Part 49 - Termination of Contracts

49.000 Scope of part.

49.001 Definitions.

49.002 Applicability.

Subpart 49.1 - General Principles

49.100 Scope of subpart.

49.101 Authorities and responsibilities.

49.102 Notice of termination.

49.103 Methods of settlement.

49.104 Duties of prime contractor after receipt of notice of termination.

49.105 Duties of termination contracting officer after issuance of notice of termination.

49.105-1 Termination status reports.

49.105-2 Release of excess funds.

49.105-3 Termination case file.

49.105-4 Cleanup of construction site.

49.106 Fraud or other criminal conduct.

49.107 Audit of prime contract settlement proposals and subcontract settlements.

49.108 Settlement of subcontract settlement proposals.

49.108-1 Subcontractor’s rights.

49.108-2 Prime contractor’s rights and obligations.

49.108-3 Settlement procedure.

49.108-4 Authorization for subcontract settlements without approval or ratification.

49.108-5 Recognition of judgments and arbitration awards.

49.108-6 Delay in settling subcontractor settlement proposals.

49.108-7 Government assistance in settling subcontracts.

49.108-8 Assignment of rights under subcontracts.

49.109 Settlement agreements.
49.109-1 General.

49.109-2 Reservations.

49.109-3 Government property.

49.109-4 No-cost settlement.

49.109-5 Partial settlements.

49.109-6 Joint settlement of two or more settlement proposals.

49.109-7 Settlement by determination.

49.110 Settlement negotiation memorandum.

49.111 Review of proposed settlements.

49.112 Payment.

49.112-1 Partial payments.

49.112-2 Final payment.

49.113 Cost principles.

49.114 Unsettled contract changes.

49.115 Settlement of terminated incentive contracts.

Subpart 49.2 - Additional Principles for Fixed-Price Contracts Terminated for Convenience

49.201 General.

49.202 Profit.

49.203 Adjustment for loss.

49.204 Deductions.

49.205 Completed end items.

49.206 Settlement proposals.

49.206-1 Submission of settlement proposals.

49.206-2 Bases for settlement proposals.

49.206-3 Submission of inventory disposal schedules.

49.207 Limitation on settlements.

49.208 Equitable adjustment after partial termination.

Subpart 49.3 - Additional Principles for Cost-Reimbursement Contracts Terminated for Convenience
49.301 General.

49.302 Discontinuance of vouchers.

49.303 Procedure after discontinuing vouchers.

49.303-1 Submission of settlement proposal.

49.303-2 Submission of inventory disposal schedules.

49.303-3 Audit of settlement proposal.

49.303-4 Adjustment of indirect costs.

49.303-5 Final settlement.

49.304 Procedure for partial termination.

49.304-1 General.

49.304-2 Submission of settlement proposal (fee only).

49.304-3 Submission of vouchers.

49.305 Adjustment of fee.

49.305-1 General.

49.305-2 Construction contracts.

Subpart 49.4 - Termination for Default

49.401 General.

49.402 Termination of fixed-price contracts for default.

49.402-1 The Government’s right.

49.402-2 Effect of termination for default.

49.402-3 Procedure for default.

49.402-4 Procedure in lieu of termination for default.

49.402-5 Memorandum by the contracting officer.

49.402-6 Repurchase against contractor’s account.

49.402-7 Other damages.

49.402-8 Reporting Information.

49.403 Termination of cost-reimbursement contracts for default.

49.404 Surety-takeover agreements.
49.405 Completion by another contractor.

49.406 Liquidation of liability.

Subpart 49.5 - Contract Termination Clauses

49.501 General.

49.502 Termination for convenience of the Government.

49.503 Termination for convenience of the Government and default.

49.504 Termination of fixed-price contracts for default.

49.505 Other termination clauses.

Subpart 49.6 - Contract Termination Forms and Formats

49.601 Notice of termination for convenience.

49.601-1 Electronic notice.

