FAR 49.204—Deductions.
Plain-English Summary
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.
Key Rules
Deduct retained inventory value
The TCO must deduct the agreed price for any termination inventory that the contractor purchases or keeps. This prevents the contractor from receiving settlement payment for property it retains.
Deduct unpaid sale proceeds
If termination inventory has been sold and the Government has not yet been paid or credited for the proceeds, those amounts must be deducted from the settlement. The Government is entitled to the value of inventory it has already effectively recovered through a sale.
Deduct lost or damaged inventory
The TCO must deduct the fair value of termination inventory that is lost or damaged before title transfers to the Government or to a buyer under FAR part 45, if the inventory becomes undeliverable. The TCO determines that fair value based on the circumstances.
Normal spoilage is excluded
Routine or normal spoilage is not a deductible loss under this section. The deduction applies only to loss or damage beyond normal spoilage, unless the Government has expressly assumed the risk of loss.
Risk assumed by Government
If the Government has expressly assumed the risk of loss for the inventory, the TCO does not deduct for that loss or damage under this provision. The allocation of risk in the contract or settlement matters.
Other appropriate deductions
The TCO may deduct other amounts as appropriate in the particular case. This catch-all gives the TCO flexibility to address unique settlement facts, but the deduction must still be justified by the record and the settlement circumstances.
Responsibilities
Termination Contracting Officer (TCO)
Calculate the settlement amount and make all required deductions for retained inventory, unpaid sale proceeds, lost or damaged inventory, and any other appropriate amounts. The TCO must determine fair value where needed and apply the exceptions for normal spoilage and Government-assumed risk of loss.
Contractor
Identify termination inventory accurately, account for items retained or sold, report proceeds received, and provide documentation supporting any claimed losses, damage, spoilage, or risk-of-loss exceptions. The contractor must ensure the settlement submission reflects the correct inventory status.
Government / Agency
Ensure the settlement reflects the Government’s ownership interests and risk allocations, including any express assumption of risk of loss. The agency must support the TCO with contract terms, property records, and other evidence needed to verify deductions.
Practical Implications
This section is a settlement safeguard: it keeps the Government from paying for inventory the contractor keeps, sells, or no longer can deliver.
The biggest pitfalls are poor inventory records, unclear title-transfer timing, and failure to distinguish normal spoilage from deductible loss or damage.
Contractors should document sales, credits, losses, and damage carefully, because missing records can lead to larger deductions or disputes over fair value.
TCOs should tie each deduction to the contract terms, property status, and evidence in the file, especially when using the catch-all authority for other amounts.
Both sides should pay close attention to risk-of-loss language and FAR part 45 title-transfer rules, because those details determine whether a loss is deductible at all.
Official Regulatory Text
From the amount payable to the contractor under a settlement, the TCO shall deduct- (a) The agreed price for any part of the termination inventory purchased or retained by the contractor, and the proceeds from any materials sold that have not been paid or credited to the Government; (b) The fair value, as determined by the TCO, of any part of the termination inventory that, before transfer of title to the Government or to a buyer under part 45 , is lost or so damaged as to become undeliverable (normal spoilage is excepted, as is inventory for which the Government has expressly assumed the risk of loss); and (c) Any other amounts as appropriate in the particular case.