FAR 49.107—Audit of prime contract settlement proposals and subcontract settlements.
Plain-English Summary
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.
Key Rules
Mandatory referral of large prime settlements
The TCO must refer each prime contractor settlement proposal at or above the certified cost or pricing data threshold in FAR 15.403-4(a)(1) to the appropriate audit agency. For smaller proposals, referral is optional, but the TCO may still send them for audit if review would be useful.
Referral should be specific and complete
When sending a proposal to the audit agency, the TCO must identify any information or data considered relevant and include facts and circumstances that will help the audit agency perform its review. This ensures the audit agency can focus on the issues that matter most to the settlement.
Audit agency provides comments and recommendations
The audit agency reviews the referred proposal, may perform additional accounting work it deems appropriate, and then submits written comments and recommendations to the TCO. If a formal audit is not warranted for a smaller proposal, the TCO must perform or arrange a desk review and document that review in the termination case file.
Subcontract settlements require audit review in certain cases
The TCO must refer subcontract settlements submitted for approval or ratification when the amount exceeds the certified cost or pricing data threshold, or when a complete or partial accounting review is advisable. The audit agency then provides written comments and recommendations to the TCO.
Prime and higher-tier contractors still owe accounting review
Government audit review of a subcontract settlement does not eliminate the prime contractor’s or higher-tier subcontractor’s responsibility to perform the required accounting review. The contractor chain remains responsible for its own review process even when the Government also reviews the settlement.
Government audit may be preferred in special situations
The TCO should ask the Government audit agency to perform the subcontractor’s accounting review when the subcontractor objects for competitive reasons, when the Government can do the work more economically or efficiently, when Government review is needed for consistent treatment, or when the contractor has a substantial or controlling financial interest in the subcontractor.
Avoid duplicate reviews, but allow additional review when needed
The audit agency should avoid duplicating accounting reviews already performed by the upper-tier contractor, but this does not prevent the Government from conducting additional review if appropriate. The TCO should also have the audit agency periodically examine the contractor’s review procedures and performance when the contractor is doing the accounting reviews.
Audit reports are advisory and must be protected
Audit reports are advisory only and are used by the TCO in negotiating a settlement or making a unilateral determination. Government personnel must not disclose privileged or negotiation-sensitive information, and the TCO may share audit reports with prime or higher-tier subcontractors only when consistent with the Government’s interest and for use in settling subcontract proposals.
Responsibilities
Termination Contracting Officer (TCO)
Refer required prime settlement proposals and qualifying subcontract settlements to the appropriate audit agency; decide whether smaller proposals or subcontract settlements merit review; include relevant facts and data in referrals; perform or arrange a desk review when a formal audit is not warranted; request Government audit review in the special subcontract situations listed in the rule; use audit reports only as advisory input for settlement negotiations or unilateral determinations; protect privileged and negotiation-sensitive information; and document reviews in the termination case file.
Audit Agency
Review referred settlement proposals, develop requested information, perform any additional accounting reviews it considers appropriate, and provide written comments and recommendations to the TCO. When the contractor performs the accounting review, periodically examine the contractor’s procedures and performance and provide comments and recommendations to the TCO.
Prime Contractor
Perform accounting reviews of subcontract settlement proposals as part of its responsibility under the termination rules, avoid duplicating work unnecessarily, and use audit reports only as permitted when furnished by the TCO for settlement purposes.
Higher-Tier Subcontractor
Perform required accounting reviews of lower-tier subcontract settlement proposals, cooperate with the review process, and maintain responsibility for its own accounting review obligations even if the Government also reviews the settlement.
Subcontractor
Submit settlement proposals for approval or ratification as required and, when applicable, cooperate with accounting review and audit processes. A subcontractor may also object to an upper-tier contractor’s review for competitive reasons, which can trigger Government audit review.
Government Personnel Handling Audit Reports
Use audit reports only for authorized settlement purposes and avoid disclosing privileged information or information that could harm the Government’s or contractors’ negotiation positions.
Practical Implications
This section creates a clear audit gate for termination settlements: larger proposals generally get formal audit review, while smaller ones may receive a desk review instead. Contractors and TCOs should expect more scrutiny as the dollar value rises.
The TCO’s referral package matters. If it lacks key facts, the audit agency may not focus on the real issues, which can slow settlement and lead to follow-up questions or rework.
Contractors cannot assume Government audit replaces their own review duties. Prime contractors and higher-tier subcontractors still need to perform accounting reviews and, where appropriate, field audits of subcontract settlements.
A common pitfall is duplicating effort or over-auditing the same subcontract settlement. FAR 49.107 tries to prevent that, but the Government can still step in when independence, efficiency, consistency, or financial-interest concerns justify it.
Audit reports are not final decisions. The TCO remains the decision-maker for settlement negotiations or unilateral determinations, so both sides should treat audit findings as influential but not binding and should protect sensitive information carefully.
Official Regulatory Text
(a) The TCO shall refer each prime contractor settlement proposal valued at or above the threshold for obtaining certified cost or pricing data set forth in FAR 15.403-4 (a)(1) to the appropriate audit agency for review and recommendations. The TCO may submit settlement proposals of less than the threshold for obtaining certified cost or pricing data to the audit agency. Referrals shall indicate any specific information or data that the TCO considers relevant and shall include facts and circumstances that will assist the audit agency in performing its function. The audit agency shall develop requested information and may make any further accounting reviews it considers appropriate. After its review, the audit agency shall submit written comments and recommendations to the TCO. When a formal examination of settlement proposals valued under the threshold for obtaining certified cost or pricing data is not warranted, the TCO will perform or have performed a desk review and include a written summary of the review in the termination case file. (b) The TCO shall refer subcontract settlements received for approval or ratification to the appropriate audit agency for review and recommendations when— (1) The amount exceeds the threshold for obtaining certified cost or pricing data; or (2) The TCO determines that a complete or partial accounting review is advisable. The audit agency shall submit written comments and recommendations to the TCO. The review by the audit agency does not relieve the prime contractor or higher tier subcontractor of the responsibility for performing an accounting review. (c) (1) The responsibility of the prime contractor and of each subcontractor (see 49.108 ) includes performance of accounting reviews and any necessary field audits. However, the TCO should request the Government audit agency to perform the accounting review of a subcontractor’s settlement proposal when- (i) A subcontractor objects, for competitive reasons, to an accounting review of its records by an upper tier contractor; (ii) The Government audit agency is currently performing audit work at the subcontractor’s plant, or can perform the audit more economically or efficiently; (iii) Audit by the Government is necessary for consistent audit treatment and orderly administration; or (iv) The contractor has a substantial or controlling financial interest in the subcontractor. (2) The audit agency should avoid duplication of accounting reviews performed by the upper tier contractor on subcontractor settlement proposals. However, this should not preclude the Government from making additional reviews when appropriate. When the contractor is performing accounting reviews according to this section, the TCO should request the audit agency to periodically examine the contractor’s accounting review procedures and performance, and to make appropriate comments and recommendations to the TCO. (d) The audit report is advisory only, and is for the TCO to use in negotiating a settlement or issuing a unilateral determination. Government personnel handling audit reports must be careful not to reveal privileged information or information that will jeopardize the negotiation position of the Government, the prime contractor, or a higher tier subcontractor. Consistent with this, and when in the Government’s interest, the TCO may furnish audit reports under paragraph (c) of this section to prime and higher tier subcontractors for their use in settling subcontract settlement proposals.