Stage Five: Close the Contractual Relationship
Termination or closure of a contract is the last stage of the contracting lifecycle. Termination occurs when action is taken by one or more parties to the agreement to end a contract before its full performance—usually earlier than planned and often after other efforts to address challenges under the agreement have failed.
Closure of a contract refers to the planned completion of the obligations stated within the terms of the contract on or before the designated effective period ends. A contract should explicitly outline provisions and a process for termination and closure, which all parties agree to follow to minimize disruption and costs to end the contract. It is important to consider continuity of service for clients, including proper notification and communication of changes, which may affect clients as a result of the contract termination. SDOs, in particular, should evaluate their obligations in the event of a contract termination by either party when negotiating terms—an important consideration is the length of time the SDO would be obligated to continue service delivery in the event of a contract termination.
- 5.1 The purchaser is not meeting its contractual obligation for payment or provision of supplies. What should an SDO do?
- 5.2 The obligations under the contract have been met and the effective period will end soon. What should I expect to do to close out the contract?
- 5.3 I have a dispute with the purchaser. How do I resolve this?
5.1 The purchaser is not meeting its contractual obligation for payment or provision of supplies. What should an SDO do?
Timeliness of payment can be a common challenge faced by SDOs, especially when dealing with government purchasers. It is advisable to know the prior performance of a purchaser with regard to timeliness and reliability of payments and to monitor this closely. SDOs should also anticipate some delays from time to time and have some cash reserves to prevent disruption of operations for short-term delays. Careful monitoring for any delay or disruption in payment is important to allow action when a problem may first present. Additionally, SDOs should seek contract provisions that establish late fees (usually a percentage of outstanding fees due) and allow the SDO to decrease or even suspend service delivery in the event of late payments.
Termination of the contract is a last resort if a purchaser does not pay as promised. Contracts should have an escape provision that can be exercised to limit the SDO’s exposure to nonpayment or underpayment to a maximum amount that can be tolerated. Note that similar provisions may also be in contracts to protect purchasers from exposure to poor service delivery (for example, quality-of-care issues).
In the event that payments are not made, are made late, or there is any dispute over the amount owed, the contract should provide a mechanism to resolve such disputes, informally as well as formally, through mechanisms such as mediation or arbitration.
5.2 The obligations under the contract have been met and the effective period will end soon. What should I expect to do to close out the contract?
An SDO should keep abreast of the final deliverables due at the end of a contract period and plan sufficient time to ensure that these final “wrap-ups” are completed on schedule. For example, a final report may be for the most recent reporting period but also require a comprehensive analysis of performance under the contract during the entire effective period. A final disposition of resources may be required. Any outstanding bills or payments can be due and only allowed within a certain period of time. Final record keeping and storage can be decided.
The SDO should evaluate implications to no longer perform under the contract. For example, is there any impact on jobs, procurement, or space planning? Will any transitional care or client servicing be required, and if so, how can this be done to maintain quality and continuity for clients? Is there a new SDO that will be stepping in, and if so, what handoffs should be conducted and how?
The end of a contract presents a natural period of reflection. What lessons has the SDO learned from this experience that it wishes to apply in the future? Are there opportunities to disseminate results and insights from this contractual relationship internally or in external fora?
5.3 I have a dispute with the purchaser. How do I resolve this?
Most often, disputes center on the amount and timing of payments, but they may also stem from other challenges ranging from failure to provide timely reports, format of reports, use of names or trademarks, or a disagreement on quality or other aspects of service delivery. In all cases, an essential purpose of a contract is to establish a mechanism to resolve disputes. Typical dispute resolution options include informal as well as formal mechanisms such as mediation or arbitration by third parties or the legal system.
Often, an early stage of dispute resolution will include both parties making “best efforts" to resolve the dispute themselves. They can establish a range of issues that would be recognized as legitimate to dispute and a general process and time period for efforts to take place (for example, disputes will be submitted in writing in a standard format, by authorized person(s); the other party will acknowledge the dispute in 10 working days and respond in writing within 30 calendar days). Dispute resolution processes should also include any process for appeals. The final decision point should be clear.
SDOs should carefully design and consider procedures that will govern the resolution of any dispute that may arise in the course of a contractual relationship. This will help to resolve any disagreements to avoid the possibility that the contract will need to be terminated ahead of the original agreed upon terms. The World Bank and American Bar Association offer an overview of different dispute resolution mechanisms. JAMS, Inc., is a U.S.-based international alternative dispute resolution service that offers sample dispute resolution clauses, which may be helpful in the contract drafting process. All three resources are located in the resource section of this FAQ.