FAR 49.305-1—General.
Plain-English Summary
FAR 49.305-1 explains how the Termination Contracting Officer (TCO) determines the adjusted fee, if any, payable after a termination for convenience. It covers the basic method for calculating fee based on the percentage of completion of the whole contract or the terminated portion, and it identifies the work factors the TCO must compare against the total work required. Those factors include planning, scheduling, technical study, engineering, production, supervision, placing and supervising subcontracts, and the contractor’s efforts in stopping work, settling terminated subcontracts, and disposing of termination inventory. The section also makes clear that the contractor’s adjusted fee cannot include fee on subcontract effort that is already included in subcontractors’ settlement proposals. Finally, it warns that the ratio of costs incurred to total estimated cost is only one input, not the sole determinant, and the TCO may adjust the completion percentage upward or downward based on other relevant factors. In practice, this section matters because it prevents a mechanical cost-ratio approach and requires a reasoned, work-based evaluation of the contractor’s actual performance before fee is settled.
Key Rules
TCO sets adjusted fee
The Termination Contracting Officer must determine the adjusted fee, if any, in the manner provided by the contract. This means the contract’s termination clause and fee provisions control the calculation, not a one-size-fits-all formula.
Percentage-of-completion basis
The fee determination is generally based on the percentage of completion of the contract or the terminated portion. The TCO must assess how much of the required work was actually performed, rather than simply looking at dollars spent.
Work performed must be compared
The TCO must compare the extent and difficulty of work performed with the total work required under the contract or terminated portion. Relevant work includes planning, scheduling, technical study, engineering, production, supervision, subcontract management, stopping performance, settling terminated subcontracts, and disposing of termination inventory.
No fee on subcontract settlement effort
The contractor’s adjusted fee may not include an allowance for fee on subcontract effort that is already included in subcontractors’ settlement proposals. This prevents double recovery of profit or fee on the same subcontract work.
Cost ratio is only one factor
The ratio of costs incurred to total estimated cost is only one factor in determining percentage of completion. The TCO may conclude the completion percentage is higher or lower than the cost ratio suggests, depending on other pertinent factors.
Responsibilities
Termination Contracting Officer (TCO)
Determine the adjusted fee, if any, using the contract’s required method; evaluate percentage of completion based on actual work performed and its difficulty; consider all relevant performance and termination-related activities; and ensure no fee is allowed on subcontract effort already included in subcontract settlement proposals.
Contractor
Provide accurate records and support for work performed, costs incurred, subcontract settlement efforts, and termination-related activities; substantiate the extent and difficulty of completed work; and avoid claiming fee on subcontract effort that is already being compensated in subcontractor settlement proposals.
Subcontractors
Submit settlement proposals for terminated subcontract work as applicable, recognizing that their effort may be included in the termination settlement process but cannot be used to support duplicate fee recovery by the prime contractor.
Contracting Agency
Administer the termination settlement process through the TCO and ensure fee determinations are made consistently with the contract and FAR requirements.
Practical Implications
Do not assume fee equals a simple percentage of costs incurred; the TCO must weigh the nature and difficulty of the work actually completed.
Contractors should document planning, engineering, supervision, subcontract management, shutdown, settlement, and inventory-disposal efforts because these can materially affect the fee percentage.
A common pitfall is double counting subcontract-related effort; fee cannot be added on top of subcontract settlement proposals for the same work.
The TCO has discretion to adjust the completion percentage above or below the cost-incurred ratio, so parties should be prepared to justify why cost data does or does not reflect actual progress.
This section is especially important in partial terminations, where the terminated portion may have a very different completion profile than the overall contract.
Official Regulatory Text
(a) The TCO shall determine the adjusted fee to be paid, if any, in the manner provided by the contract. The determination is generally based on a percentage of completion of the contract or of the terminated portion. When this basis is used, factors such as the extent and difficulty of the work performed by the contractor ( e.g., planning, scheduling, technical study, engineering work, production and supervision, placing and supervising subcontracts, and work performed by the contractor in (1) stopping performance, (2) settling terminated subcontracts, and (3) disposing of termination inventory) shall be compared with the total work required by the contract or by the terminated portion. The contractor’s adjusted fee shall not include an allowance for fee for subcontract effort included in subcontractors’ settlement proposals. (b) The ratio of costs incurred to the total estimated cost of performing the contract or the terminated portion is only one factor in computing the percentage of completion. This percentage may be either greater or less than that indicated by the ratio of costs incurred, depending upon the evaluation by the TCO of other pertinent factors.