49.601-2 Letter notice.

49.602 Forms for settlement of terminated contracts.

49.602-1 Termination settlement proposal forms.

49.602-2 Inventory forms.

49.602-3 Schedule of accounting information.

49.602-4 Partial payments.

49.602-5 Settlement agreement.

49.603 Formats for termination for convenience settlement agreements.

49.603-1 Fixed price contracts-complete termination.

49.603-2 Fixed-price contracts-partial termination.

49.603-3 Cost reimbursement contracts-complete termination, if settlement includes cost.

49.603-4 Cost-reimbursement contracts-complete termination, with settlement limited to fee.

49.603-5 Cost-reimbursement contracts-partial termination.

49.603-6 No-cost settlement agreement-complete termination.

49.603-7 No-cost settlement agreement-partial termination.

49.603-8 Fixed-price contracts-settlements with subcontractors only.

49.603-9 Settlement of reservations.
49.604 Release of excess funds under terminated contracts.

49.605 Request to settle subcontractor settlement proposals.

49.606 Granting subcontract settlement authorization.

49.607 Delinquency notices.

Parent topic: Federal Acquisition Regulation

49.000 Scope of part.

This part establishes policies and procedures relating to the complete or partial termination of

contracts for the convenience of the Government or for default. It prescribes contract clauses

relating to termination and excusable delay and includes instructions for using termination and

settlement forms.

49.001 Definitions.

As used in this partOther work means any current or scheduled work of the contractor, whether Government or

commercial, other than work related to the terminated contract.

Plant clearance period, as used in this subpart, means the period beginning on the effective date of

contract completion or termination and ending 90 days (or such longer period as may be agreed to)

after receipt by the contracting officer of acceptable inventory schedules for each property

classification. The final phase of the plant clearance period means that period after receipt of

acceptable inventory schedules.

Settlement agreement means a written agreement in the form of a contract modification settling all

or a severable portion of a settlement proposal.

Settlement proposal means a proposal for effecting settlement of a contract terminated in whole or

in part, submitted by a contractor or subcontractor in the form, and supported by the data, required

by this part. A settlement proposal is included within the generic meaning of the word "claim" under

false claims acts (see 18 U.S.C.287 and 31 U.S.C.3729).

Unsettled contract change means any contract change or contract term for which a definitive

modification is required but has not been executed.

49.002 Applicability.

(a)

(1) This part applies to contracts that provide for termination for the convenience of the Government

or for the default of the contractor (see also 12.403 and 13.302-4).
(2) This part does not apply to commercial product and commercial service contracts awarded using

part 12 procedures. See 12.403 for termination policies for contracts for the acquisition of

commercial products and commercial services. However, for contracts for the acquisition of

commercial products and commercial services, this part provides administrative guidance which

may be followed unless it is inconsistent with the requirements and procedures in 12.403,

Termination, and the clause at 52.212-4, Contract Terms and Conditions-Commercial Products and

Commercial Services.

(b) Contractors shall use this part, unless inappropriate, to settle subcontracts terminated as a result

of modification of prime contracts. The contracting officer shall use this part as a guide in evaluating

settlements of subcontracts terminated for the convenience of a contractor whenever the settlement

will be the basis of a proposal for reimbursement from the Government under a cost-reimbursement

contract.

(c) The contracting officer may use this part in determining an equitable adjustment resulting from a

modification under the Changes clause of any contract, except cost-reimbursement contracts.

(d) When action to be taken or authority to be exercised under this part depends upon the "amount"

of the settlement proposal, that amount shall be determined by deducting from the gross settlement

proposed the amounts payable for completed articles or work at the contract price and amounts for

the settlement of subcontractor settlement proposals. Credits for retention or other disposal of

termination inventory and amounts for advance or partial payments shall not be deducted.

