FAR 49.202—Profit.
Plain-English Summary
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.
Key Rules
Profit allowed on work performed
The TCO shall allow profit on preparations made and work done by the contractor for the terminated portion of the contract. Profit is tied to actual performance on the terminated work, not to the mere existence of a termination settlement claim.
No profit on settlement costs
Profit may not be allowed on settlement expenses. Those costs are part of the termination settlement process, but they are not themselves profit-bearing work.
No anticipatory or consequential damages
Anticipatory profits and consequential damages are expressly barred, except as otherwise provided in FAR 49.108-5. The contractor is compensated for allowable termination costs and profit on performed work, not for expected future earnings or downstream losses.
Subcontract settlement effort is indirect
Profit for the contractor’s efforts in settling subcontractor proposals cannot be based on the dollar amount of the subcontract settlement agreements. The contractor’s settlement effort may be considered in setting the overall profit rate, but not as a direct percentage of subcontract settlement dollars.
No profit on undelivered subcontract items
Profit is not allowed for material or services that, as of the effective date of termination, have not been delivered by a subcontractor, even if the subcontract work is partially complete. Delivery status controls, not percentage of completion.
Reasonable method required
The TCO may use any reasonable method to arrive at a fair profit. The rule gives discretion, but the result must be supportable and grounded in the facts of the terminated effort.
Profit factors to consider
When negotiating or determining profit, the TCO should consider the extent and difficulty of work performed, engineering and production effort, contractor efficiency, capital and risk, inventive contributions, business character, expected completed-contract profit, contemplated profit at award, and subcontracting complexity and settlement effort.
Construction-specific profit rules
For terminated construction contracts, the contracting officer must apply the general profit rules and also allow profit on prime contractor settlements with construction subcontractors for actual work in place at the job site. Profit must be excluded for subcontractor settlements covering materials on hand and preparations to complete the work.
Responsibilities
Termination Contracting Officer (TCO)
Determine and allow a fair profit on the terminated portion of the contract, using any reasonable method supported by the facts. The TCO must exclude profit on settlement expenses, anticipatory profits, consequential damages, and undelivered subcontractor materials or services, and must weigh the listed profit factors when negotiating or determining the amount.
Contracting Officer
For terminated construction contracts, apply the special construction rules for profit, including allowing profit on settlements for actual work in place and excluding profit on materials on hand and preparations to complete the work.
Contractor
Document the work performed, preparations made, subcontract settlement efforts, and other facts relevant to profit entitlement. The contractor should present support for the extent and difficulty of work, efficiency, risk, capital employed, and any other factor that may justify a fair profit rate.
Subcontractors
Provide settlement proposals and supporting information for terminated subcontract work so the prime contractor and TCO can determine what portion, if any, is eligible for profit under the termination rules.
Agency
Ensure termination settlements are handled consistently with FAR Part 49, including proper exclusion of prohibited profit elements and proper application of the construction-specific rules where applicable.
Practical Implications
Profit in a termination settlement is not automatic on every claimed dollar; it must be tied to actual work and allowable factors.
A common mistake is trying to earn profit on settlement administration, subcontract settlement amounts, or undelivered subcontract work. FAR 49.202 rejects those approaches.
Contractors should keep contemporaneous records showing what was actually done, what was delivered, and what effort went into subcontract management and settlement negotiations.
The TCO has discretion, but that discretion must be exercised reasonably and consistently with the listed factors; unsupported percentage assumptions can be challenged.
Construction terminations require extra care because profit treatment differs for work in place versus materials on hand and completion preparations.
Official Regulatory Text
(a) The TCO shall allow profit on preparations made and work done by the contractor for the terminated portion of the contract but not on the settlement expenses. Anticipatory profits and consequential damages shall not be allowed (but see 49.108-5 ). Profit for the contractor’s efforts in settling subcontractor proposals shall not be based on the dollar amount of the subcontract settlement agreements but the contractor’s efforts will be considered in determining the overall rate of profit allowed the contractor. Profit shall not be allowed the contractor for material or services that, as of the effective date of termination, have not been delivered by a subcontractor, regardless of the percentage of completion. The TCO may use any reasonable method to arrive at a fair profit. (b) In negotiating or determining profit, factors to be considered include- (1) Extent and difficulty of the work done by the contractor as compared with the total work required by the contract (engineering estimates of the percentage of completion ordinarily should not be required, but if available should be considered); (2) Engineering work, production scheduling, planning, technical study and supervision, and other necessary services; (3) Efficiency of the contractor, with particular regard to- (i) Attainment of quantity and quality production; (ii) Reduction of costs; (iii) Economic use of materials, facilities, and manpower; and (iv) Disposition of termination inventory; (4) Amount and source of capital and extent of risk assumed; (5) Inventive and developmental contributions, and cooperation with the Government and other contractors in supplying technical assistance; (6) Character of the business, including the source and nature of materials and the complexity of manufacturing techniques; (7) The rate of profit that the contractor would have earned had the contract been completed; (8) The rate of profit both parties contemplated at the time the contract was negotiated; and (9) Character and difficulty of subcontracting, including selection, placement, and management of subcontracts, and effort in negotiating settlements of terminated subcontracts. (c) When computing profit on the terminated portion of a construction contract, the contracting officer shall- (1) Comply with paragraphs (a) and (b) of this section; (2) Allow profit on the prime contractor’s settlements with construction subcontractors for actual work in place at the job site; and (3) Exclude profit on the prime contractor’s settlements with construction subcontractors for materials on hand and for preparations made to complete the work.