FAR 49.402-4—Procedure in lieu of termination for default.
Plain-English Summary
FAR 49.402-4 explains what a contracting officer may do instead of terminating a contract for default when that is in the Government’s interest. It covers three main alternatives: allowing the contractor, surety, or guarantor to keep performing under a revised delivery schedule; allowing performance to continue through a subcontract or other business arrangement with an acceptable third party while preserving the Government’s rights; and, when the Government no longer needs the supplies or services and the contractor is not liable for damages, using a no-cost termination settlement agreement. In practice, this section gives the Government flexibility to avoid the disruption, delay, and administrative burden of a default termination when a less drastic solution will protect the Government’s interests. It also ties directly to the contracting officer’s judgment about whether continued performance is feasible, whether the Government’s rights remain protected, and whether the contract should instead be closed out without cost because the requirement has disappeared. The section is important because it helps agencies recover performance or exit a contract efficiently without unnecessarily escalating to default termination.
Key Rules
Use alternatives when beneficial
The contracting officer may choose a course of action in lieu of default termination when doing so is in the Government’s interest. This is a discretionary decision, not an entitlement for the contractor.
Allow revised performance schedules
The contractor, surety, or guarantor may be permitted to continue performance under a revised delivery schedule. This option is used when the contract can still be completed and a new schedule is more advantageous than termination.
Permit third-party performance
The contractor may continue performance through a subcontract or other business arrangement with an acceptable third party, but only if the Government’s rights are adequately preserved. The arrangement must not weaken the Government’s ability to enforce the contract or protect its interests.
Use no-cost settlement when need disappears
If the Government no longer needs the supplies or services and the contractor is not liable for damages under FAR 49.402-7, the contracting officer may execute a no-cost termination settlement agreement. The cited formats in FAR 49.603-6 and 49.603-7 serve as guides.
Preserve Government rights
Any alternative to default termination must protect the Government’s contractual rights. The contracting officer should ensure the chosen approach does not waive remedies, impair recovery, or create ambiguity about responsibility for performance.
Responsibilities
Contracting Officer
Decide whether an alternative to default termination is in the Government’s interest; evaluate revised schedules, third-party arrangements, or no-cost settlement options; and ensure the Government’s rights are preserved before approving any substitute course of action.
Contractor
If allowed to continue performance, comply with the revised delivery schedule or approved business arrangement and continue meeting contract requirements through the authorized means.
Surety
May be permitted to continue performance under a revised delivery schedule when that approach is chosen by the contracting officer and is in the Government’s interest.
Guarantor
May be permitted to continue performance under a revised delivery schedule when the contracting officer determines that this is an appropriate alternative to default termination.
Acceptable Third Party
May perform the contract through a subcontract or other business arrangement only if the contracting officer accepts the arrangement and the Government’s rights remain adequately protected.
Agency/Government
Determine whether the contract requirement still exists and whether a no-cost settlement is appropriate; ensure any alternative course of action supports the Government’s operational and legal interests.
Practical Implications
This section gives contracting officers a practical off-ramp when default termination would be too disruptive or unnecessary, especially if the contractor can still finish the work with a revised plan or another performer.
A common pitfall is agreeing to a workaround without clearly documenting how the Government’s rights are preserved; that can create disputes over liability, remedies, or acceptance of late performance.
Another risk is using a no-cost settlement too quickly without confirming that the Government truly no longer needs the supplies or services and that the contractor is not liable for damages.
Contractors should understand that these are discretionary Government options, not automatic relief; the contracting officer can still choose default termination if the alternative does not protect the Government’s interests.
When a third party is involved, the contracting officer should scrutinize the arrangement carefully to avoid hidden novations, unauthorized substitutions, or weakened enforcement rights.
Official Regulatory Text
The following courses of action, among others, are available to the contracting officer in lieu of termination for default when in the Government’s interest: (a) Permit the contractor, the surety, or the guarantor, to continue performance of the contract under a revised delivery schedule. (b) Permit the contractor to continue performance of the contract by means of a subcontract or other business arrangement with an acceptable third party, provided the rights of the Government are adequately preserved. (c) If the requirement for the supplies and services in the contract no longer exists, and the contractor is not liable to the Government for damages as provided in 49.402-7 , execute a no-cost termination settlement agreement using the formats in 49.603-6 and 49.603-7 as a guide.