FAR 49.207—Limitation on settlements.
Plain-English Summary
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.
Key Rules
Settlement cap equals remaining contract price
The total amount payable for the settlement may not exceed the contract price minus payments otherwise made or to be made under the contract. This creates an upper limit based on the unpaid balance of the contract, not on the contractor’s claimed costs alone.
Credits reduce the payable amount
The cap is applied before deducting disposal or other credits. Those credits must still be taken into account in the settlement calculation, which can further reduce the amount actually payable to the contractor.
Settlement costs are excluded from the cap
The rule states that the cap is exclusive of settlement costs. In other words, the limitation applies to the settlement payment itself, while allowable settlement costs are treated separately under the applicable termination cost rules.
Applies to termination settlements
This section governs settlements reached after termination, whether the termination is total or partial, by limiting the amount that can be paid in resolving the terminated portion of the contract.
Contract price is the reference point
The ceiling is measured against the contract price, adjusted for payments already made or still required under the contract. Contracting officers must use the correct contract price and payment status to determine the maximum permissible settlement.
Responsibilities
Contracting Officer
Calculate the maximum settlement amount using the contract price and all payments otherwise made or to be made under the contract. Ensure the settlement does not exceed the FAR 49.207 cap and properly account for disposal or other credits and any separately allowable settlement costs.
Contractor
Submit settlement proposals that stay within the remaining contract value and support claimed amounts with accurate cost, credit, and payment information. Identify any disposal or other credits that reduce the amount payable and distinguish settlement costs from the capped settlement amount.
Agency
Review termination settlements for compliance with the payment limitation and ensure the Government does not pay more than the remaining contract price. Maintain accurate records of prior payments, outstanding obligations, and credits needed to apply the cap correctly.
Practical Implications
This rule prevents a contractor from recovering more than the unpaid balance of the contract through a termination settlement, even if actual termination-related costs are higher.
Contracting officers must verify prior progress payments, invoice payments, and any amounts still due under the contract before approving a settlement.
Disposal credits, salvage value, and other offsets can materially reduce the final payable amount, so they must be tracked carefully.
A common mistake is treating settlement costs as part of the capped settlement amount; FAR 49.207 separates them from the cap.
Both sides should document the calculation clearly, because disputes often arise when the remaining contract price, credits, or outstanding payments are not fully reconciled.
Official Regulatory Text
The total amount payable to the contractor for a settlement, before deducting disposal or other credits and exclusive of settlement costs, must not exceed the contract price less payments otherwise made or to be made under the contract.