FAR 49.108—Settlement of subcontract settlement proposals.

Subcontractor’s rights.

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.

Prime contractor’s rights and obligations.

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.

Settlement procedure.

FAR 49.108-3 explains how subcontract termination settlements are handled when a prime contract is terminated or changed. It covers the contractor’s duty to settle with subcontractors in line with the termination principles used for prime contracts, the requirement that subcontract settlement proposals be acceptable in form and basis to the prime contractor or next higher-tier subcontractor, and the need for supporting accounting data and other information sufficient for Government review. It also addresses the prohibition on Government payment for a prime contractor’s loss of anticipatory profits or consequential damages arising from a subcontract termination, except as otherwise allowed by FAR 49.108-5. On the Government side, it requires the TCO to ensure subcontract termination inventory is disposed of and accounted for under the Government property clause, and to require submission of subcontract settlements for approval or ratification unless an exception applies. Finally, it sets out the TCO’s review duties: confirm the subcontract termination was caused by the prime termination or change order, assess good faith, reasonableness, and allocability, apply the broader termination principles and related accounting review requirements, and then provide written approval/ratification or a written explanation for disapproval. In practice, this section is about controlling downstream termination costs, ensuring subcontract settlements are supportable, and preventing the Government from paying unsupported or nonallowable amounts through the prime contractor.

Authorization for subcontract settlements without approval or ratification.

FAR 49.108-4 explains when a Termination Contracting Officer (TCO) may let a prime contractor settle terminated subcontracts without prior TCO approval or ratification. It covers the dollar threshold for this delegated authority, the conditions that must be met before authorization is granted, how the authority applies across Executive agency prime contracts and lower-tier subcontract settlements, and when a contracting officer may opt out by written notice. The section also addresses disposal of termination inventory and completed end items, including when property screening and TCO review are not required, and it ties those property actions to the settlement dollar limit. In addition, it requires periodic TCO oversight, selective review, and revocation of authority if procedures are inadequate, improper settlements occur, or the authority goes unused for two years. Finally, it prohibits splitting settlements to stay under the limit, allows increases in authority for a particular prime contract, excludes intra-corporate requisitions and orders, and points to the prescribed request and authorization formats. In practice, this section is about controlled delegation: it can speed up subcontract termination settlements, but only if the contractor has sound procedures, the TCO maintains oversight, and property disposal rules are followed.

Recognition of judgments and arbitration awards.

FAR 49.108-5 explains when a termination contracting officer (TCO) must, or may, recognize a subcontractor’s final judgment or arbitration award as an allowable cost in settling a terminated prime contract. It covers three related topics: final court judgments against the prime contractor, the conditions that must be met for the TCO to treat that judgment as part of the prime contractor’s termination settlement costs, the fallback rule when not all conditions are satisfied, and the treatment of arbitration awards arising from subcontract settlement disputes. The section is designed to protect the Government from paying for subcontract disputes that could have been avoided or better managed, while still allowing fair reimbursement where the prime contractor acted reasonably and in good faith. In practice, it ties subcontract dispute handling to the termination settlement process and requires the prime contractor to show diligence in subcontract drafting, settlement efforts, notice to the Government, and defense of the claim. It also gives the TCO discretion to allow a fair portion of a judgment or award when strict conditions are not fully met, but only to the extent consistent with termination settlement policies. For contractors, this section is a strong reminder that subcontract terms, litigation management, and timely communication with the Government can directly affect what costs are recoverable after termination.

Delay in settling subcontractor settlement proposals.

FAR 49.108-6 addresses what happens when a prime contractor cannot reach agreement with a subcontractor on a settlement proposal, and that delay is holding up settlement of the prime contract. The section gives the Termination Contracting Officer (TCO) authority to go ahead and settle with the prime contractor instead of waiting indefinitely for the subcontract issue to be resolved. It also requires the TCO to carve out, or except, the subcontractor settlement proposal from the prime settlement—either in whole or in part—so the subcontract matter remains open. The purpose is to prevent a subcontract dispute from blocking timely closeout of the terminated prime contract while preserving the Government’s and prime contractor’s rights regarding the unresolved subcontract claim. In practice, this section is about balancing speed in prime contract settlement with protection of downstream rights and avoiding premature waiver or release of subcontract-related issues.

Government assistance in settling subcontracts.

FAR 49.108-7 addresses a narrow but important exception in termination settlement practice: when the Termination Contracting Officer (TCO) decides, in unusual cases and with the prime contractor’s consent, that Government assistance is in the Government’s interest, the Government may help the prime contractor settle a particular subcontract. The section covers when that assistance may be used, the need for an agreement among the Government, the prime contractor, and the subcontractor, the possibility that one agreement may cover more than one subcontract, and the payment method for the subcontractor. Its purpose is to speed and stabilize settlement of difficult subcontract issues after termination by allowing the Government to participate directly rather than leaving the prime contractor to resolve the matter alone. In practice, this provision is used sparingly and only when the TCO concludes that direct Government involvement will improve the settlement outcome, reduce delay, or protect the Government’s interests. It also preserves the prime contractor’s central role by requiring consent and by routing payment to the subcontractor through the prime contractor as part of the overall prime settlement.

Assignment of rights under subcontracts.

FAR 49.108-8 explains what happens to subcontract rights and subcontractor settlement proposals when a prime contract is terminated for convenience. It covers two related but distinct topics: first, the assignment of the prime contractor’s rights, title, and interest in terminated subcontracts to the Government; and second, the Government’s discretionary authority to settle and pay subcontract termination settlement proposals directly. The rule applies to the standard termination for convenience clauses in FAR 52.249, but not the short-form clauses. In practice, this section is about protecting the Government’s interests, preserving control over terminated subcontract assets and claims, and deciding when direct Government involvement is justified. It also makes clear that direct settlement with subcontractors is the exception, not the norm, because the prime contractor is generally responsible for settling and paying subcontractor claims.