FAR 49.115—Settlement of terminated incentive contracts.
Plain-English Summary
FAR 49.115 explains how to settle terminated incentive contracts, specifically fixed-price incentive (FPI) contracts and cost-plus-incentive-fee (CPIF) contracts, when the Government terminates all or part of the work. It tells the termination contracting officer (TCO) and contracting officer how to coordinate the termination settlement with the contract’s incentive clauses, including the fixed-price incentive clauses at 52.216-16 and 52.216-17, the fixed-price termination clause at 52.249-2, the cost-reimbursement termination clause at 52.249-6, and the incentive fee clause at 52.216-10. The section distinguishes between partial terminations and complete terminations, because the treatment of completed and accepted items, target price, target fee, target cost, and final price differs depending on what portion of the contract is terminated. In practice, this provision prevents double recovery and ensures the contractor is paid correctly under the incentive structure for work already completed while also applying the proper termination settlement rules to the terminated portion. It also requires careful reservations in settlement agreements when final prices or target cost adjustments are still unresolved. For contracting personnel, the rule is mainly about sequencing: first determine what incentive adjustments still apply, then settle the terminated portion without overlapping costs or fees.
Key Rules
FPI contracts use both clauses
Terminated fixed-price incentive contracts are settled under paragraph (j) of 52.216-16 and the fixed-price termination clause at 52.249-2. The TCO must use the incentive clause for the pricing side that remains relevant and the termination clause for the terminated portion.
Partial FPI terminations split treatment
For a partial termination, the TCO negotiates the settlement under the termination clause and the applicable incentive-price-revision clause. Completed and accepted items are subject to the incentive price revision provisions, even if the contractor includes them in the settlement proposal.
Target price applies to unresolved items
For completed articles in the settlement proposal that do not yet have a final price, the TCO must reimburse the contractor at target price. The settlement agreement must reserve the Government’s right to establish the final price later.
Complete FPI terminations separate the portions
If the contract is completely terminated but some items were already delivered and accepted, the contracting officer must establish prices for those items under the incentive provisions. The terminated portion is settled only under the termination clause, and the incentive clause does not apply to that terminated work.
No double counting of costs
The TCO must ensure that costs already considered in the incentive-price negotiations are not included again in the termination settlement. Coordination with the contracting officer and review of the evidence are required to prevent duplicate recovery.
CPIF partial terminations adjust fee only
For a partial termination of a cost-plus-incentive-fee contract, the settlement is limited to adjusting target fee under 52.216-10. The settlement agreement must reserve any necessary adjustment to target cost, and the contracting officer must make that adjustment if required.
CPIF complete terminations follow cost-reimbursement rules
A complete termination of a CPIF contract is settled under subpart 49.3 and 52.249-6. The fee is adjusted based on target fee, and the incentive provisions are not applied or considered in the termination settlement.
Responsibilities
Termination Contracting Officer (TCO)
Settle terminated FPI and CPIF contracts under the correct clause framework; negotiate partial and complete termination settlements; ensure completed accepted items are priced correctly; include reservations in settlement agreements where final price or target cost remains open; and prevent double counting of costs already used in incentive pricing.
Contracting Officer
Coordinate with the TCO on pricing and settlement issues; establish prices for delivered and accepted items under the incentive provisions when required; adjust target cost for partial CPIF terminations if required; and support the TCO with evidence and contract interpretation needed to avoid overlap between incentive and termination amounts.
Contractor
Submit settlement proposals and supporting data for terminated work; identify completed items included in the proposal; and understand that accepted items, target price, target fee, and target cost may be treated differently from the terminated portion depending on the contract type and extent of termination.
Government/Agency
Apply the correct termination and incentive clauses, ensure settlements are consistent with the contract type and termination scope, and maintain controls that prevent duplicate payment or inconsistent pricing outcomes.
Practical Implications
This section is mainly a guardrail against double recovery: the same costs cannot be used both to settle the termination and to calculate incentive pricing.
For FPI contracts, the hardest issue is separating completed and accepted items from the terminated portion and deciding whether final price has already been established.
For CPIF contracts, partial terminations usually affect fee first, but target cost may also need adjustment, so both the settlement agreement and contract administration records must be checked carefully.
Settlement agreements should include explicit reservations when final price or target cost is still unresolved; otherwise, later pricing adjustments can become disputed.
Contracting officers and TCOs should coordinate closely before finalizing the settlement, because the wrong clause sequence or missed price adjustment can lead to overpayment, underpayment, or a protest/dispute.
Official Regulatory Text
(a) Fixed-price incentive contracts. The TCO shall settle terminated fixed-price incentive (FPI) contracts under the provisions of paragraph (j) of the clause at 52.216-16 , Incentive Price Revision-Firm Target, and 52.249-2 , Termination for Convenience of the Government (Fixed-Price). (1) Partial termination. Under a partially terminated contract, the TCO shall negotiate a settlement as provided in the termination clause of the contract, and paragraph (j) of the clause at 52.216-16 , Incentive Price Revision-Firm Target, or paragraph (1) of the clause at 52.216-17 , Incentive Price Revision-Successive Targets. The contracting officer shall apply the incentive price revision provisions to completed items accepted by the Government, including any for which the contractor may request reimbursement in the settlement proposal. The TCO shall reimburse the contractor at target price for completed articles included in the settlement proposal for which a final price has not been established. The TCO shall incorporate in the settlement agreement an appropriate reservation as to final price for these completed articles. (2) Complete termination. If any items were delivered and accepted by the Government, the contracting officer shall establish prices under the incentive provisions of the contract. On the terminated portion of the contract, the provisions of the termination clause (see 52.249-2 , Termination for Convenience of the Government (Fixed-Price)) shall govern and the provisions of the incentive clause shall not apply. The TCO responsible for the termination settlement will ensure, on the basis of evidence considered proper (including coordination with the contracting officer), that no portion of the costs considered in the negotiations under the incentive provisions are included in the termination settlement. (b) Cost-plus-incentive-fee contracts. The TCO shall settle terminated cost-plus-incentive-fee contracts under the clause at 52.249-6 , Termination (Cost-Reimbursement). (1) Partial termination. Under a partial termination, the TCO shall limit the settlement to an adjustment of target fee as provided in paragraph (e) of the clause at 52.216-10 , Incentive Fee. The settlement agreement shall include a reservation regarding any adjustment of target cost resulting from the partial termination. The contracting officer shall adjust the target cost, if required. (2) Complete termination. The parties shall negotiate the settlement under the provisions of subpart 49.3 and the clause at 52.249-6 , Termination (Cost Reimbursement). The fee shall be adjusted on the basis of the target fee, and the incentive provisions shall not be applied or considered.