FAR 49.1—Subpart 49.1

Scope of subpart.

FAR 49.100 is the gateway provision for the termination subpart. It explains that this subpart covers four core subjects: the contracting officer’s authority and responsibility to terminate contracts in whole or in part for the Government’s convenience or for default; the duties of both the contractor and the contracting officer after a termination notice is issued; the general procedures used to settle terminated contracts; and settlement agreements. It also points readers to the more detailed rules that apply depending on the type of termination and contract: subpart 49.2 and subpart 49.3 for convenience terminations and settlements of fixed-price and cost-reimbursement contracts, and subpart 49.4 for default terminations. In practice, this section tells users where the termination framework begins and how the FAR organizes the subject, so contracting officers and contractors can quickly identify the governing procedures after a termination decision. It matters because termination actions are time-sensitive, documentation-heavy, and often financially significant, and this section signals that the general rules here must be read together with the more specific subparts that follow.

Authorities and responsibilities.

FAR 49.101 explains who has authority and responsibility in the termination process and how that authority should be exercised. It covers the contracting officer’s authority to terminate for convenience or default and to enter settlement agreements, the requirement to terminate only when it is in the Government’s interest, when a no-cost settlement should be used instead of a formal termination notice, the special rule that contracts with an undelivered balance under $5,000 normally should not be terminated for convenience, the post-termination role of the termination contracting officer (TCO) in negotiating settlements, the need for prompt audit and negotiation action with special attention to small business concerns, the preference for continuing small business performance over large business performance when both supply the same item and only part of the remaining units must be terminated, and the contracting officer’s responsibility to release excess funds unless delegated to the TCO. In practice, this section is about making termination decisions efficiently, minimizing administrative cost, protecting the Government’s interests, and handling settlements fairly and promptly. It also helps agencies avoid unnecessary terminations, reduce paperwork where a no-cost settlement is appropriate, and manage funds and workload correctly after termination action begins.

Notice of termination.

FAR 49.102 explains how a contracting officer must issue, distribute, amend, and sometimes reinstate a termination notice for convenience or default. It covers the required form of notice, acceptable delivery methods, what the notice must state, who must receive copies, when the notice may be corrected or rescinded, and when a terminated contract may be reinstated. The section exists to ensure terminations are legally effective, clearly communicated, and properly documented, while also protecting the contractor’s ability to respond and mitigate disruption. In practice, this rule matters because an improper notice can create disputes over whether termination was effective, what work stopped, and whether the Government preserved its rights. It also ensures that affected third parties such as assignees, guarantors, and sureties are informed, and that workforce impacts are addressed when a termination causes significant layoffs. For contracting officers, this section is a procedural checklist; for contractors, it is the point at which termination rights, obligations, and mitigation duties become immediate and concrete.

Methods of settlement.

FAR 49.103 explains the basic methods the Government may use to settle termination claims for terminated cost-reimbursement contracts and fixed-price contracts terminated for convenience. It identifies four settlement approaches: negotiated agreement, determination by the Termination Contracting Officer (TCO), costing-out through vouchers using SF 1034 for cost-reimbursement contracts under subpart 49.3, or a combination of these methods. The section also establishes a strong preference for negotiated settlements, directing the TCO to seek a fair and prompt agreement with the contractor whenever possible. Only when the settlement proposal cannot be resolved by agreement may the TCO settle it by determination. In practice, this section matters because it sets the framework for how termination costs are resolved, how quickly the parties can close out the terminated work, and when the Government may unilaterally decide the amount due.

Duties of prime contractor after receipt of notice of termination.