Subpart 49.1 - General Principles

49.100 Scope of subpart.

(a) This subpart deals with-

(1) The authority and responsibility of contracting officers to terminate contracts in whole or in part

for the convenience of the Government or for default;

(2) Duties of the contractor and the contracting officer after issuance of the notice of termination;

(3) General procedures for the settlement of terminated contracts; and

(4) Settlement agreements.

(b) Additional principles applicable to the termination for convenience and settlement of fixed-price

and cost-reimbursement contracts are included in subparts 49.2 and 49.3. Additional principles

applicable to the termination of contracts for default are included in subpart 49.4.

49.101 Authorities and responsibilities.

(a) The termination clauses or other contract clauses authorize contracting officers to terminate

contracts for convenience, or for default, and to enter into settlement agreements under this

regulation.
(b) The contracting officer shall terminate contracts, whether for default or convenience, only when

it is in the Government’s interest. The contracting officer shall effect a no-cost settlement instead of

issuing a termination notice when-

(1) It is known that the contractor will accept one,

(2) Government property was not furnished, and

(3) There are no outstanding payments, debts due the Government, or other contractor obligations.

(c) When the price of the undelivered balance of the contract is less than $5,000, the contract should

not normally be terminated for convenience but should be permitted to run to completion.

(d) After the contracting officer issues a notice of termination, the termination contracting officer

(TCO) is responsible for negotiating any settlement with the contractor, including a no-cost

settlement if appropriate. Auditors and TCO’s shall promptly schedule and complete audit reviews

and negotiations, giving particular attention to the need for timely action on all settlements involving

small business concerns.

(e) If the same item is under contract with both large and small business concerns and it is

necessary to terminate for convenience part of the units still to be delivered, preference shall be

given to the continuing performance of small business contracts over large business contracts unless

the chief of the contracting office determines that this is not in the Government’s interest.

(f) The contracting officer is responsible for the release of excess funds resulting from the

termination unless this responsibility is specifically delegated to the TCO.

49.102 Notice of termination.

(a) General. The contracting officer shall terminate contracts for convenience or default only by a

written notice to the contractor (see 49.601). The notice of termination may be expedited by means

of electronic communication capable of providing confirmation of receipt by the contractor. When

the notice is mailed, it shall be sent by certified mail, return receipt requested. When the contracting

office arranges for hand delivery of the notice, a written acknowledgment shall be obtained from the

contractor. The notice shall state-

(1) That the contract is being terminated for the convenience of the Government (or for default)

under the contract clause authorizing the termination;

(2) The effective date of termination;

(3) The extent of termination;

(4) Any special instructions; and

(5) The steps the contractor should take to minimize the impact on personnel if the termination,

together with all other outstanding terminations, will result in a significant reduction in the

contractor’s work force (see paragraph (g) of the notice in 49.601-2). If the termination notice is by

telegram, include these "steps" in the confirming letter or modification.

(b) Distribution of copies. The contracting officer shall simultaneously send the termination notice to

the contractor, and a copy to the contract administration office and to any known assignee,
guarantor, or surety of the contractor.

(c) Amendment of termination notice. The contracting officer may amend a termination notice to-

(1) Correct nonsubstantive mistakes in the notice;

(2) Add supplemental data or instructions; or

(3) Rescind the notice if it is determined that items terminated had been completed or shipped

before the contractor’s receipt of the notice.

(d) Reinstatement of terminated contracts. Upon written consent of the contractor, the contracting

office may reinstate the terminated portion of a contract in whole or in part by amending the notice

of termination if it has been determined in writing that-

(1) Circumstances clearly indicate a requirement for the terminated items; and

(2) Reinstatement is advantageous to the Government.

49.103 Methods of settlement.

Settlement of terminated cost-reimbursement contracts and fixed-price contracts terminated for

convenience may be effected by (a) negotiated agreement, (b) determination by the TCO, (c) costingout under vouchers using SF 1034, Public Voucher for Purchases and Services Other Than Personal,

for cost-reimbursement contracts (as prescribed in subpart 49.3), or (d) a combination of these

methods. When possible, the TCO should negotiate a fair and prompt settlement with the contractor.

