FAR 49.2—Subpart 49.2

General.

FAR 49.201 explains the basic policy for settling terminated contracts and sets the tone for the entire termination settlement process. It covers fair compensation for work performed and preparations made for the terminated portion of the contract, the inclusion of a reasonable allowance for profit, the role of business judgment versus strict accounting rules, the preference for negotiated settlements by agreement, the ability to settle on a lump-sum basis without itemizing every cost element, and the use of cost and accounting data as guides rather than rigid measures. It also addresses the use of estimates, compromises, and other reliable standards when exact proof is not practical, and it emphasizes minimizing recordkeeping, reporting, and accounting burdens while still protecting the public interest. In practice, this section tells contracting officers and contractors that termination settlements are meant to be equitable and practical, not mechanical audits. The section is important because it gives both sides flexibility to reach a fair result without forcing unnecessary administrative burden or litigation-style proof. It also signals that settlement negotiations should focus on reasonableness, judgment, and agreement rather than on perfect precision.

Profit.

FAR 49.202 explains how profit is handled when the Government terminates a contract for convenience and the parties must settle the terminated portion. It covers the basic rule that the Termination Contracting Officer (TCO) may allow profit on preparations made and work performed for the terminated portion, but not on settlement expenses, anticipatory profits, or consequential damages. It also addresses how profit is treated for the contractor’s efforts in settling subcontractor proposals, including the rule that profit is not based on the dollar amount of subcontract settlements. The section lists the factors to consider when negotiating or determining a fair profit rate, such as the extent and difficulty of work performed, engineering and production effort, efficiency, capital and risk, inventive contributions, business character, expected profit on full performance, contemplated profit at award, and subcontracting complexity. Finally, it gives special rules for construction contracts, including allowing profit on prime contractor settlements for actual work in place at the job site while excluding profit on materials on hand and preparations to complete the work. In practice, this section is important because it prevents overcompensation after termination while still allowing a fair return for completed work and legitimate performance efforts.

Adjustment for loss.

FAR 49.203 addresses how to adjust a termination settlement when the contractor would have incurred a loss if the entire contract had been completed. Its purpose is to prevent a contractor from recovering profit on a contract that was already projected to end in a loss, while still allowing payment of allowable settlement expenses and other properly supported amounts. The section applies in both inventory-basis settlements and total-cost-basis settlements, and it tells the Termination Contracting Officer (TCO) how to compute the loss adjustment in each case. It also requires the TCO to estimate the cost to complete the contract by considering expected production efficiencies and other factors that affect completion cost. In practice, this section is about making the settlement fair to both sides: the contractor is compensated for allowable termination-related costs, but not placed in a better position than if performance had continued to completion. It also interacts with other termination provisions, including settlement expenses, acceptable completed end items, initial costs, disposal credits, and advance or progress payments.

Deductions.

FAR 49.204 explains what the Termination Contracting Officer (TCO) must subtract from a termination settlement before paying the contractor. It covers three main deduction categories: the agreed price for termination inventory the contractor keeps or has already been paid for through sale proceeds, the fair value of termination inventory that is lost or damaged before title transfers to the Government or a buyer under FAR part 45, and any other amounts that are appropriate in the specific case. The rule also identifies important exceptions, including normal spoilage and inventory where the Government has expressly assumed the risk of loss. In practice, this section protects the Government from paying twice for the same property or paying full value for inventory that no longer exists or is no longer deliverable. It also gives the TCO discretion to make case-specific deductions when the facts justify them, which makes accurate inventory accounting, title tracking, and loss documentation critical in termination settlements.

Completed end items.

FAR 49.205 explains how to handle completed end items when a contract is terminated for convenience or another termination action that triggers settlement procedures. It covers the termination contracting officer’s duty to promptly inspect and accept undelivered completed end items that meet contract requirements, decide which accepted items will still be delivered under the contract, and distinguish those items from accepted items that will not be delivered and therefore must be included in the termination settlement proposal. It also explains how the contractor must invoice accepted and delivered end items at the contract price in the normal billing process, while excluding them from the settlement proposal, and how to price accepted but undelivered items in the settlement proposal by using the contract price adjusted for freight or other savings and any credits for purchase, retention, or sale. Finally, it clarifies that in construction contracts, work in place accepted by the Government is not treated as a completed end item even if the contract paid for that work at unit prices. In practice, this section prevents double recovery, separates normal contract performance from termination settlement costs, and ensures the Government pays only once for accepted deliverables while properly settling items that were accepted but not ultimately delivered.

Settlement proposals.

Limitation on settlements.

FAR 49.207 sets a hard ceiling on what the Government may pay in a termination settlement. It addresses the total amount payable to the contractor for the settlement itself, the treatment of disposal or other credits, the exclusion of settlement costs from the cap, and the relationship between the settlement amount and the original contract price after subtracting payments already made or still to be made under the contract. In practice, this means a contractor cannot recover more through a termination settlement than the remaining unpaid contract value, and the contracting officer must ensure the settlement does not exceed that limit. The rule protects the Government from overpaying after termination while still allowing fair compensation for allowable settlement amounts within the contract’s remaining price. It is especially important in partial and complete terminations, where credits, prior progress payments, and other contract payments must be carefully accounted for before finalizing the settlement.

Equitable adjustment after partial termination.

FAR 49.208 addresses equitable adjustments after a partial termination of a fixed-price contract. It explains when a contractor may seek a price adjustment for the continued portion of the contract, who receives and forwards the contractor’s proposal, what format the proposal must use, and how the government must avoid duplicating costs between the termination settlement and the equitable adjustment. The section also distinguishes responsibilities when the Termination Contracting Officer (TCO) handles the matter versus when the contracting officer retains negotiation authority and executes the supplemental agreement. In practice, this rule is meant to ensure the contractor is fairly compensated for the changed scope of the remaining work without being paid twice for the same costs. It is especially important in partial terminations because the terminated and continued portions of the contract can overlap in cost accounting, pricing, and settlement discussions. The section therefore serves both as a procedural guide and as a safeguard against double recovery.