FAR 49.603-2—Fixed-price contracts-partial termination.
Plain-English Summary
FAR 49.603-2 provides the standard SF 30 supplemental agreement language used to settle a partial termination of a fixed-price contract. It covers the required contents of the settlement agreement, including identification of the terminated portion of the contract by line item, description, quantity, unit price, and total price; contractor certifications about termination inventory and scrap; subcontractor flowdown certifications; confirmation that inventory costs are properly allocable and not usable on other work; assignment of rights in subcontract termination inventory to the Government; payment obligations to subcontractors; the Government’s payment formula using gross settlement, deductions for prior partial/progress and advance payments, and property disposal credits; the effect of payment as full settlement; and the rights and liabilities that must be reserved or excepted from the settlement. In practice, this section is a drafting tool and compliance checklist for contracting officers and contractors negotiating a partial termination settlement, ensuring the agreement is precise, auditable, and legally complete. It exists to prevent uncertainty about what was terminated, what inventory and credits were accounted for, what subcontractor claims are included, and what issues remain open after settlement. It also protects the Government from overpayment and preserves rights that should not be waived by the settlement. For contractors, it establishes the certifications and payment timing needed to close out the terminated portion while preserving the remainder of the contract.
Key Rules
Use SF 30 block 14
The settlement language must be inserted in Block 14 of SF 30. This is the prescribed format for a supplemental agreement settling a partial termination of a fixed-price contract.
Identify terminated work precisely
The terminated portion must be described clearly enough to avoid ambiguity, including line item numbers, descriptions, quantities terminated, unit prices, total price of terminated items, and any other explanation needed to prevent misunderstanding.
Certify inventory disposition
The contractor must certify that all termination inventory, including scrap, has been properly retained, acquired, sold, returned, delivered, stored, or otherwise accounted for, and that all proceeds and retention credits were used in the settlement calculation.
Flow down subcontractor certifications
If subcontract settlement proposals are included, the contractor must certify that each immediate subcontractor provided the required inventory certificate, and that each such subcontractor obtained similar certificates from its own immediate subcontractors.
Confirm allocability and usability
The contractor must certify that the termination inventory costs used in the settlement are properly allocable to the terminated portion, do not exceed reasonable quantitative requirements, and do not include items reasonably usable on other work without loss.
Assign subcontract inventory rights
The contractor transfers to the Government any right, title, and interest it has received or is entitled to receive in subcontract termination inventory that is not otherwise properly accounted for.
Pay subcontractors promptly
Within 10 days after receiving settlement payment, the contractor must pay each immediate subcontractor, or its assignee, the amount due after deducting prior payments and any amounts the contractor elects to offset that are due from the subcontractor.
Apply settlement deductions
The Government’s payment is the net settlement amount after deducting unliquidated partial or progress payments, unliquidated advance payments with interest, and applicable property disposal credits from the gross settlement amount.
Treat payment as full settlement
The net settlement, together with amounts previously paid, constitutes full and complete settlement of the terminated portion, except for rights and liabilities expressly reserved in the agreement.
Reserve specified rights and liabilities
The agreement must preserve any rights and liabilities that should not be extinguished, including renegotiation matters, royalty-related rights, and rights and liabilities under required statutory or executive-order clauses, with additional exceptions added as needed.
Responsibilities
Contracting Officer
Prepare or approve the SF 30 supplemental agreement language for the partial termination settlement, ensure the terminated portion is described with precision, determine which rights and liabilities must be reserved, verify that required certifications and deductions are addressed, and ensure the settlement reflects the proper gross and net amounts.
Contractor
Provide accurate settlement proposal information, certify disposition and accounting of termination inventory and scrap, ensure subcontractor certifications are obtained, confirm allocability and usability of inventory costs, assign rights in subcontract inventory as required, and pay immediate subcontractors within 10 days after receiving settlement payment.
Immediate Subcontractors
Provide the contractor with the required certificate regarding their own termination inventory and scrap, confirm proper accounting of proceeds and retention credits, and ensure similar certificates are obtained from their immediate subcontractors when their proposals are included.
Government
Pay the net settlement amount upon proper invoice or voucher, apply deductions for prior payments and property disposal credits, and preserve any reserved rights and liabilities not covered by the settlement.
Practical Implications
This section is mainly about getting the paperwork right: if the terminated portion is not described precisely, later disputes can arise over what was actually settled.
The inventory certifications are critical audit protections; missing or incomplete certifications can delay settlement or create questioned costs.
Contractors must track subcontractor settlements carefully because the prime remains responsible for obtaining certificates and paying subcontractors promptly after receiving settlement funds.
The Government should verify all offsets before payment, especially unliquidated progress or advance payments and property disposal credits, to avoid overpayment.
Reserved rights matter: a settlement should not accidentally waive statutory, clause-based, or royalty-related claims that need to remain open after the partial termination.
