FAR 49.4—Subpart 49.4

General.

FAR 49.401 explains the basic legal framework for termination for default and how it differs from termination for convenience. It covers what a default termination is, when a default termination must be converted to a convenience termination because the contractor was not actually in default or had an excusable failure, and the effect of that conversion on the parties’ rights and obligations. It also notes that the Government may have additional termination or cancellation rights beyond the specific contract clause, points readers to special rules for default terminations of Federal Supply Schedule orders, and allows reinstatement of a terminated contract when the contractor agrees in writing and the contracting officer determines the supplies or services are still needed and reinstatement benefits the Government. In practice, this section is the gateway rule for understanding when the Government can end a contract for contractor nonperformance, when that action is legally softened into a convenience termination, and when a terminated contract may be revived instead of fully closed out. It matters because the classification of the termination drives cost recovery, liability, settlement rights, and the contractor’s exposure to excess reprocurement and other default consequences.

Termination of fixed-price contracts for default.

Termination of cost-reimbursement contracts for default.

FAR 49.403 explains how default termination works for cost-reimbursement contracts and how that process differs from default termination under other contract types. It covers the source of the Government’s right to terminate for default, the mandatory 10-day notice requirement in the termination clause at 52.249-6, the settlement framework that applies after default termination, the special treatment of settlement proposal preparation costs and fee reduction, the contracting officer’s use of the default-termination procedures in FAR 49.402 to the extent they fit, and the rule that the Government cannot recover excess repurchase costs under a cost-reimbursement contract after default termination. It also points to the defective supplies clause at 52.246-3 for a separate remedy involving failure to replace or correct defective supplies. In practice, this section matters because it tells contracting officers and contractors that a cost-reimbursement default termination is handled much like a convenience termination for settlement purposes, but with important exceptions that limit contractor recovery and limit Government remedies. It is especially important for understanding notice, settlement allowability, fee treatment, and the boundaries of Government recovery after termination.

Surety-takeover agreements.

FAR 49.404 addresses surety-takeover agreements after a contractor default, with special focus on fixed-price construction contracts. It explains when and how a contracting officer may consider a surety’s proposal to complete the work, the Government’s duty to protect its own interests, and the surety’s rights in completing the contract and seeking payment from undisbursed contract funds. The section also covers the use of takeover agreements, including possible tripartite agreements among the Government, the surety, and the defaulting contractor to resolve competing claims to retained percentages and unpaid progress estimates. It sets limits on what the surety may be paid, how liquidated damages apply, how assigned contract proceeds affect payment, and when the surety may be reimbursed for liabilities under the payment bond. In practice, this section is about balancing completion of the project, protection of Government claims, and orderly resolution of competing financial interests after default.

Completion by another contractor.

FAR 49.405 addresses what happens when a defaulted or otherwise incomplete contract must be finished by someone other than the original contractor and the surety does not step in to arrange completion. It explains the contracting officer’s normal next step: obtaining completion through a new contract based on the same plans and specifications, rather than redesigning the requirement or starting over from scratch. The section also makes clear that the replacement contract may be awarded using sealed bidding or any other appropriate contracting method or procedure, giving the government flexibility to choose the most suitable acquisition approach for the circumstances. A key purpose of the rule is to protect the Government’s interest by ensuring the unfinished work is completed efficiently, consistently with the original scope, and at the lowest price reasonably obtainable. In practice, this section guides contracting officers in post-default completion actions and signals to contractors and sureties that the Government will seek economical completion of the remaining work using the original technical baseline whenever possible.

Liquidation of liability.

FAR 49.406 addresses how the Government recovers money owed after a termination when the contract makes both the contractor and the surety liable for resulting damages. It explains the contracting officer’s duty to apply retained percentages of progress payments already made, as well as any progress payments still due for work completed before termination, to offset the Government’s loss. The section also covers what happens when those retained and unpaid amounts are not enough: the contracting officer must pursue recovery of the remaining balance from the contractor and the surety. In practice, this provision is about liquidation of termination-related liability, meaning the Government uses contract funds already tied to completed work before seeking additional recovery. It is significant because it establishes the order of collection, protects the Government’s financial interests, and clarifies that both the contractor and surety may remain responsible for damages beyond amounts already withheld or owed.