FAR 52.241-10—Termination Liability.
Plain-English Summary
FAR 52.241-10, Termination Liability, addresses how the Government will compensate a contractor if utility service is discontinued before the contractor has recovered the agreed cost of a new facility furnished and installed at the contractor’s expense. The clause covers the trigger for liability, the negotiated facility cost recovery period, the net facility cost after subtracting salvage value, the monthly facility cost recovery rate, the formula for calculating termination charges, and the rule that no termination liability is owed once capital costs have been fully recovered. In practice, this clause is used to allocate financial risk when a contractor makes a capital investment to support utility service under a Government contract, and it protects the contractor from unrecovered investment if the Government ends service early. It also limits the Government’s exposure by tying payment to a negotiated recovery period that cannot exceed the contract term and by reducing liability by salvage value and amounts already recovered. The clause is highly formula-driven, so the exact inserted numbers and negotiated assumptions are critical to determining the Government’s payment obligation.
Key Rules
Government discontinuance triggers liability
If the Government discontinues utility service before the end of the agreed facility cost recovery period, it must pay termination charges under the clause. The liability exists only because the contractor furnished and installed the new facility at its own expense in reliance on the contract.
Recovery period must be negotiated
The facility cost recovery period is a negotiated number of months and may not exceed the contract term. This period defines how long the contractor is allowed to recover the net cost of the facility through the monthly recovery rate.
Net cost equals cost minus salvage
The net facility cost is the cost of the new facility less the agreed salvage value. Salvage value reduces the amount the Government must help recover because the contractor is expected to retain or realize value from the facility after termination.
Monthly recovery rate is formula-based
The monthly facility cost recovery rate is calculated by dividing the net facility cost by the recovery period. The Government pays this amount whether or not service is actually received, so long as the clause remains in effect and the recovery period has not ended.
Termination charges cover remaining months
If service is discontinued before the recovery period ends, termination charges equal the remaining months multiplied by the monthly recovery rate. This formula compensates the contractor for the unrecovered portion of the agreed capital investment.
No liability after full recovery
If the contractor has already recovered its capital costs at the time of termination, there is no termination liability charge. The clause is designed to make the contractor whole, not to provide a windfall beyond capital cost recovery.
Responsibilities
Contracting Officer
Negotiate and insert the recovery period, net facility cost, salvage value, and resulting monthly rate and termination charge amounts. The contracting officer must ensure the recovery period does not exceed the contract term and that the clause reflects the parties’ agreed financial assumptions.
Contractor
Furnish and install the new facility at its own expense, maintain records supporting cost recovery, and rely on the clause’s formulas to seek payment if the Government discontinues service before full recovery. The contractor must also account for salvage value and any amounts already recovered.
Government
Continue utility service or, if it discontinues service before the recovery period ends, pay the calculated termination charges. The Government must also honor the negotiated payment structure even if service is not received during the remaining recovery period.
Agency/Program Office
Support the contracting officer by identifying the operational need for the facility, the expected service period, and any technical or business assumptions affecting cost recovery. The agency should ensure the negotiated terms align with actual utility requirements and funding expectations.
Practical Implications
This clause is mainly about protecting a contractor’s unrecovered capital investment, so the numbers inserted into the blanks matter as much as the clause text itself.
A common pitfall is miscalculating salvage value or the recovery period, which can materially overstate or understate the Government’s liability.
Because the recovery period cannot exceed the contract term, the parties must align the financial recovery schedule with the expected duration of the underlying utility service contract.
The clause uses a simple formula, but disputes often arise over what costs are included in the facility cost, whether capital costs have already been recovered, and how salvage is determined.
Contracting officers should document the basis for each negotiated figure, since the clause’s enforceability and payment amount depend on those inserted values and the underlying agreement.
Official Regulatory Text
As prescribed in 41.501 (d)(4) , insert a clause substantially the same as the following: Termination Liability (Feb 1995) (a) If the Government discontinues utility service under this contract before completion of the facilities cost recovery period specified in paragraph (b) of this clause, in consideration of the Contractor furnishing and installing at its expense, the new facility described herein, the Government shall pay termination charges, calculated as set forth in this clause. (b) Facility cost recovery period. The period of time, not exceeding the term of this contract, during which the net cost of the new facility shall be recovered by the Contractor is ______ months.[ Insert negotiated duration. ] (c) Net facility cost. The cost of the new facility, less the agreed upon salvage value of such facility, is $ _______. [ Insert appropriate dollar amount .] (d) Monthly facility cost recovery rate. The monthly facility cost recovery rate which the Government shall pay the Contractor whether or not service is received is $ _____.[ Divide the net facility cost in paragraph (c) of this clause by the facility’s cost recovery period in paragraph (b) of this clause and insert the resultant figure .] (e) Termination charges. Termination charges = $ ____.[ Multiply the remaining months of the facility's cost recovery period specified in paragraph (b) of this clause by the monthly facility cost recovery rate in paragraph (d) of this clause and insert the resultant figure .] (f) If the Contractor has recovered its capital costs at the time of termination there will be no termination liability charge. (End of clause)