FAR 32.109—Termination financing.
Plain-English Summary
FAR 32.109, Termination financing, addresses one narrow but important topic: how contract financing procedures under FAR Part 32 may be used to finance termination costs when a contract is terminated for the convenience of the Government. The section explains that the Government may apply contract financing methods not only to ongoing contract performance, but also to the financing of terminations, either together with performance financing or separately from it. Its purpose is to encourage contractors to commit their own funds to performance even though the contract may later be terminated for convenience, by reducing the cash-flow risk associated with termination settlement costs. In practice, this provision matters when a contractor faces significant unrecovered costs after a convenience termination and needs interim financing before final settlement is completed. The section also points readers to FAR 49.112-1, which contains the related termination settlement financing procedures and should be consulted for the operational details.
Key Rules
Financing may cover terminations
The Government may use contract financing procedures under FAR Part 32 to finance termination costs. This is an available tool, not an automatic entitlement, and it applies when a termination for convenience creates a need for interim funding.
May be separate or combined
Termination financing may be provided either in connection with contract performance financing or independently of it. That means the Government can structure financing to address only termination-related needs, or it can integrate that support with financing for ongoing performance.
Purpose is to encourage contractor investment
The policy goal is to encourage contractors to use their own funds in performance despite the risk of a convenience termination. By making termination financing available, the Government reduces the financial disincentive for contractors to front costs before final settlement.
Subject to related settlement rules
This section works together with FAR 49.112-1, which governs the specific procedures for financing termination settlements. Users should treat FAR 32.109 as the policy authority and FAR 49.112-1 as the operational cross-reference.
Responsibilities
Contracting Officer
Consider whether termination financing is appropriate when a convenience termination creates cash-flow pressure, and coordinate any financing action with the applicable termination settlement procedures in FAR 49.112-1. The contracting officer must ensure the financing approach is consistent with the contract terms and the broader Part 32 financing framework.
Contractor
Use the availability of termination financing as a planning factor when deciding how much of its own funds to invest in performance. If a termination occurs, the contractor should seek financing only in accordance with the contract financing arrangement and the applicable settlement procedures.
Agency
Provide the financing framework and policy support needed to apply Part 32 financing methods to termination situations. The agency should ensure its contracting personnel understand when termination financing may be used and how it fits with termination settlement administration.
Practical Implications
This section is mainly about cash flow after a convenience termination, not about the substantive right to a termination settlement itself.
Contractors should not assume termination financing is automatic; it depends on the financing structure used in the contract and the contracting officer’s application of the rules.
A common pitfall is overlooking the cross-reference to FAR 49.112-1, which contains the practical settlement-financing mechanics.
Contracting officers should think about termination financing early in acquisition planning for contracts where the contractor must invest significant upfront funds.
Because the rule is brief and permissive, the real operational details will usually be found in the contract financing clause, the termination clause, and the settlement procedures that implement the financing arrangement.
Official Regulatory Text
To encourage contractors to invest their own funds in performance despite the susceptibility of the contract to termination for the convenience of the Government, the contract financing procedures under this part may be applied to the financing of terminations either in connection with or independently of financing for contract performance (see 49.112-1 ).