FAR 49.403—Termination of cost-reimbursement contracts for default.
Plain-English Summary
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.
Key Rules
Default right comes from clause
The Government’s right to terminate a cost-reimbursement contract for default is not inherent in the statute here; it comes from the Termination for Default or for Convenience of the Government clause at 52.249-6. If that clause applies, it supplies the contractual basis for default termination.
Ten-day notice required
The clause requires a 10-day notice to the contractor before termination for default in every case. This is a mandatory procedural safeguard, so the contracting officer must provide the notice before the termination becomes effective.
Settlement follows convenience principles
Settlement of a cost-reimbursement contract terminated for default is governed by the principles in FAR subparts 49.1 and 49.3, the same general framework used for convenience terminations. The default context does not create a wholly separate settlement system; it largely borrows the convenience-termination settlement rules.
Settlement proposal costs unallowable
The contractor may not recover the costs of preparing its settlement proposal. FAR 49.403(b)(1) makes those costs unallowable, consistent with paragraph (h)(3) of the clause.
Allowable costs and fee reduction
The contractor is reimbursed allowable costs, but an appropriate reduction is made in the total fee, if any. This means the Government pays allowable reimbursable costs, but the contractor does not necessarily keep the full fee after default termination.
Use default procedures as appropriate
The contracting officer should use the procedures in FAR 49.402 to the extent they are appropriate for a cost-reimbursement contract. This means the officer should apply the default-termination decision process and related safeguards, but only insofar as they fit the contract type.
No excess repurchase cost recovery
A cost-reimbursement contract does not provide for recovery of excess repurchase costs after termination for default. The Government therefore cannot seek the same excess repurchase cost remedy that may be available in other contract types, except for the separate defective-supplies remedy referenced in 52.246-3(g).
Responsibilities
Contracting Officer
Determine whether default termination is appropriate, provide the required 10-day notice, and apply FAR 49.402 procedures to the extent they fit a cost-reimbursement contract. The contracting officer must also settle the termination using the convenience-termination principles in FAR subparts 49.1 and 49.3, ensure settlement proposal preparation costs are not allowed, and reduce fee as required.
Contractor
Respond to the default notice, protect its rights during the termination process, and submit a settlement proposal if appropriate, knowing that the cost of preparing that proposal is unallowable. The contractor must also understand that it may recover allowable costs but may face a fee reduction and cannot expect reimbursement of settlement proposal preparation costs.
Agency/Government
Administer the termination consistent with the contract clause and FAR settlement rules, including honoring the notice requirement and limiting recovery to allowable costs and adjusted fee. The Government must also recognize that it cannot recover excess repurchase costs under a cost-reimbursement contract after default termination, except where a separate clause provides a different remedy.
Practical Implications
For contracting officers, the biggest day-to-day issue is that a cost-reimbursement default termination is not handled like a fixed-price default in every respect; settlement is largely convenience-based, so using the wrong framework can create errors in payment and documentation.
Contractors should not assume they can bill the Government for the cost of preparing a termination settlement proposal. That cost is expressly unallowable, so it should not be included as a recoverable termination expense.
The required 10-day notice is a common procedural pitfall. Failing to give proper notice can undermine the termination action or create disputes over whether the default termination was effective.
Fee treatment matters. Even when allowable costs are reimbursed, the total fee may be reduced, so contractors should evaluate the financial impact of default termination beyond just cost reimbursement.
The Government cannot use this section to recover excess repurchase costs under a cost-reimbursement contract, so contracting officers should not assume the same post-default recovery tools available in other contract types apply here. Separate remedies may exist only under other clauses, such as the defective supplies clause referenced in the regulation.
Official Regulatory Text
(a) The right to terminate a cost-reimbursement contract for default is provided for in the Termination for Default or for Convenience of the Government clause at 52.249-6 . A 10-day notice to the contractor before termination for default is required in every case by the clause. (b) Settlement of a cost-reimbursement contract terminated for default is subject to the principles in subparts 49.1 and 49.3 the same as when a contract is terminated for convenience, except that- (1) The costs of preparing the contractor’s settlement proposal are not allowable (see paragraph (h)(3) of the clause); and (2) The contractor is reimbursed the allowable costs, and an appropriate reduction is made in the total fee, if any, (see paragraph (h)(4) of the clause). (c) The contracting officer shall use the procedures in 49.402 to the extent appropriate in considering the termination for default of a cost-reimbursement contract. However, a cost-reimbursement contract does not contain any provision for recovery of excess repurchase costs after termination for default (but see paragraph (g) of the clause at 52.246-3 with respect to failure of the contractor to replace or correct defective supplies).