McDonnell Douglas and General Dynamics sued the Navy over an A-12 aircraft development contract terminated in 1991. The court ruled that an incrementally funded fixed-price contract's H-7 clause caps the contractor's cost recovery at only the funds the government had obligated by the termination date—not the total costs actually incurred. This means contractors cannot recover work performed beyond the amount of money the government had committed, even if the contract required that work.
Incrementally funded contracts limit your recovery to obligated funds at termination, not actual costs incurred—review your contract's funding clause before starting work.
If your contract uses an H-7 or similar incremental funding clause, track the government's cumulative obligations monthly and stop work if funding falls behind your schedule.
Termination for convenience does not override incremental funding limits—you cannot claim extra costs for work performed beyond obligated amounts, even if the government ordered it.