(a) WHAT IS A CANCELLATION CEILING
(1) "Cancellation ceiling" means the maximum cancellation charge that the contractor can receive in the event of cancellation. "Cancellation charge" means the amount of unrecovered costs, which would have been recouped through amortization over the full term of the contract, including the term canceled (FAR 17.103).
(2) A multi-year contract has a unique cancellation ceiling for each point in time when the contract could be canceled.
Example Assume you have a multi-year contract for 20 flying saucers a year for five years, for a total procurement of 100 flying saucers. If the contract is canceled at the end of FY 1, the cancellation ceiling must cover incurred costs associated with FY 2 through FY 5 end items, i.e., 80 flying saucers. If you cancel the contract at the end of FY 2, the cancellation ceiling must cover incurred costs associated with FY 3 through FY 5 end items, i.e., 60 flying saucers. |
(3) If a multi-year contract is canceled, the contractor should be compensated fairly for the work done and the preparations made for the canceled portion of the contract. The specific dollar amount that is "fair compensation" is only determined if the contract is actually canceled. The contractor submits a cancellation claim, the contracting officer evaluates it, and the parties negotiate the "fair compensation", called the cancellation charge, which the Government will pay to the contractor.
(4) None of this can be done in a vacuum, however. It must be done within ground rules established at the time of contract award. Those ground rules include things such as procedures the contracting officer should follow to cancel the contract, what types of costs can be included in the cancellation claim and cancellation charge, and the maximum cancellation charge the Government will pay. That maximum cancellation charge is the cancellation ceiling.