Contractor remedies amid overhaul of federal spending

A February 11, 2025 Executive Order (EO) and a February 26, 2025 Trump Administration memorandum aimed to transform the federal government's contract, grant, and loan spending.

The EO implementing the Department of Government Efficiency's cost efficiency initiative, and the guidance that followed, required a sweeping review of "all existing covered contracts and grants," as well as a comprehensive review of their contracting policies, procedures, and personnel over a 30-day period that ended on March 28, 2025.

Notwithstanding certain broad exclusions – such as for the military and intelligence community – and depending on how it is implemented, the EO may be significant for federal contractors and grantees in both the near and long terms.

The EO called for each federal agency to review contracts and grants and, where appropriate, terminate or modify them, "including through renegotiation," to "reduce overall Federal spending or reallocate spending to promote efficiency and advance the policies" of the Trump Administration.

The contract and grant review process also prioritized the review of "covered contracts and grants to educational institutions and foreign entities for waste, fraud, and abuse."

The EO broadly defines "covered contracts and grants" as any contract or grant subject to discretionary spending, but it also broadly excludes expenditures relating to immigration and law enforcement, the military, the intelligence community, public safety, and emergency spending.

General exclusions also include any contract or grant exempted in writing by the respective agency head.

Although the EO did not expressly prohibit agencies from entering into new contracts or grants, it required them to issue guidance on "signing new contracts or modifying existing contracts," and explained that agency heads may "approve new contracts prior to the issuance of such guidance on a case-by-case basis."

The EO also called for agencies to "identify all termination rights" under existing leases of government-owned real property, and determine whether such rights should be exercised.

Within 60 days of the EO, the administrator of the General Services Administration is required to submit a plan to the US Office of Management and Budget for the disposition of government-owned real property that has been determined to be "no longer needed."

The EO also calls for each agency to "build a centralized technological system" that would "seamlessly record every payment" issued pursuant to a covered contract or grant. It also would require agency employees to include a written justification for every payment made, and contemplates a mechanism that would allow an agency to "pause and rapidly review" any payment that does not have such a payment justification.

Each agency is required under the EO to "build a technological system ... that centrally records approval for federally funded travel for conferences and other non-essential purposes." It further provides that, once this system is in place, agency employees are prohibited from "engaging in federally funded travel for conferences or other non-essential purposes" unless a written justification has been submitted and approved.

The EO also froze federal employee credit cards for a 30-day period, with limited exceptions for critical services and subject to review by agency heads and agency DOGE team leads.

What does this mean for federal contractors and grantees?

While the EO required a sweeping review of all federal contracts and grants, it broadly excluded contracts and grants related to the military and the intelligence community, as well as contracts and grants related to public safety, immigration enforcement, law enforcement, and emergency spending. Thus, it may not affect contracts and grants of the US Department of Defense.

The EO targets civilian agencies, with a particular focus on (1) contracts and grants of those agencies to educational institutions and foreign entities, and (2) leases of government-owned real property.

Contractors and grantees working with civilian agencies are encouraged to:

• Evaluate the degree to which their agreements are at risk of termination or modification
• Consider advising any relevant agencies as to why their agreements are excluded from the EO or, if not excluded, how they "promote efficiency and advance the policies of the Administration," and
• Understand the rules and timelines related to terminations, modifications, stop work orders, and dispute resolution in their contracts, grants, and leases.

Termination of contracts

Unlike many contracts between commercial entities, federal contracts typically contain clauses permitting the government to terminate the contract, in whole or in part, for convenience – in other words, whenever it is in the government's interest to do so.

Even if such a clause is not expressly included in an agreement or is not expressly exercised, judicially created frameworks such as the Christian doctrine, which operates to read certain mandatory clauses into a contract, even if they were left out of the written document, as well as constructive termination, may give the government termination rights and limit the damages the contractor or grantee may recover for the termination.

If the government terminates a contract for convenience, the contractor may be entitled to recoup payment for work completed and costs incurred. However, contractors are generally not entitled to lost profits in such a scenario.

Contract modifications

The government's right to modify a contract is subject to multiple limitations. First, if the contract is for a commercial product or service, the government cannot unilaterally change it – any modification must be mutually agreed upon by the parties.

Under a noncommercial contract, typically the government is allowed to make unilateral changes to work within the scope of the contract, or to temporarily stop work under the contract, but must compensate the contractor for any such change. Thus, if the government seeks to modify or stop work on an existing contract, contractual remedies may be available.

Contract Disputes Act

Although the government may have broad discretion to terminate an agreement for its convenience, it cannot abuse that discretion and cannot act in bad faith – ie, with a specific intent to injure the terminated party.

Contractors who believe that their contracts have been improperly terminated in whole or in part may bring an action under the Contract Disputes Act (CDA) at Title 41 of the US Code, Sections 7101-7109.

Before bringing a CDA claim in federal court or at one of the federal boards of contract appeals, contractors are required to file a claim with the contracting officer that requests a final decision. Successful CDA claims entitle the contractor to interest on payments owed, starting from the date the contracting officer received the claim.

Prompt Payment Act

The Prompt Payment Act, at Title 31 of the US Code, Sections 3901-3909, generally requires the federal government to make payments properly invoiced to the government within 30 days, subject to interest penalties. Separate from the CDA interest, Prompt Payment Act interest applies only when there is no dispute over the payment amount or compliance with the terms of the contract.

Contractors that have had payments paused in connection with the EO and want to recover interest should consider whether they are entitled to interest under the Prompt Payment Act, or if they would need to submit a CDA claim.

Termination and modification of grants

The governing regulation for federal grants and cooperative agreements – the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, or Uniform Grant Guidance, in Title 2 of the Code of Federal Regulations, Part 200, – also gives the government flexibility with respect to termination and modification.

Specifically, the Uniform Grant Guidance permits agencies to terminate grants in whole or in part "if an award no longer effectuates the program goals or agency priorities." 2 C.F.R. § 200.340(a)(4).

However, the process for challenging agency actions in connection with a federal grant award is less uniform relative to a federal procurement contract, and the procedures may vary depending on the awarding agency.

Some agencies' grant regulations outline the processes to be followed for disputes over the award or administration of federal funding. For example, the US Department of Energy's grant regulations in Title 2 of the Code of Federal Regulations, Part 910, provide for informal, alternative, and formal dispute resolution procedures, as well as subsequent appeals thereof.

However, the CDA and the Prompt Payment Act do not apply directly to grants or the interest therefrom. Grantees may still be able to seek relief in federal court but are generally required to exhaust any available administrative remedies before doing so.

Termination of real property leases

Unlike federal contracts, generally, government leases with a specified term do not contain a termination for convenience clause. However, leases may contain provisions allowing the government to adjust lease payments on vacant premises.

Travel and credit card freezes

Although this section of the EO focuses on federal employees, contractors should consider how freezing travel and credit cards might affect payments and opportunities to interface with government representatives. If a credit card freeze affects timely payment under a contract, contractors may consider evaluating how to recover interest on the late payments.

Conclusion

Since the inauguration, the Trump Administration has signaled its clear initiative to make federal spending more efficient. The February 26 government contracts and grants EO specifically targeted federal spending in connection with procurement contracts and financial assistance agreements.

Companies doing business with the government are encouraged to consider how existing federal contracts and grants align with the policies and directives of the current Administration, and are encouraged to have a plan ready to implement in the event their existing agreements are terminated or modified.

Please contact the authors for more information. 

This article was originally published in Law360.