FAR 49.406—Liquidation of liability.
Plain-English Summary
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.
Key Rules
Contract and surety liability
When the contract so provides, both the contractor and the surety are liable to the Government for the damages resulting from the termination. This creates a shared recovery basis rather than limiting the Government to only one source of payment.
Use retained percentages first
The contracting officer must apply all retained percentages of progress payments previously made to the contractor to liquidate the liability. These withheld amounts are the first source used to offset the Government’s damages.
Apply unpaid progress payments
Any progress payments due for work completed before termination must also be used to reduce the contractor’s and surety’s liability. The Government may not ignore amounts already earned but not yet paid.
Recover any shortfall
If retained and unpaid amounts do not fully cover the Government’s damages, the contracting officer must take steps to recover the remaining balance from the contractor and the surety. The rule requires affirmative collection action, not passive accounting.
Responsibilities
Contracting Officer
Apply retained percentages of prior progress payments and any unpaid progress payments for completed work to liquidate the Government’s damages. If those amounts are insufficient, take steps to recover the remaining sum from the contractor and the surety.
Contractor
Remain liable for termination-related damages to the extent the retained and unpaid contract amounts do not fully satisfy the Government’s loss, and respond to recovery efforts for any remaining balance.
Surety
Share liability with the contractor for resultant damages when the contract so provides, and satisfy recovery demands for any deficiency after application of retained and unpaid amounts.
Government
Use available contract balances tied to completed work to offset its damages and pursue collection of any remaining amount owed after those offsets are applied.
Practical Implications
This section sets the collection order after termination: first retained percentages, then unpaid progress payments, then direct recovery from contractor and surety for any deficiency.
Contracting officers should carefully reconcile progress payments, retainage, and completed work to avoid under- or over-collection.
A common pitfall is failing to identify all amounts still due for work completed before termination, which can leave recoverable funds uncollected.
Another risk is assuming the retained amounts fully resolve liability; if damages exceed those amounts, the Government must actively pursue the balance.
Contractors and sureties should expect that termination liability may extend beyond withheld funds and should prepare for potential collection actions or settlement discussions.
Official Regulatory Text
(1) The contract provides that the contractor and the surety are liable to the Government for resultant damages. The contracting officer shall use all retained percentages of progress payments previously made to the contractor and any progress payments due for work completed before the termination to liquidate the contractor’s and the surety’s liability to the Government. If the retained and unpaid amounts are insufficient, the contracting officer shall take steps to recover the additional sum from the contractor and the surety.