FAR 49.603-3—Cost reimbursement contracts-complete termination, if settlement includes cost.
Plain-English Summary
FAR 49.603-3 provides the standard settlement-agreement language for a complete termination of a cost-reimbursement contract when the settlement amount includes costs. It is designed for use in Block 14 of SF 30 and turns the negotiated termination settlement into a formal supplemental agreement that documents the notice of termination, the contractor’s certifications about termination inventory and subcontractor settlements, the treatment of proceeds and retention credits, the allocation and reasonableness of inventory costs, the assignment of rights in subcontract termination inventory, payment obligations to subcontractors, the calculation of the gross and net settlement amounts, and the effect of the settlement as payment in full. It also requires the parties to reserve or except certain rights and liabilities that should survive the settlement, such as renegotiation matters, royalty-related rights, and rights and liabilities under mandatory statutory or executive-order clauses. In practice, this section matters because it is the closing document that converts a negotiated termination settlement into an enforceable contract modification and helps prevent later disputes over inventory, subcontractor claims, offsets, and residual government rights. It is especially important that the contracting officer tailor the reserved-rights list to the contract and omit or add items as needed, because the standard text is only a starting point and not a one-size-fits-all release.
Key Rules
Use in SF 30 Block 14
This language is inserted in Block 14 of SF 30 for a supplemental agreement settling a complete termination of a cost-reimbursement contract when the settlement includes costs. It is the standard form for documenting the final settlement terms in writing.
Settlement must reference termination notice
The agreement must identify the Notice of Termination date, because the settlement is tied to the specific termination action being resolved. This anchors the agreement to the terminated contract and the resulting settlement proposal.
Contractor must certify inventory disposition
The contractor must certify that all termination inventory, including scrap, has been retained, acquired, sold, returned, delivered, stored, or otherwise properly accounted for, and that all proceeds and retention credits were used in arriving at the settlement. This prevents double recovery and confirms proper treatment of terminated property.
Subcontractor certifications are required
If the settlement includes subcontractor proposals, the contractor must certify that each immediate subcontractor provided a similar certificate, including certifications from its own immediate subcontractors. This creates a chain of accountability for lower-tier termination inventory and proceeds.
Inventory costs must be allocable and reasonable
The contractor must certify that 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. The contractor must also report any substantial change in inventory status between the schedules and the agreement date.
Government receives rights in unaccounted inventory
The contractor transfers, conveys, and assigns to the Government any right, title, and interest it has received or is entitled to receive in subcontract termination inventory not otherwise properly accounted for. This protects the Government’s ability to recover or control property-related interests.
Subcontractors must be paid promptly
Within 10 days after receiving payment under the settlement, the contractor must pay each immediate subcontractor, or its assignee, the amounts due after deducting prior payments and any amounts the contractor elects to offset that are due from the subcontractor. This ensures prompt pass-through of settlement funds.
Settlement amount and offsets must be stated
The agreement must state the amount already received for work or services performed before termination, the gross settlement amount, and the net amount payable after deducting unliquidated progress or advance payments, property disposal credits, and any other amounts due the Government if applicable. This makes the financial reconciliation explicit.
Settlement is payment in full
The net settlement, together with sums previously paid, constitutes full and complete settlement of the contractor’s entitlement and all other demands and liabilities under the contract, except for reserved rights. This finality is central to closing out the terminated contract.
Reserved rights must be listed
The agreement must preserve any rights and liabilities that should survive the settlement, including renegotiation matters, royalty-related rights, and rights and liabilities under mandatory statutory or executive-order clauses such as labor law, contingent fees, domestic articles, and employment of aliens. The contracting officer may vary the language, reference specific clauses, omit inapplicable items, and add other necessary exceptions.
Responsibilities
Contracting Officer
Prepare or approve the SF 30 supplemental agreement language, ensure the termination notice date is correctly stated, verify that the settlement amount and offsets are properly calculated, and tailor the reserved-rights list to the contract. The contracting officer must also ensure the settlement reflects the complete termination and that any necessary exceptions or additional reservations are included.
Contractor
Certify the disposition and accounting of all termination inventory and scrap, ensure proceeds and retention credits were applied in the settlement, obtain required certificates from immediate subcontractors, confirm inventory costs are properly allocable and reasonable, notify the contracting officer of material changes in inventory status, assign any unaccounted subcontract inventory rights to the Government, and pay immediate subcontractors within 10 days after receiving settlement payment.
Immediate Subcontractors
Provide the contractor with certificates covering their own termination inventory and proceeds/retention credits, and provide similar certificates from their own immediate subcontractors when their proposals are included in the settlement chain. They must also receive payment from the contractor or their assignees as required by the settlement.