FAR 49.104 explains what a prime contractor must do immediately after receiving a termination notice, especially for a termination for convenience. It covers stopping work on the terminated portion, stopping new subcontracts, terminating related subcontracts, notifying the Termination Contracting Officer (TCO) of any special circumstances that prevent an immediate stop, continuing and pricing any unaffected work in a partial termination, protecting and preserving Government property, notifying the TCO of legal proceedings tied to terminated subcontracts or commitments, settling subcontractor liabilities and termination proposals, preparing and submitting the prime contractor’s own termination settlement proposal, and disposing of termination inventory as directed. In practice, this section is the contractor’s operational checklist for minimizing further costs, preserving rights to recovery, and avoiding noncompliance after a termination notice. It also gives the TCO control over how the contractor winds down the terminated effort and handles property, subcontract settlements, and inventory. The rule matters because failure to act promptly can increase costs, jeopardize settlement recovery, create disputes with subcontractors, and expose the contractor to avoidable liability. For contracting officers and contractors alike, this section is the bridge between the termination notice and the formal settlement process.

Duties of termination contracting officer after issuance of notice of termination.

FAR 49.105 explains what the termination contracting officer (TCO) must do after a notice of termination has been issued, and how the TCO should manage the settlement process from start to finish. It covers the TCO’s core duties to direct the prime contractor’s required actions, review the contractor’s settlement proposal and any relevant subcontractor proposals, negotiate and document a settlement agreement, and issue a determination for any items that cannot be resolved by negotiation. It also addresses the TCO’s authority to bring in specially qualified personnel to help with legal, accounting, inventory, and disposition issues, including verification and screening of termination inventory under FAR part 45. The section further requires the TCO to promptly hold a settlement conference with the contractor, and when appropriate, invite principal subcontractors, to establish a definite settlement program and document key topics such as the scope of termination, subcontract termination, inventory protection, accounting practices, settlement proposal formats, interim financing, schedules, employee impact mitigation, and cost or pricing data obligations. In practice, this section is about organizing the post-termination process so the Government can settle fairly, efficiently, and with adequate documentation while minimizing delay, disputes, and avoidable costs.

Fraud or other criminal conduct.

FAR 49.106 addresses what the Termination Contracting Officer (TCO) must do when fraud or other criminal conduct is suspected in connection with settling a terminated contract. Its purpose is to stop the normal settlement process from continuing in a situation that may involve false claims, falsified records, collusion, bribery, theft, or other unlawful conduct, and to ensure the matter is handled through the agency’s established reporting channels rather than through ordinary negotiation. In practice, this section means the TCO does not try to resolve or negotiate the settlement further once a credible suspicion arises; instead, the TCO must halt the discussion and elevate the issue under agency procedures. The section is narrow but important because termination settlements often involve cost data, inventory, subcontractor claims, and other sensitive information where misconduct can affect the government’s financial recovery and legal exposure. It protects the integrity of the termination process, preserves evidence, and helps ensure that potential criminal matters are referred promptly to the proper officials.

Audit of prime contract settlement proposals and subcontract settlements.

FAR 49.107 explains how the Government reviews and audits settlement proposals after a termination, focusing on both prime contract settlement proposals and subcontract settlements. It covers when the termination contracting officer (TCO) must refer proposals to the appropriate audit agency, when referrals are optional, what information the referral should include, and what the audit agency does with the referral. It also addresses subcontract settlement proposals, including when they must be referred for audit review, the continuing responsibility of prime contractors and higher-tier subcontractors to perform accounting reviews, and when the Government should step in and perform the review itself. Finally, it covers the advisory nature of audit reports, the need to protect privileged and negotiation-sensitive information, and the limited circumstances in which the TCO may share audit reports with contractors. In practice, this section is about making sure termination settlements are reviewed thoroughly, consistently, and efficiently without duplicating work unnecessarily or compromising the Government’s negotiating position.

Settlement of subcontract settlement proposals.

Settlement agreements.

Settlement negotiation memorandum.

