FAR 49.402-2—Effect of termination for default.
Plain-English Summary
FAR 49.402-2 explains the legal and financial consequences of a termination for default. It covers the Government’s lack of liability for costs on undelivered work, the Government’s right to recover advance and progress payments tied to that work, and the Government’s option under the Default clause to require transfer of title and delivery of completed supplies and manufacturing materials. It also limits when the contracting officer may use the Default clause to acquire completed supplies or materials, including the need to confirm whether the Government already has title under another contract provision and to consider whether materials can reasonably be used by another contractor. The section then addresses payment for completed supplies and manufacturing materials acquired after default, while requiring the Government to protect itself from overpayment caused by possible lien claims from laborers and material suppliers. Finally, it states that the contractor remains liable for excess reprocurement costs and for other damages, whether or not the Government actually repurchases the supplies or services. In practice, this section is about balancing the Government’s right to recover and mitigate losses after default with the need to pay fairly for usable completed items while avoiding double payment or exposure to lien-related liability.
Key Rules
No payment for undelivered work
After a termination for default, the Government is not liable for the contractor’s costs on work not delivered. Advance and progress payments tied to that undelivered work are also recoverable by the Government.
Government may take completed items
Under the Default clause, the Government may require the contractor to transfer title and deliver completed supplies and manufacturing materials as directed by the contracting officer. This is an election, not an automatic result in every default case.
Do not use Default clause unnecessarily
The contracting officer may not use the Default clause to acquire completed supplies or manufacturing materials unless it has first been determined that the Government does not already have title under another contract provision. For materials to be furnished to another contractor, the contracting officer must also consider whether the other contractor can practically use them.
Pay for completed supplies and materials
Subject to lien-protection requirements, the Government must pay the contract price for completed supplies and the amount agreed upon for manufacturing materials acquired under the Default clause.
Protect against lien exposure
Before paying for supplies or materials, the contracting officer must take steps to protect the Government from overpayment and potential liability to laborers and material suppliers with lien rights. The regulation lists several acceptable measures, including checking bond adequacy, obtaining lien waivers, securing tripartite agreements, withholding funds if necessary, or taking other appropriate action.
Contractor remains liable for excess costs
The contractor is liable for excess costs incurred in acquiring similar supplies and services after default, as well as other damages, whether or not the Government actually repurchases the items or services.
Responsibilities
Contracting Officer
Determine the financial effect of default, decide whether to require transfer of completed supplies or manufacturing materials, verify whether the Government already has title under another contract provision, consider whether materials can be used by another contractor, and ensure lien-related protections are in place before paying for acquired items.
Government
Avoid paying for undelivered work, recover applicable advance and progress payments, take title to and receive delivery of completed supplies or materials when elected under the Default clause, pay for acquired completed supplies and agreed manufacturing materials subject to lien protections, and seek excess costs and damages from the defaulting contractor.
Contractor
Return or transfer completed supplies and manufacturing materials when required under the Default clause, repay advance and progress payments applicable to undelivered work, and remain liable for excess reprocurement costs and other damages resulting from the default.
Laborers and Material Suppliers
Provide lien-related statements or waivers when requested, or otherwise resolve outstanding lien claims affecting completed supplies or materials before the Government pays the contractor.
Other Contractors
If materials are to be furnished to them after default, assess whether the materials are usable in their performance and cooperate with any transfer arrangements directed by the contracting officer.
Practical Implications
This section is a reminder that default is not just a performance issue; it is also a title, payment, and recovery issue. Contracting officers must sort out what the Government already owns, what it can lawfully take, and what it must pay for.
A common pitfall is paying for completed supplies or materials without first addressing lien exposure. If laborers or suppliers may still have claims, the Government can end up paying twice unless the contracting officer uses one of the required protection methods.
Another frequent mistake is assuming the Default clause automatically authorizes acquisition of all remaining property. The contracting officer must first confirm whether title already passed under some other clause or contract term.
When materials are intended for use by a replacement contractor, practical usability matters. Even if the Government can take the materials, they may be of little value if the follow-on contractor cannot use them efficiently or at all.
The contractor’s liability does not end because the Government chooses not to repurchase immediately. Excess costs and other damages may still be pursued, so documentation of reprocurement decisions and cost comparisons is important.
Official Regulatory Text
(a) Under a termination for default, the Government is not liable for the contractor’s costs on undelivered work and is entitled to the repayment of advance and progress payments, if any, applicable to that work. The Government may elect, under the Default clause, to require the contractor to transfer title and deliver to the Government completed supplies and manufacturing materials, as directed by the contracting officer. (b) The contracting officer shall not use the Default clause as authority to acquire any completed supplies or manufacturing materials unless it has been ascertained that the Government does not already have title under some other provision of the contract. The contracting officer shall acquire manufacturing materials under the Default clause for furnishing to another contractor only after considering the difficulties the other contractor may have in using the materials. (c) Subject to paragraph (d) of this section, the Government shall pay the contractor the contract price for any completed supplies, and the amount agreed upon by the contracting officer and the contractor for any manufacturing materials, acquired by the Government under the Default clause. (d) The Government must be protected from overpayment that might result from failure to provide for the Government’s potential liability to laborers and material suppliers for lien rights outstanding against the completed supplies or materials after the Government has paid the contractor for them. To accomplish this, before paying for supplies or materials, the contracting officer shall take one or more of the following measures: (1) Ascertain whether the payment bonds, if any, furnished by the contractor are adequate to satisfy all lienors’ claims or whether it is feasible to obtain similar bonds to cover outstanding liens. (2) Require the contractor to furnish appropriate statements from laborers and material suppliers disclaiming any lien rights they may have to the supplies and materials. (3) Obtain appropriate agreement by the Government, the contractor, and lienors ensuring release of the Government from any potential liability to the contractor or lienors. (4) Withhold from the amount due for the supplies or materials any amount the contracting officer determines necessary to protect the Government’s interest, but only if the measures in paragraphs (d)(1), (2), and (3) of this section cannot be accomplished or are considered inadequate. (5) Take other appropriate action considering the circumstances and the degree of the contractor’s solvency. (e) The contractor is liable to the Government for any excess costs incurred in acquiring supplies and services similar to those terminated for default (see 49.402-6 ), and for any other damages, whether or not repurchase is effected (see 49.402-7 ).