The TCO shall settle a settlement proposal by determination only when it cannot be settled by

agreement.

49.104 Duties of prime contractor after receipt of notice of termination.

After receipt of the notice of termination, the contractor shall comply with the notice and the

termination clause of the contract, except as otherwise directed by the TCO. The notice and clause

applicable to convenience terminations generally require that the contractor-

(a) Stop work immediately on the terminated portion of the contract and stop placing subcontracts

thereunder;

(b) Terminate all subcontracts related to the terminated portion of the prime contract;

(c) Immediately advise the TCO of any special circumstances precluding the stoppage of work;

(d) Perform the continued portion of the contract and submit promptly any request for an equitable

adjustment of price for the continued portion, supported by evidence of any increase in the cost, if

the termination is partial;

(e) Take necessary or directed action to protect and preserve property in the contractor’s possession

in which the Government has or may acquire an interest and, as directed by the TCO, deliver the

property to the Government;
(f) Promptly notify the TCO in writing of any legal proceedings growing out of any subcontract or

other commitment related to the terminated portion of the contract;

(g) Settle outstanding liabilities and proposals arising out of termination of subcontracts, obtaining

any approvals or ratifications required by the TCO;

(h) Promptly submit the contractor’s own settlement proposal, supported by appropriate schedules;

and

(i) Dispose of termination inventory, as directed or authorized by the TCO.

49.105 Duties of termination contracting officer after issuance of notice of

termination.

(a) Consistent with the termination clause and the notice of termination, the TCO shall-

(1) Direct the action required of the prime contractor;

(2) Examine the settlement proposal of the prime contractor and, when appropriate, the settlement

proposals of sub-contractors;

(3) Promptly negotiate settlement with the contractor and enter into a settlement agreement; and

(4) Promptly settle the contractor’s settlement proposal by determination for the elements that

cannot be agreed on, if unable to negotiate a complete settlement.

(b) To expedite settlement, the TCO may request specially qualified personnel to-

(1) Assist in dealings with the contractor;

(2) Advise on legal and contractual matters;

(3) Conduct accounting reviews and advise and assist on accounting matters; and

(4) Perform the following functions regarding termination inventory (see subpart 45.6):

(i) Verify its existence.

(ii) Determine qualitative and quantitative allocability.

(iii) Make recommendations concerning serviceability.

(iv) Undertake necessary screening and redistribution.

(v) Assist the contractor in accomplishing other disposition.

(c) The TCO should promptly hold a conference with the contractor to develop a definite program for

effecting the settlement. When appropriate in the judgment of the TCO, after consulting with the

contractor, principal subcontractors should be requested to attend. Topics that should be discussed

at the conference and documented include-

(1) General principles relating to the settlement of any settlement proposal, including obligations of
the contractor under the termination clause of the contract;

(2) Extent of the termination, point at which work is stopped, and status of any plans, drawings, and

information that would have been delivered had the contract been completed;

(3) Status of any continuing work;

(4) Obligation of the contractor to terminate subcontracts and general principles to be followed in

settling subcontractor settlement proposals;

(5) Names of subcontractors involved and the dates termination notices were issued to them;

(6) Contractor personnel handling review and settlement of subcontractor settlement proposals and

the methods being used;

(7) Arrangements for transfer of title and delivery to the Government of any material required by the

Government;

(8) General principles and procedures to be followed in the protection, preservation, and disposition

of the contractor’s and subcontractors’ termination inventories, including the preparation of

termination inventory schedules;

(9) Contractor accounting practices and preparation of SF 1439 (Schedule of Accounting

Information (49.602-3));

(10) Form in which to submit settlement proposals;

(11) Accounting review of settlement proposals;