FAR 49.110 explains what the termination contracting officer (TCO) must document after settlement negotiations for a terminated contract. It covers the settlement negotiation memorandum, its required contents, how pricing aspects must be documented under FAR 15.406-3, and how the memorandum must be distributed. It also distinguishes between settlements negotiated on an individual-item basis and those negotiated as an overall lump-sum settlement, and it requires the TCO to explain disputed or doubtful issues resolved by agreement. In practice, this section exists to create a clear administrative record showing how the settlement amount was reached, so reviewing authorities can understand and evaluate the basis for the settlement. It is important because termination settlements often involve complex cost, pricing, and factual judgments, and a well-supported memorandum helps protect the government’s interests, supports audit/review, and reduces the risk of later challenges.

Review of proposed settlements.

FAR 49.111 addresses the administrative review of proposed termination settlements. It requires each agency to establish procedures, when necessary, to review proposed settlements before they are finalized, so the government can ensure the settlement amount, supporting documentation, and overall resolution of a terminated contract are proper, consistent, and defensible. The section also covers interagency termination settlement support: when one agency performs termination settlement services for another agency, the servicing agency must also carry out the settlement review function. In practice, this means agencies need an internal control process for checking proposed settlement agreements, and they cannot separate the review responsibility from the settlement-processing responsibility when another agency is acting on their behalf. The purpose is to promote oversight, reduce the risk of overpayment or unsupported claims, and ensure termination settlements are handled consistently across agencies.

Payment.

Cost principles.

FAR 49.113 explains how the cost principles in FAR Part 31 apply when the government and a contractor are working out termination settlements. It covers two related situations: first, termination settlements under contracts with non-educational institutions, where the applicable Part 31 cost principles and procedures are used to assert, negotiate, or determine settlement costs; and second, settlements under experimental, developmental, or research contracts with educational institutions, where those same cost principles serve as a guide rather than a strict rule. The section also ties these settlement decisions to the general termination principles in FAR 49.201, which means settlement costs must still be fair, reasonable, and consistent with the termination framework. In practice, this provision tells contracting officers and contractors which cost standards to use when valuing terminated work, preparing settlement proposals, and resolving disputed costs. It also signals that educational institutions may be treated somewhat differently in research-type terminations, but only within the limits of FAR 31.104 and the broader termination rules.

Unsettled contract changes.

FAR 49.114 addresses how the government must handle unsettled contract changes when a contract is being terminated, either completely or partially. It covers two related situations: first, the termination settlement officer (TCO) must identify and resolve all related but still-open contract changes before final settlement of a completely terminated contract; and second, when only part of a contract is terminated, the contracting officer normally keeps responsibility for any unresolved changes, although that responsibility may be delegated to the TCO. The section exists to make sure termination settlements are complete, accurate, and coordinated with any pending contract modifications, equitable adjustments, or other change actions that could affect the final amount owed. In practice, this prevents the government and contractor from settling a termination claim without accounting for unresolved changes that may increase, decrease, or otherwise affect the final settlement amount. It also clarifies who has authority to resolve those changes, reducing the risk of inconsistent decisions between the termination settlement process and the underlying contract administration process.

Settlement of terminated incentive contracts.

FAR 49.115 explains how to settle terminated incentive contracts, specifically fixed-price incentive (FPI) contracts and cost-plus-incentive-fee (CPIF) contracts, when the Government terminates all or part of the work. It tells the termination contracting officer (TCO) and contracting officer how to coordinate the termination settlement with the contract’s incentive clauses, including the fixed-price incentive clauses at 52.216-16 and 52.216-17, the fixed-price termination clause at 52.249-2, the cost-reimbursement termination clause at 52.249-6, and the incentive fee clause at 52.216-10. The section distinguishes between partial terminations and complete terminations, because the treatment of completed and accepted items, target price, target fee, target cost, and final price differs depending on what portion of the contract is terminated. In practice, this provision prevents double recovery and ensures the contractor is paid correctly under the incentive structure for work already completed while also applying the proper termination settlement rules to the terminated portion. It also requires careful reservations in settlement agreements when final prices or target cost adjustments are still unresolved. For contracting personnel, the rule is mainly about sequencing: first determine what incentive adjustments still apply, then settle the terminated portion without overlapping costs or fees.