FAR 49.303-5—Final settlement.
Plain-English Summary
FAR 49.303-5 explains how the Termination Contracting Officer (TCO) completes a final settlement after a termination for convenience, once the audit report (if one is required) and the contract audit closing statement for vouchered costs are received. It covers the timing of settlement action, the requirement to adjust the termination fee under FAR 49.305, what may be included in the final settlement agreement, and how overall settlements of costs may be reached. The section is designed to move the termination process from audit review into final agreement and payment, while protecting the Government from paying disallowed or otherwise unallowable costs. In practice, it tells the TCO when to proceed, what can be negotiated, and where the limits are on reimbursable amounts. It also makes clear that the parties do not need to agree on every individual cost element if they can reach an overall settlement, but they cannot use that flexibility to approve costs that are clearly not allowable under the contract.
Key Rules
Proceed after audit materials
The TCO must move forward with settlement and execute the settlement agreement after receiving the audit report, if applicable, and the contract audit closing statement covering vouchered costs. This ties final settlement to completion of the audit-related review needed to support the settlement amount.
Adjust the fee
The TCO must adjust the fee in accordance with FAR 49.305. This means the termination settlement must reflect the separate fee adjustment rules that apply to the terminated contract.
Settlement may cover all claims
The final settlement agreement may include all Government demands and all contractor proposals under the terminated contract. This allows the parties to resolve the full range of termination-related issues in one agreement rather than piecemeal.
No payment for disallowed costs
No amount may be allowed for any item of cost disallowed by the Government, or for any other item of the same nature. The Government’s disallowance of a cost category also bars similar costs of that type from being recovered.
Overall settlement is permitted
If the parties agree on an overall settlement of costs, they do not need to agree on every individual cost element. They may compromise differences and resolve doubtful questions by agreement, but the overall settlement cannot include costs that are clearly unallowable under the contract.
Responsibilities
Termination Contracting Officer (TCO)
Receive and review the audit report, if applicable, and the contract audit closing statement; proceed with settlement and execute the settlement agreement; adjust the fee under FAR 49.305; ensure the final settlement includes only allowable amounts; and use overall settlement authority appropriately without approving clearly unallowable costs.
Contractor
Submit termination settlement proposals and supporting cost information; participate in negotiations over Government demands and contractor proposals; and accept that disallowed costs and clearly unallowable costs cannot be recovered in the final settlement.
Government/Audit Function
Provide the audit report, when required, and the contract audit closing statement covering vouchered costs so the TCO can complete settlement; identify disallowed costs and support the Government’s position on allowability.
Practical Implications
Final settlement usually cannot be completed until the audit package is in hand, so delays in audit completion can delay payment and closeout.
Contractors should expect the TCO to reject not only a specific disallowed cost item, but also other costs of the same nature, so cost classification and support matter.
An overall negotiated settlement can save time by avoiding line-by-line agreement on every cost element, but it does not permit settlement of clearly unallowable costs.
The fee adjustment under FAR 49.305 is a separate required step; parties should not assume the settlement amount is final until fee treatment is resolved.
Both sides should document compromises carefully, especially when settling doubtful questions, because the agreement becomes the basis for final payment and contract closeout.
Official Regulatory Text
(a) The TCO shall proceed with the settlement and execution of a settlement agreement upon receipt of the audit report, if applicable, and the contract audit closing statement covering vouchered costs. (b) The TCO shall adjust the fee as provided in 49.305 . (c) The final settlement agreement may include all demands of the Government and proposals of the contractor under the terminated contract. However, no amount shall be allowed for any item of cost disallowed by the Government, nor for any other item of cost of the same nature. (d) If an overall settlement of costs is agreed upon, agreement on each element of cost is not necessary. If appropriate, differences may be compromised and doubtful questions settled by agreement. An overall settlement shall not include costs that are clearly not allowable under the terms of the contract.