FAR 49.108-2—Prime contractor’s rights and obligations.
Plain-English Summary
FAR 49.108-2 explains the prime contractor’s rights and obligations when the Government terminates prime work for convenience and that termination affects subcontracts. It covers the duty to terminate affected subcontracts unless the Termination Contracting Officer (TCO) directs otherwise, the recommendation that prime contractors include termination clauses in their subcontracts for protection, the rule that a prime’s failure to include or use such a clause does not limit the Government’s termination rights or increase Government liability, and the standard for judging whether the prime’s settlement with a subcontractor is reasonable. In practice, this section is about managing termination flow-down risk: the prime must act promptly to stop subcontract work tied to the terminated prime effort, but the Government is not responsible for gaps in the prime’s subcontract drafting or enforcement. It also gives the TCO a benchmark for reimbursing subcontract settlement costs, generally tying reimbursement to the amount due under the suggested subcontract termination clause in FAR 49.502(e), with extra reimbursement allowed only in unusual cases. The section matters because subcontract terms and settlement decisions can materially affect termination costs, recovery, and disputes after a convenience termination.
Key Rules
Terminate affected subcontracts
After receiving a termination notice, the prime contractor must terminate all subcontracts to the extent they relate to the terminated prime work, unless the TCO directs otherwise. This is a default obligation intended to stop downstream performance that is no longer needed.
Include subcontract termination clauses
Prime contractors should protect themselves by including a termination clause in their subcontracts. FAR points contractors to subpart 49.5 for suggested language and guidance on subcontract termination provisions.
Government rights are preserved
If the prime fails to include an appropriate termination clause, or fails to exercise its rights under that clause, the Government’s right to require subcontract termination is not affected. The Government also does not assume any extra obligation because of the prime’s subcontract drafting or enforcement failure.
Government liability is not expanded
The absence of a proper subcontract termination clause cannot increase the Government’s obligation beyond what it would have been if the subcontract had contained an appropriate clause. The Government’s exposure is capped as though the prime had used proper subcontract terms.
Reasonableness benchmark for settlements
The reasonableness of the prime contractor’s settlement with a subcontractor should normally be measured by the aggregate amount due under paragraph (f) of the suggested subcontract termination clause in FAR 49.502(e). This creates a practical benchmark for evaluating subcontract settlement costs.
Extra reimbursement only in unusual cases
The TCO should allow reimbursement above that benchmark only in unusual cases, and only to the extent the subcontract terms did not unreasonably increase the subcontractor’s rights. This limits recovery where the prime negotiated unusually generous subcontract terms.
Responsibilities
Prime Contractor
Upon receipt of a termination notice, terminate affected subcontracts unless the TCO directs otherwise. The prime should also include an appropriate termination clause in subcontracts to protect itself and should exercise subcontract clause rights when needed to control termination costs and obligations.
Termination Contracting Officer (TCO)
May direct the prime contractor not to terminate certain subcontracts. The TCO also evaluates the reasonableness of the prime’s subcontract settlement and decides whether reimbursement above the normal benchmark is justified in unusual cases.
Government
May require termination of subcontracts regardless of whether the prime included a proper termination clause or exercised its rights. The Government’s financial obligation is limited to what it would have been had the subcontract contained an appropriate termination clause.
Subcontractor
Must comply with termination actions flowing down from the prime’s termination of the subcontract, subject to the subcontract terms and any applicable termination clause rights and settlement procedures.
Practical Implications
Primes should flow down a workable termination clause in subcontracts; otherwise they may be stuck with avoidable settlement costs or disputes even though the Government is not responsible for the drafting gap.
A prime cannot avoid terminating downstream work simply because the subcontract lacks a termination clause; the Government can still require subcontract termination tied to the terminated prime work.
Settlement amounts with subcontractors are not automatically reimbursable just because they were paid; the TCO will test them against the normal benchmark in FAR 49.502(e).
Overly generous subcontract terms can reduce or eliminate the chance of recovering extra settlement costs from the Government, so primes should avoid giving subcontractors rights that unreasonably exceed standard termination protections.
Contracting teams should document why any subcontract settlement exceeds the normal benchmark, because reimbursement above that level is allowed only in unusual cases and only to the extent the subcontract terms were not unreasonably favorable to the subcontractor.
Official Regulatory Text
(a) Termination for convenience clauses provide that after receipt of a termination notice the prime contractor shall, unless directed otherwise by the TCO, terminate all subcontracts to the extent that they relate to the performance of prime work terminated. Therefore, prime contractors should include a termination clause in their subcontracts for their own protection. Suggestions regarding use of subcontract termination clauses are in subpart 49.5 . (b) The failure of a prime contractor to include an appropriate termination clause in any subcontract, or to exercise the clause rights, shall not- (1) Affect the Government’s right to require the termination of the subcontract; or (2) Increase the obligation of the Government beyond what it would have been if the subcontract had contained an appropriate clause. (c) In any case, the reasonableness of the prime contractor’s settlement with the subcontractor should normally be measured by the aggregate amount due under paragraph (f) of the subcontract termination clause suggested in 49.502 (e). The TCO shall allow reimbursement in excess of that amount only in unusual cases and then only to the extent that the terms of the subcontract did not unreasonably increase the rights of the subcontractor.