FAR 49.108-1—Subcontractor’s rights.
Plain-English Summary
FAR 49.108-1 explains how subcontractor claims are handled when a prime contract is terminated. It covers three core topics: the subcontractor’s lack of direct contractual rights against the Government, the possibility that the subcontractor may still have rights against the prime contractor or an intermediate subcontractor, and the duty of the prime contractor and each subcontractor to promptly settle the settlement proposals of their immediate subcontractors after termination of the prime contract. In practice, this section makes clear that termination of the prime contract does not create a direct Government payment or claim path for lower-tier subcontractors. Instead, subcontractor recovery generally depends on the subcontract chain and the terms of the private contracts between the parties. The rule also emphasizes speed and orderly closeout, requiring each tier to resolve its immediate lower-tier settlement proposals promptly so termination costs do not cascade into avoidable delay or dispute. For contracting officers and contractors, this section is important because it defines the Government’s limited role in subcontractor recovery and places settlement responsibility primarily on the prime and subcontracting tiers.
Key Rules
No direct Government rights
A subcontractor has no contractual rights against the Government when a prime contract is terminated. The subcontractor cannot assert a direct termination claim against the Government based solely on the prime contract termination.
Rights depend on private contracts
A subcontractor may still have rights against the prime contractor or an intermediate subcontractor, but those rights come from the subcontract relationship, not from the Government. Recovery and remedies are governed by the applicable subcontract terms and any flowdown provisions.
Prompt settlement required
After termination of the prime contract, the prime contractor and each subcontractor must promptly settle the settlement proposals of their immediate subcontractors. This creates a chain of responsibility for timely resolution at each subcontract tier.
Immediate subcontractor focus
The duty to settle applies to immediate subcontractors, meaning each party is responsible for the next lower tier in the contracting chain. The rule does not require a party to settle claims of remote lower-tier subcontractors directly.
Responsibilities
Government
Has no direct contractual obligation to subcontractors under this section and does not owe subcontractors contractual rights arising from termination of the prime contract.
Prime Contractor
Must promptly settle the settlement proposals of its immediate subcontractors after the prime contract is terminated and handle subcontractor recovery through the subcontract relationship.
Intermediate Subcontractor
Must promptly settle the settlement proposals of its immediate subcontractors after termination, consistent with its subcontract obligations and flowdown arrangements.
Subcontractor
May pursue rights against the prime contractor or intermediate subcontractor with whom it contracted, but not against the Government; must submit and support its settlement proposal to the immediate higher-tier contractor.
Practical Implications
Subcontractors should not expect direct payment or direct claim rights from the Government after a prime contract termination; their recovery path is usually through the prime or higher-tier subcontractor.
Primes should plan for termination closeout to include lower-tier settlements, because delays in resolving immediate subcontractor proposals can slow overall termination settlement and increase dispute risk.
Contract language matters: subcontract terms, flowdowns, and termination clauses largely determine what a subcontractor can recover and how quickly it can recover it.
A common pitfall is assuming that a Government termination automatically creates a pass-through claim for every subcontractor; this section makes clear that the Government is not in privity with subcontractors.
Each tier should document costs, settlement proposals, and communications carefully so that immediate subcontractor settlements can be evaluated and resolved promptly and consistently.
Official Regulatory Text
A subcontractor has no contractual rights against the Government upon the termination of a prime contract. A subcontractor may have rights against the prime contractor or intermediate subcontractor with whom it has contracted. Upon termination of a prime contract, the prime contractor and each subcontractor are responsible for the prompt settlement of the settlement proposals of their immediate subcontractors.