(12) Any requirement for interim financing in the nature of partial payments;

(13) Tentative time schedule for negotiation of the settlement, including submission by the

contractor and subcontractors of settlement proposals, termination inventory schedules, and

accounting information schedules (see 49.206-3 and 49.303-2);

(14) Actions taken by the contractor to minimize impact upon employees affected adversely by the

termination (see paragraph (g) of the letter notice in 49.601-2); and

(15) Obligation of the contractor to furnish accurate, complete, and current cost or pricing data, and

to certify to that effect in accordance with 15.403-4(a)(1) when the amount of a termination

settlement agreement, or a partial termination settlement agreement plus the estimate to complete

the continued portion of the contract exceeds the threshold in 15.403-4.

49.105-1 Termination status reports.

When the TCO and contracting officer are in different activities, the TCO will furnish periodic status

reports on termination actions to the contracting office upon request. The contracting office shall

specify the information required.
49.105-2 Release of excess funds.

(a) The TCO shall estimate the funds required to settle the termination, and within 30 days after the

receipt of the termination notice, recommend the release of excess funds to the contracting officer.

The initial deobligation of excess funds should be accomplished in a timely manner by the

contracting officer, or the TCO, if delegated the responsibility. The TCO shall not recommend the

release of amounts under $1,000, unless requested by the contracting officer.

(b) The TCO shall maintain continuous surveillance of required funds to permit timely release of any

additional excess funds (a recommended format for release of excess funds is in 49.604). If previous

releases of excess funds result in a shortage of the amount required for settlement, the TCO shall

promptly inform the contracting officer, who shall reinstate the funds within 30 days.

49.105-3 Termination case file.

The TCO responsible for negotiating the final settlement shall establish a separate case file for each

termination. This file will include memoranda and records of all actions relative to the settlement

(see 4.801).

49.105-4 Cleanup of construction site.

In the case of terminated construction contracts, the contracting officer shall direct action to ensure

the cleanup of the site, protection of serviceable materials, removal of hazards, and other action

necessary to leave a safe and healthful site.

49.106 Fraud or other criminal conduct.

If the TCO suspects fraud or other criminal conduct related to the settlement of a terminated

contract, the TCO shall discontinue negotiations and report the facts under agency procedures.

49.107 Audit of prime contract settlement proposals and subcontract

settlements.

(a) The TCO shall refer each prime contractor settlement proposal valued at or above the threshold

for obtaining certified cost or pricing data set forth in FAR 15.403-4(a)(1) to the appropriate audit

agency for review and recommendations. The TCO may submit settlement proposals of less than the

threshold for obtaining certified cost or pricing data to the audit agency. Referrals shall indicate any

specific information or data that the TCO considers relevant and shall include facts and

circumstances that will assist the audit agency in performing its function. The audit agency shall

develop requested information and may make any further accounting reviews it considers

appropriate. After its review, the audit agency shall submit written comments and recommendations

to the TCO. When a formal examination of settlement proposals valued under the threshold for

obtaining certified cost or pricing data is not warranted, the TCO will perform or have performed a

desk review and include a written summary of the review in the termination case file.
(b) The TCO shall refer subcontract settlements received for approval or ratification to the

appropriate audit agency for review and recommendations when—

(1) The amount exceeds the threshold for obtaining certified cost or pricing data; or

(2) The TCO determines that a complete or partial accounting review is advisable. The audit agency

shall submit written comments and recommendations to the TCO. The review by the audit agency

does not relieve the prime contractor or higher tier subcontractor of the responsibility for

performing an accounting review.

(c)

(1) The responsibility of the prime contractor and of each subcontractor (see 49.108) includes

performance of accounting reviews and any necessary field audits. However, the TCO should request

the Government audit agency to perform the accounting review of a subcontractor’s settlement

proposal when-

(i) A subcontractor objects, for competitive reasons, to an accounting review of its records by an

upper tier contractor;

(ii) The Government audit agency is currently performing audit work at the subcontractor’s plant, or

can perform the audit more economically or efficiently;

(iii) Audit by the Government is necessary for consistent audit treatment and orderly administration;

or

(iv) The contractor has a substantial or controlling financial interest in the subcontractor.

