FAR 49.104—Duties of prime contractor after receipt of notice of termination.
Plain-English Summary
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.
Key Rules
Follow the notice and clause
After receipt of the termination notice, the contractor must comply with the notice and the contract’s termination clause unless the TCO directs otherwise. This means the notice is immediately operative and the contractor cannot wait for later settlement discussions before taking required actions.
Stop terminated work immediately
The contractor must stop work on the terminated portion of the contract and stop placing subcontracts for that portion. This is intended to prevent additional costs from being incurred on work the Government has ended.
Terminate related subcontracts
The contractor must terminate all subcontracts related to the terminated portion of the prime contract. The prime contractor is responsible for managing the downstream wind-down and cannot leave terminated subcontract work in place without direction.
Report special circumstances promptly
If there are special circumstances that prevent an immediate stoppage of work, the contractor must immediately advise the TCO. This allows the Government to decide whether limited continued performance is necessary or appropriate.
Continue unaffected work and seek adjustment
If the termination is partial, the contractor must continue the remaining work and promptly request an equitable adjustment for the continued portion if the termination increases costs. The request must be supported by evidence of the added cost.
Protect Government property
The contractor must take necessary or directed action to protect and preserve property in its possession in which the Government has or may acquire an interest, and must deliver that property if directed by the TCO. This includes safeguarding termination-related property and inventory.
Notify of legal proceedings
The contractor must promptly notify the TCO in writing of any legal proceedings arising from any subcontract or other commitment related to the terminated portion. This keeps the Government informed of disputes or claims that may affect settlement.
Settle subcontract liabilities
The contractor must settle outstanding liabilities and proposals arising from termination of subcontracts, and obtain any approvals or ratifications required by the TCO. Subcontract settlements are not fully at the contractor’s discretion when Government interests are involved.
Submit settlement proposal
The contractor must promptly submit its own termination settlement proposal, supported by appropriate schedules. This is the formal claim for allowable termination costs and related recovery.
Dispose of termination inventory
The contractor must dispose of termination inventory as directed or authorized by the TCO. Inventory disposition is controlled to ensure proper credit, accountability, and protection of Government interests.
Responsibilities
Contractor
Immediately comply with the termination notice and contract termination clause; stop work on the terminated portion; stop placing related subcontracts; terminate related subcontracts; notify the TCO of any special circumstances preventing stoppage; continue the unaffected portion of a partial termination; request an equitable adjustment when warranted; protect and preserve Government-interest property; notify the TCO of related legal proceedings; settle subcontract liabilities and proposals; submit the contractor’s termination settlement proposal; and dispose of termination inventory as directed or authorized.
Termination Contracting Officer (TCO)
Direct or authorize exceptions to the contractor’s default obligations where appropriate; receive notice of special circumstances, legal proceedings, and settlement matters; direct protection, delivery, and disposition of Government-interest property and termination inventory; and approve or ratify subcontract settlement actions when required.
Subcontractors
Comply with termination actions passed down by the prime contractor under the terminated portion of the work, and support settlement of their termination proposals and liabilities as applicable under their subcontracts and the prime’s direction.
Government
Through the TCO, control the termination process, determine whether any work may continue, and oversee property, inventory, and settlement actions to protect the Government’s interests.
Practical Implications
This section is an immediate-action checklist: the contractor should not wait for a settlement meeting before stopping terminated work, notifying the TCO, and preserving property.
Partial terminations are especially risky because the contractor must keep performing the remaining work while documenting any cost increase caused by the termination to support an equitable adjustment.
Subcontract management is a common pitfall; the prime must actively terminate related subcontracts and manage downstream settlement, rather than assuming subcontractors will handle it independently.
Failure to preserve property or inventory properly can reduce recovery, create audit issues, or lead to disputes over Government ownership and credit.
Prompt, written communication with the TCO is critical whenever there are special circumstances, legal claims, or settlement issues, because silence can be treated as noncompliance or can weaken the contractor’s position in settlement negotiations.
Official Regulatory Text
After receipt of the notice of termination, the contractor shall comply with the notice and the termination clause of the contract, except as otherwise directed by the TCO. The notice and clause applicable to convenience terminations generally require that the contractor- (a) Stop work immediately on the terminated portion of the contract and stop placing subcontracts thereunder; (b) Terminate all subcontracts related to the terminated portion of the prime contract; (c) Immediately advise the TCO of any special circumstances precluding the stoppage of work; (d) Perform the continued portion of the contract and submit promptly any request for an equitable adjustment of price for the continued portion, supported by evidence of any increase in the cost, if the termination is partial; (e) Take necessary or directed action to protect and preserve property in the contractor’s possession in which the Government has or may acquire an interest and, as directed by the TCO, deliver the property to the Government; (f) Promptly notify the TCO in writing of any legal proceedings growing out of any subcontract or other commitment related to the terminated portion of the contract; (g) Settle outstanding liabilities and proposals arising out of termination of subcontracts, obtaining any approvals or ratifications required by the TCO; (h) Promptly submit the contractor’s own settlement proposal, supported by appropriate schedules; and (i) Dispose of termination inventory, as directed or authorized by the TCO.