The State Department's rush to cancel contracts in 2025 left about $8.1 million tied up in six terminated deals and exposed the agency to contractor claims, according to an October 2026 audit by the department's Office of Inspector General. The report, AUD-AFA-27-03, examined how contracting officers carried out terminations ordered under Executive Order 14222 and earlier directives. It found errors at nearly every step, from the first notice sent to a contractor to the final settlement.

Government Executive reported the findings on Nov. 6, noting the report was published on Monday.

How 399 Terminations Moved Through State's Contracting Shop

E.O. 14222, signed Feb. 26, 2025, required agencies to review all covered contracts by March 28, 2025, and to terminate or modify them to cut or reallocate spending. According to figures the Bureau of Global Acquisitions (GA) gave auditors, State reviewed 5,578 contracts with a total cost of about $65 billion and terminated 399 of them, totaling about $360 million, between Jan. 20 and June 15, 2025.

The OIG focused on 178 domestic contracts terminated for convenience, worth approximately $292.7 million, and tested a sample of 30 valued at $173.9 million.

The work landed on a strained workforce. The department announced a reorganization in April 2025, cut roughly 1,300 employees in July, absorbed U.S. Agency for International Development activities and then furloughed GA contracting officers during the lapse in appropriations that began Oct. 1, 2025. Auditors said those pressures complicated the surge but did not excuse the gaps. The report notes that contracting officers responsible for several of the sampled contracts "stated that they had never executed a contract termination and were unsure of what actions they needed to take."

Termination Notices That Failed the FAR Test

The Federal Acquisition Regulation requires a written notice stating the basis for termination, the effective date, the extent of the termination and instructions for the contractor. The OIG found that 25 (83 percent) of the 30 sampled contracts lacked adequate written notices.

The department could not show it sent a formal notice at all to 7 of those 25 contractors. Sixteen notices cited the wrong FAR provision or a clause that did not fit the contract type, and in 5 of those cases the contractor asked the contracting officer to correct and reissue the notice. In 10 (33 percent) of the 30 contracts, the notice and the confirming contract modification listed different effective dates. In one case, two modifications carried dates that differed from the notice by 59 days.

Those mismatches matter for settlement math. The auditors wrote that accurate effective dates are critical to "reducing the risk of disputed costs, administrative delays, or contractor claims."

Where the $8.1 Million Sat

The FAR requires contracting officers to estimate settlement costs and recommend releasing excess funds within 30 days of termination. The OIG found no evidence that happened for 17 (57 percent) of the 30 contracts. Six of those 17 still held excess funds as of August 2026. In one, the contracting officer had taken no documented action since issuing the termination notice in May 2025 and had not determined whether the contractor planned to submit a settlement proposal.

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The six contracts held $8,147,076 awaiting deobligation, which the OIG classified as funds that could be put to better use. The largest balances were $3,472,123 on a contract held by the Bureau of International Narcotics and Law Enforcement Affairs (INL) and $2,855,877 on a GA contract. INL told auditors it deobligated its full balance as of Oct. 9, 2026. GA agreed to deobligate the four other balances.

GA rejected one recommendation. It determined that $49,012.68 on a sixth contract was owed to the contractor as the termination settlement, and the OIG accepted that conclusion.

"Because [contracting officers] did not take timely action to deobligate excess funds, the department’s ability to redirect those resources to other mission priorities was limited and the risk that the funds would expire before they could be used increased," auditors wrote, as quoted by Government Executive.

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Settlements, Laptops and a Repeat Finding From 2020 and 2023

Settlement handling fell short of FAR and department requirements for 8 (27 percent) of the 30 contracts. Ten months after one termination took effect, the cognizant contracting officer still did not know whether a settlement proposal was coming. For another contract, the department could not locate the contractor's settlement proposal, yet the contracting officer negotiated an amount and approved payment.

Government property also slipped through. Contractors held government laptops and cell phones on seven sampled contracts, and a contracting officer settled and closed out four of them without verifying the equipment came back.

The root causes are not new. The OIG said the department lacked standard procedures, guidance, communication and training. "Finally, the Department lacked an effective mechanism to track contracts from termination through closeout, and management did not sufficiently oversee Contracting Officers to ensure compliance with requirements," the report states. It adds that similar deficiencies surfaced in OIG reports in 2020 and 2023, and that corrective actions on 10 related recommendations have not yet been implemented.

Nine Recommendations and State's Response

The OIG issued nine recommendations. The first three direct GA to standardize guidance on handling government-furnished property after a termination, issue standard operating procedures for reviewing excess funds and settlement proposals, and build a process to track deobligation actions and flag overdue items. GA concurred with all three. The remaining six address the specific balances in Table 1. The OIG considers two recommendations closed and seven resolved, pending further action.

What It Means for Contractors

Firms with State contracts terminated in 2025 should pull their own files now. Check whether the termination notice cited the correct FAR clause for the contract type and whether its effective date matches the confirming modification. A mismatch can change which costs are allowable in a settlement, and the OIG's findings give contractors a documented basis for asking the contracting officer to correct the record.

The one-year window to submit a final settlement proposal runs from the effective date of termination unless the contracting officer extends it. For terminations made in the first half of 2025, that deadline has likely passed or is close, so any firm that has not filed should confirm in writing whether an extension applies. Companies that returned government laptops or phones should keep proof of return, since the audit shows State did not always verify it.

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