Government
Confirm the contractor’s right to retain amounts already received for pre-termination work or services, pay the net settlement amount upon proper invoice or voucher, and preserve any rights and liabilities expressly reserved in the agreement. The Government also benefits from assignments of unaccounted subcontract termination inventory rights and from any applicable offsets.
Assignees
If payment rights have been assigned, receive the amounts due under the settlement and, where applicable, receive subcontractor payments or contractor payments made to the contractor’s assignee as provided in the agreement.
Practical Implications
This section is the final paper trail for a complete termination settlement, so errors in the inventory certifications, subcontractor certificates, or payment calculations can delay closeout or create later disputes.
Contractors should carefully reconcile termination inventory, scrap, proceeds, retention credits, and any usable items on other work before signing, because the certification is broad and supports finality.
Contracting officers should scrutinize the reserved-rights paragraph rather than using it mechanically; missing a required reservation can unintentionally waive important Government rights, while overbroad reservations can undermine the finality of the settlement.
The 10-day subcontractor payment requirement is a common compliance trap, especially where multiple tiers of subcontractors or assignees are involved.
Offsets for progress payments, advance payments, property disposal credits, and other Government claims must be computed accurately, because the net settlement amount is only as reliable as the underlying deductions and supporting records.
Official Regulatory Text
[ Insert the following in Block 14 of SF 30 for settlement of cost-reimbursement contracts that are completely terminated, if settlement includes costs. ] (a) This supplemental agreement settles the settlement proposal resulting from the Notice of Termination dated . (b) The parties agree to the following: (1) 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. (2) 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. (3) The Contractor certifies that all items of termination inventory, the costs of which were used in arriving at the amount of this settlement or he 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. (4) 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. (5) 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. (6)(i) The Contractor has received $ for work and services performed, or articles delivered, under the contract before the effective date of termination. The Government confirms the right of the Contractor, subject to paragraph (b)(7) of this section, to retain this sum and agrees that it constitutes a portion of the total amount to which the Contractor is entitled in complete and final settlement of the contract. (ii) Further, 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 the sum of $___ [ insert gross amount of settlement less amount shown in subdivision(6)(i) a of this section ]- (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), (B) The amount of $___ for all applicable property disposal credits [ insert if appropriate, "and (C) the amount of $___ for all other amounts due the Government under this contract, except as provided in paragraph (b)(7) of this section."] (iii) The net settlement of $_______ in subdivision (b)(6)(ii) of this section, together with sums previously paid, constitutes payment in full and complete settlement of the amount due the Contractor for the complete termination of the contract and of all other demands and liabilities of the Contractor and the Government under the contract, except as provided in paragraph (b)(7) in this section. (7) 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 on 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 of the parties under agreements relating to the future care and disposition by the Contractor of Government-owned property remaining in the Contractor’s custody. (viii) All rights and liabilities of the parties relating to Government property furnished to the Contractor for the performance of this contract. (ix) All rights and liabilities of the parties under the contract relating to options (except options to continue or increase the work under the contract), covenants not to compete, and covenants of indemnity. (x) Unresolved demands or assertions by the Contractor against the Government for costs under Government Accountability Office exceptions or other costs of the same nature that are excluded from the settlement without prejudice to the rights of either party, as follows: [ Insert amount and describe charges not waived .] (xi) Claims by the Contractor against the Government, when the Contractor’s rights of reimbursement are disputed, that are excluded without prejudice to the rights of either party are as follows: [ Insert the amounts and describe the claims on which the Contracting Officer has made findings and has disallowed and on which the Contractor has taken, or intends to take, timely appeal .] (xii) Unresolved demands or assertions by the Contractor against the Government that are unknown in amount and involve costs alleged to be reimbursable under the contract are as follows: [ Insert the estimated amounts and describe the charges .] (xiii) Unknown amounts alleged by the Contractor against the Government, based upon responsibility of the Contractor to third parties that involve costs reimbursable under the contract. (xiv) Debts due the Government by the Contractor that are based on refunds, rebates, credits, or other amounts not now known to the Government, with interest, now due or that may become due the Contractor from third parties, if the amounts arise out of transactions for which reimbursement has been made to the Contractor under the contract. The Contractor shall pay to the Government, within 30 days after receipt, any of these amounts that become due from any third party or any other source. Interest at the rate established by the Secretary of the Treasury under 50 U.S.C. (App.) 1215(b)(2) shall accrue and shall be paid to the Government on any amounts that remain unpaid after the 30-day period. (xv) 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)