviation from current practice because commercial item contracts do not normally incorporate FASB pronouncements into their calculations nor is there currently a methodology to determine present value of actual costs completed in commercial contracts. Another deviation from current practice is the valuation of special commercial item contracts, such as those for aircraft.