State Department's push to cancel hundreds of contracts left behind a trail of mistakes, watchdog finds

Widespread errors in State Department efforts to terminate contracts may have wasted money and exposed the agency to lawsuits, its inspector general said in a report published on Monday. 

Within a month of Donald Trump taking office for the second time, the department began reviewing some contracts for termination, particularly ones regarding foreign aid and diversity, equity and inclusion initiatives. Then Trump issued an executive order directing agencies to review their contracts and grants for cancellation or modification “to reduce overall federal spending or reallocate spending to promote efficiency and advance the policies of my administration.”

This led State workers to review nearly 5,600 contracts worth a total of about $65 billion. From Jan. 20 to June 15, 2025, the department terminated almost 400 contracts, totaling roughly $360 million. But auditors found several instances where employees didn’t rescind obligated funds. 

Across at least six terminated contracts, there was about $8.1 million that still had not been deobligated as of August 2026, the IG reported. 

“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. 

The watchdog recommended that officials repurpose the $8.1 million, which the department agreed to do, except for nearly $50,000 that it determined was owed to the contractor as part of the termination settlement. 

Auditors also found that, out of a sample of 30 terminated contracts, 25 lacked adequate written termination notices. For example, the paperwork for 10 of the cancellations listed two different termination dates, which increases “the risk of disputed costs, administrative delays or contractor claims.” 

The IG also highlighted four terminated contracts in which State employees didn’t ensure that contractors returned their government-issued laptops and phones. Similarly, the IG for the IRS reported in August that the agency could not account for nearly 600 agency electronic devices valued at more than $270,000 from employees who separated in spring 2025. 

Auditors acknowledged that State, while undergoing the contract review, also was dealing with the Trump administration’s reductions to the civil service, a department reorganization and taking over the U.S. Agency for International Development’s operations. But they also emphasized that the agency did not standardize contract cancelation procedures and that some contracting officers had never terminated a contract before. 

The IG recommended that State specify steps for returning government-issued property due to a contract termination, set procedures for reviewing unused funds from a canceled contract and establish a process for tracking deobligation actions. Officials concurred with all three. 

The Government Accountability Office recently criticized State for entering inaccurate information into its grant management system following significant cuts to foreign assistance grants, contracts and cooperative agreements. For example, more than 4,000 awards (out of around 10,000) were categorized as both active and terminated. 

The IG for the Veterans Affairs Department in September similarly reported on the VA’s contract cancellations, finding that employees generally complied with termination requirements but that, in some cases, they had “only a few hours” to complete reviews.