Official Regulatory Text
[ Insert the following in Block14 of SF 30 for settlements of fixed-price contracts partially terminated. ] (a) This supplemental agreement settles the settlement proposal resulting from the Notice of Termination dated . (b) The parties agree to the following: (1) The terminated portion of the contract is as follows: [ specify the terminated portion clearly as to- (i) Line item numbers, (ii) Descriptions, (iii) Quantity terminated, (iv) Unit price of items, (v) Total price of terminated items, and (vi) Any other explanation necessary to avoid uncertainty or misunderstanding ]. (2) The Contractor certifies that all contract termination inventory (including scrap) has been retained or acquired by the Contractor, sold to third parties, returned to suppliers, delivered to or stored for the Government, or otherwise properly accounted for, and that all proceeds and retention credits have been used in arriving at this agreement. (3) The Contractor certifies that each immediate subcontractor, whose settlement proposal is included in the proposal settled by this agreement, has furnished the Contractor a certificate stating- (i) That all subcontract termination inventory (including scrap) has been retained or acquired by the subcontractor, sold to third parties, returned to suppliers, delivered to or stored for the Government, or otherwise properly accounted for, and that all proceeds and retention credits were used in arriving at the settlement of the subcontract, and (ii) That the subcontractor has received a similar certificate from each immediate subcontractor whose proposal was included in its proposal. (4) The Contractor certifies that all items of termination inventory, the costs of which were used in arriving at the amount of this settlement or the settlement of any subcontract settlement proposal included in this settlement, (i) are properly allocable to the terminated portion of the contract, (ii)do not exceed the reasonable quantitative requirements of the terminated portion of the contract, and (iii)do not include any items reasonably usable without loss to the Contractor on its other work. The Contractor further certifies that the Contracting Officer has been informed of any substantial change in the status of the items between the dates of the termination inventory schedules and the date of this agreement. (5) The Contractor transfers, conveys, and assigns to the Government all the right, title, and interest, if any, that the Contractor has received, or is entitled to receive, in and to subcontract termination inventory not otherwise properly accounted for. (6) The Contractor shall, within 10 days after receipt of the payment specified in this agreement, pay to each of its immediate subcontractors (or their respective assignees) the amounts to which they are entitled, after deducting any prior payments and, if the Contractor so elects, any amounts due and payable to the Contractor by those subcontractors. (7)(i) The Government agrees to pay to the Contractor or its assignee, upon presentation of a proper invoice or voucher, the sum of $ [ insert net amount of settlement ], arrived at by deducting from $ [ insert gross amount of settlement ], (A) the amount of $_ for all unliquidated partial or progress payments previously made to the Contractor or its assignee and all unliquidated advance payments (with any interest) applicable to the terminated portion of the contract and (B) the amount of $_______ for all applicable property disposal credits. (ii) The net settlement of $______ in subdivision (b)(7)(i) of this section, together with sums previously paid, constitutes payment in full and complete settlement of the amount due the Contractor for the terminated portion of the contract, except as provided in paragraph (b)(8) of this section. (iii) Upon payment of the net settlement of $______, all obligations of the Contractor to perform further work or services or to make further deliveries under the terminated portion of the contract and all obligations of the Government to take further payments or carry out other undertakings concerning the terminated portion of the contract shall cease; provided, that nothing in this agreement shall impair or affect any covenants, terms, or conditions of the contract relating to the completed or continued portion of this contract. (8) Regardless of any other provision of this agreement, the following rights and liabilities of the parties under the contract are reserved: [ The following list of reserved or excepted rights and liabilities is intended to cover those that should most frequently be reserved and that should be scrutinized at the time a settlement agreement is negotiated (see 49.109-2 ). The suggested language of the excepted items in the list may be varied at the discretion of the contracting officer. If accuracy or completeness can be achieved by referencing the number of a contract clause or provision covering the matter in question, then follow that method of enumerating reserved rights and liabilities. Omit any of the following that are not applicable and add any additional exceptions or reservations required .] (i) All rights and liabilities, if any, of the parties, as to matters covered by any renegotiation authority. (ii) All rights of the Government to take the benefit of agreements or judgments affecting royalties paid or payable in connection with the performance of the contract. (iii) All rights and liabilities, if any, of the parties under those clauses inserted in the contract because of the requirements of Acts of Congress and Executive orders, including, without limitation, any applicable clauses relating to: labor law, contingent fees, domestic articles, and employment of aliens. [ If the contract contains clauses of this character inserted for reasons other than requirements of Acts of Congress or Executive orders, the suggested language should be appropriately modified .] (iv) All rights and liabilities of the parties arising under the contract and relating to reproduction rights, patent infringements, inventions, or applications for patents, including rights to assignments, invention reports, licenses, covenants of indemnity against patent risks, and bonds for patent indemnity obligations, together with all rights and liabilities under the bonds. (v) All rights and liabilities of the parties, arising under the contract or otherwise, and concerning defects, guarantees, or warranties relating to any articles or component parts furnished to the government by the Contractor under the contract or this agreement. (vi) All rights and liabilities of the parties under the contract relating to any contract termination inventory stored for the Government. (vii) All rights and liabilities, if any, of the parties under those clauses of the contract relating to price reductions for defective certified cost or pricing data. (End of agreement)