FAR 49.606—Granting subcontract settlement authorization.
Plain-English Summary
FAR 49.606 provides the standard letter format a contracting officer must use when granting subcontract settlement authorization after a prime contract termination or termination-related modification. The section covers the scope of the delegation, including authority to settle terminated subcontracts and purchase orders without further Government approval, the limits tied to subsection 49.108-4, the treatment of Government-furnished material and completed but undelivered articles, the dollar ceiling on authorized settlements, how settlement amounts are computed, disposal of termination inventory, the contracting officer’s ability to issue specific disposal instructions, reimbursement treatment under Part 49 and the termination clause, rules for multiple settlements with the same subcontractor, the prohibition on use with affiliated subcontractors or suppliers, and the Government’s right to review and revoke the authorization. In practice, this section is about controlled delegation: it lets the prime contractor move termination settlements faster, but only within defined financial, inventory, and relationship-based limits. It protects the Government by preserving oversight over disposal of Government property, preventing artificial splitting of claims, and excluding non-arm’s-length relationships where the Government’s interests may be at greater risk. For contractors, it is a working authority document that must be followed exactly; for contracting officers, it is a risk-management tool that should be tailored with clear dollar limits and conditions.
Key Rules
Use the prescribed letter
The contracting officer must use the FAR-prescribed authorization format when delegating subcontract settlement authority. The letter should expressly state the request is approved and identify the limits and conditions of the authorization.
Authority is limited by 49.108-4
The delegation is subject to the limitations in subsection 49.108-4 and any additional limits stated in the authorization. This means the contractor’s authority is not open-ended and must be exercised within the termination inventory and settlement controls in Part 49.
No authority over certain property
The authorization does not cover disposition of Government-furnished material or completed but undelivered articles, because those items normally require Government screening and approval of disposal actions. A narrow exception allows disposal of allocable completed articles without approval if the combined amount stays within the stated limit.
Settlement ceiling must be observed
The contractor may not exceed the stated dollar limit for any subcontract termination settlement. The computation rules require certain deductions and prohibit others, so the contractor must calculate the settlement amount exactly as directed in the authorization.
Inventory must be properly disposed
Any termination inventory involved must be disposed of under 49.108-4, except that screening and Government approval of scrap and salvage determinations are not required. The contracting officer may also issue specific disposal instructions in the notice of termination or later before final settlement.
Settlements are reimbursable
Settlements made under the authorization, including related sales, retention, or other property dispositions, are reimbursable under Part 49 and the contract’s Termination clause. These actions do not require separate contracting officer approval if they are within the authorization.
No splitting to fit the limit
Multiple separate settlements with the same subcontractor may be made up to the authorized limit, but proposals that should normally be combined must be consolidated and cannot be divided just to stay under the threshold. This prevents artificial fragmentation of claims.
Affiliated parties are excluded
The authorization does not apply when the subcontractor or supplier is affiliated with the prime contractor. Affiliation includes common control or any common interest, such as stock ownership or other ties, that create reasonable doubt about arm’s-length bargaining.
Government oversight remains
A Government representative may review the contractor’s settlement methods and selectively examine settlements. If the review shows the contractor is not adequately protecting the Government’s interests, the delegation can be revoked.
Responsibilities
Contracting Officer
Issue the subcontract settlement authorization in the required FAR format, set the dollar limit, state any additional conditions, and provide specific disposal instructions when needed. The contracting officer must also monitor the contractor’s use of the authority, review settlement practices, and revoke the delegation if the Government’s interests are not being protected.
Prime Contractor
Use the delegated authority only within the stated limits and conditions, settle terminated subcontracts and purchase orders without further Government approval only when authorized, and properly compute settlement amounts. The contractor must dispose of termination inventory under the required procedures, avoid splitting proposals to fit the limit, and refrain from using the authority for affiliated subcontractors or suppliers.
