FAR 49.002—Applicability.
Plain-English Summary
FAR 49.002 explains when the termination and settlement rules in FAR Part 49 apply and how they are used in related situations. It covers four main topics: applicability to contracts with termination for convenience or default clauses, the special treatment of commercial product and commercial service contracts awarded under FAR Part 12, use of Part 49 by contractors and contracting officers in settling terminated subcontracts, use of Part 49 as guidance for equitable adjustments under the Changes clause, and how to calculate the "amount" of a settlement proposal when a threshold or authority depends on that amount. In practice, this section tells users whether Part 49 is controlling, merely advisory, or inapplicable, and it helps ensure settlement and adjustment calculations are made on a consistent basis. It is especially important in termination scenarios because the wrong rule set can affect allowable costs, settlement strategy, and the Government’s reimbursement exposure. It also clarifies that subcontract settlements and change-order adjustments may be evaluated using Part 49 concepts even when the prime contract itself is not being terminated. Finally, it defines what counts toward the settlement proposal amount, which can affect approval levels, review requirements, and whether a proposal falls within a particular authority or procedure.
Key Rules
Part 49 applies to termination clauses
This part applies to contracts that include termination for convenience of the Government or termination for default of the contractor. Those are the core situations Part 49 is designed to address, along with related references in FAR 12.403 and 13.302-4.
Commercial contracts under Part 12 are excluded
Part 49 does not apply to commercial product and commercial service contracts awarded using Part 12 procedures. For those contracts, termination policy comes from FAR 12.403 and the commercial terms clause at 52.212-4, although Part 49 may still serve as administrative guidance if it does not conflict with those authorities.
Subcontract settlements generally follow Part 49
Contractors are to use Part 49, unless inappropriate, when settling subcontracts terminated because a prime contract was modified. This promotes consistency in subcontract termination settlements tied to prime contract changes.
Government reviews subcontract settlements by guidance
When a contractor seeks reimbursement under a cost-reimbursement contract for a subcontract settlement after a subcontract was terminated for convenience of the contractor, the contracting officer should use Part 49 as a guide in evaluating the settlement. The section does not make Part 49 automatically controlling in every subcontract case, but it sets the benchmark for reasonableness and consistency.
Changes clause adjustments may use Part 49
The contracting officer may use Part 49 to determine an equitable adjustment arising from a modification under the Changes clause of any contract except a cost-reimbursement contract. This gives the CO a recognized framework for evaluating termination-like costs and settlement concepts in change situations.
Settlement amount is net of certain items
When authority or action depends on the "amount" of a settlement proposal, the amount is the gross settlement proposed minus amounts payable for completed articles or work at contract price and minus amounts for subcontractor settlement proposals. Credits for retained or otherwise disposed termination inventory, as well as advance or partial payments, are not deducted from the gross settlement proposed for this calculation.
Responsibilities
Contractor
Use FAR Part 49, unless inappropriate, to settle subcontracts terminated because of a prime contract modification. When preparing a settlement proposal, calculate the proposal amount using the rule in paragraph (d), and do not deduct credits for retained/disposed inventory or advance/partial payments when determining that amount.
Contracting Officer
Apply Part 49 to contracts that include termination for convenience or default clauses, except where Part 12 commercial procedures control. Use Part 49 as administrative guidance for commercial contracts only when consistent with FAR 12.403 and 52.212-4, use it as a guide when evaluating subcontract settlements for reimbursement under cost-reimbursement contracts, and may use it to determine equitable adjustments under the Changes clause for non-cost-reimbursement contracts.
Agency
Ensure termination and settlement practices align with the correct regulatory framework: Part 49 for covered noncommercial contracts, Part 12 termination rules for commercial products and services, and the appropriate guidance for subcontract and changes-related settlements.
Practical Implications
Always identify the contract type first. Whether Part 49 applies, is only guidance, or does not apply at all depends heavily on whether the contract is commercial under Part 12 and whether the issue is a termination, subcontract settlement, or changes adjustment.
Do not assume subcontract settlements are outside Part 49. If a prime contract modification causes subcontract termination, Part 49 is the default settlement framework unless it is inappropriate for the situation.
Be careful with reimbursement requests under cost-reimbursement contracts. The contracting officer will test subcontract settlement proposals against Part 49 concepts, so unsupported or inflated subcontract settlements can be challenged.
Use the correct settlement amount calculation. The definition in paragraph (d) can affect whether a proposal crosses a dollar threshold or triggers a particular approval path, so miscounting credits or deductions can lead to procedural errors.
For commercial item contracts, do not rely on Part 49 as the controlling rule set. FAR 12.403 and the commercial clause govern, and Part 49 can only be used if it does not conflict with those authorities.
Official Regulatory Text
(a) (1) This part applies to contracts that provide for termination for the convenience of the Government or for the default of the contractor (see also 12.403 and 13.302-4 ). (2) This part does not apply to commercial product and commercial service contracts awarded using part 12 procedures. See 12.403 for termination policies for contracts for the acquisition of commercial products and commercial services. However, for contracts for the acquisition of commercial products and commercial services, this part provides administrative guidance which may be followed unless it is inconsistent with the requirements and procedures in 12.403 , Termination, and the clause at 52.212-4 , Contract Terms and Conditions-Commercial Products and Commercial Services. (b) Contractors shall use this part, unless inappropriate, to settle subcontracts terminated as a result of modification of prime contracts. The contracting officer shall use this part as a guide in evaluating settlements of subcontracts terminated for the convenience of a contractor whenever the settlement will be the basis of a proposal for reimbursement from the Government under a cost-reimbursement contract. (c) The contracting officer may use this part in determining an equitable adjustment resulting from a modification under the Changes clause of any contract, except cost-reimbursement contracts. (d) When action to be taken or authority to be exercised under this part depends upon the "amount" of the settlement proposal, that amount shall be determined by deducting from the gross settlement proposed the amounts payable for completed articles or work at the contract price and amounts for the settlement of subcontractor settlement proposals. Credits for retention or other disposal of termination inventory and amounts for advance or partial payments shall not be deducted.