When a fixed-price contract is terminated for convenience, what is the policy on profit?

• A. Profit is allowed on the entire contract
• B. Profit is not allowed on work not completed
• C. Profit is permitted only on preparatory work
• D. Profit is fully recoverable regardless of expenses

Answer: (C)

When a fixed-price contract is terminated for convenience, the policy regarding profit is that it is permitted only on preparatory work that has been completed prior to the termination. This approach recognizes that the contractor may have incurred costs during the preparatory phase of the project, justifying the allowance of profit on that portion of the work.

In a fixed-price contract, even if the work was not fully completed, the government or contracting entity seeks to ensure that the contractor is compensated fairly for the efforts and resources expended prior to the termination decision. However, any profit on work that has not been completed is not permissible because the contractor has not fulfilled the contractual obligations to the extent necessary to warrant a profit on unfinished tasks.

This policy aims to balance the interests of both the contractor, who should not suffer an undue financial burden from an early termination, and the government, which aims to maintain fiscal responsibility by ensuring that profit is only awarded for work that has been performed.