Subcontractors and Suppliers
Participate in termination settlements as directed by the prime contractor under the delegated authority, while recognizing that their settlements may still be subject to the prime contractor’s compliance obligations and Government oversight. They must also follow any applicable disposal or settlement instructions passed through the prime contractor.
Government Representative/Agency
Review the contractor’s settlement methods and selectively examine settlements to ensure the Government’s interests are protected. The agency must maintain oversight of property disposition and may impose or enforce specific instructions and revoke authority when necessary.
Practical Implications
This section speeds up termination processing by letting the prime contractor settle smaller or routine subcontract terminations without waiting for separate Government approval each time.
The biggest compliance risk is exceeding the dollar limit or miscomputing the settlement amount, especially by improperly deducting or failing to deduct items exactly as the authorization requires.
Contractors must be careful with Government-furnished material, completed but undelivered items, and termination inventory, because those property issues can trigger separate screening, approval, or disposal instructions.
Artificially splitting one logical settlement into multiple smaller proposals is prohibited and can undermine the delegation, create audit findings, and lead to revocation.
Affiliation matters: if the subcontractor is related to the prime contractor in a way that compromises arm’s-length bargaining, the contractor should not rely on this authorization and should expect direct Government involvement.
Official Regulatory Text
Contracting officers shall use the following format when granting subcontract settlement authorization: Letter of Authorization (a) Your request of ____ (date) is approved, and you are authorized, subject to the limitations of subsection 49.108-4 and those stated below, to settle, without further approval of the Government, all subcontracts and purchase orders terminated by you as a result of a Government contract being terminated or modified- (1) For the convenience of the Government or (2) Under any other circumstances that may require the Government to bear the cost of their settlement. (b) This authorization does not extend to the disposition of Government-furnished material or articles completed but undelivered under the subcontract or purchase order, as these require screening and approval of disposal actions by the Government, except that allocable completed articles may be disposed of without Government approval or screening if the total amount (at subcontract price) when added to the amount of settlement (as computed below) does not exceed $_____ [ insert limit of authorization being granted ]. (c) This authorization is subject to the following conditions and requirements: (1) The amount of the subcontract termination settlement does not exceed $____ [ insert limit of authorization being granted ], computed as follows: (i) Do not deduct advance or partial payments or credits for retention or other disposal of termination inventory allocated to the settlement proposal. (ii) Deduct amounts payable for completed articles or work at the contract price or for the settlement of termination proposals of subcontractors (except those settlements that have not been approved by the Government). (2) Any termination inventory involved has been disposed of under subsection 49.108-4 , except that screening and Government approval of scrap and salvage determinations are not required. (3) The Contracting Officer may incorporate into each Notice of Termination specific instructions about the disposition of specific items of termination inventory, or the Contracting Officer may, at any time before final settlement, issue specific instructions. These instructions will not affect any disposal action taken by you or your subcontractors before their receipt. (4) The settlements made by you with your subcontractors and suppliers under this authorization, including sales, retention, or other dispositions of property involved in making these settlements, are reimbursable under part 49 and the Termination clause of the contract, and do not require approval of the Contracting Officer. (5) Any number of separate settlements of $_____ [ insert limit of authorization granted ] or less may be made with a single subcontractor. Settlement proposals that would normally be included in a single proposal; e.g., those based on a series of separate orders for the same item under one contract, should be consolidated whenever possible and shall not be divided to bring them within the authorization. (6) This authorization does not apply if a subcontractor or supplier is affiliated with you. For this purpose, you should consider a contractor to be affiliated with you if you are under common control or if there is any common interest between you by reason of stock ownership, or otherwise, that is sufficient to create a reasonable doubt that the bargaining between you is completely at arm’s length. (7) A representative of this office will, from time to time, review the methods used in negotiating settlements with your subcontractors and will make a selective examination of the settlements made by you. If the review indicates that you are not adequately protecting the Government’s interest, this delegation will be revoked. (End of letter)