(2) The audit agency should avoid duplication of accounting reviews performed by the upper tier

contractor on subcontractor settlement proposals. However, this should not preclude the

Government from making additional reviews when appropriate. When the contractor is performing

accounting reviews according to this section, the TCO should request the audit agency to

periodically examine the contractor’s accounting review procedures and performance, and to make

appropriate comments and recommendations to the TCO.

(d) The audit report is advisory only, and is for the TCO to use in negotiating a settlement or issuing

a unilateral determination. Government personnel handling audit reports must be careful not to

reveal privileged information or information that will jeopardize the negotiation position of the

Government, the prime contractor, or a higher tier subcontractor. Consistent with this, and when in

the Government’s interest, the TCO may furnish audit reports under paragraph (c) of this section to

prime and higher tier subcontractors for their use in settling subcontract settlement proposals.

49.108 Settlement of subcontract settlement proposals.

49.108-1 Subcontractor’s rights.

A subcontractor has no contractual rights against the Government upon the termination of a prime

contract. A subcontractor may have rights against the prime contractor or intermediate

subcontractor with whom it has contracted. Upon termination of a prime contract, the prime

contractor and each subcontractor are responsible for the prompt settlement of the settlement
proposals of their immediate subcontractors.

49.108-2 Prime contractor’s rights and obligations.

(a) Termination for convenience clauses provide that after receipt of a termination notice the prime

contractor shall, unless directed otherwise by the TCO, terminate all subcontracts to the extent that

they relate to the performance of prime work terminated. Therefore, prime contractors should

include a termination clause in their subcontracts for their own protection. Suggestions regarding

use of subcontract termination clauses are in subpart 49.5.

(b) The failure of a prime contractor to include an appropriate termination clause in any subcontract,

or to exercise the clause rights, shall not-

(1) Affect the Government’s right to require the termination of the subcontract; or

(2) Increase the obligation of the Government beyond what it would have been if the subcontract had

contained an appropriate clause.

(c) In any case, the reasonableness of the prime contractor’s settlement with the subcontractor

should normally be measured by the aggregate amount due under paragraph (f) of the subcontract

termination clause suggested in 49.502(e). The TCO shall allow reimbursement in excess of that

amount only in unusual cases and then only to the extent that the terms of the subcontract did not

unreasonably increase the rights of the subcontractor.

49.108-3 Settlement procedure.

(a) Contractors shall settle with subcontractors in general conformity with the policies and

principles relating to settlement of prime contracts in this subpart and subparts 49.2 or 49.3.

However, the basis and form of the subcontractor’s settlement proposal must be acceptable to the

prime contractor or the next higher tier subcontractor. Each settlement must be supported by

accounting data and other information sufficient for adequate review by the Government. In no

event will the Government pay the prime contractor any amount for loss of anticipatory profits or

consequential damages resulting from the termination of any subcontract (but see 49.108-5).

(b) Except as provided in 49.108-4, the TCO shall require that-

(1) All subcontractor termination inventory be disposed of and accounted for in accordance with the

procedures contained in paragraph (j) of the clause at 52.245-1, Government Property; and

(2) The prime contractor submit, for approval or ratification, all termination settlements with

subcontractors.

(c) The TCO shall promptly examine each subcontract settlement received to determine that the

subcontract termination was made necessary by the termination of the prime contract (or by

issuance of a change order-see 49.002(b)). The TCO will also determine if the settlement was arrived

at in good faith, is reasonable in amount, and is allocable to the terminated portion of the contract

(or, if allocable only in part, that the proposed allocation is reasonable). In considering the

reasonableness of any subcontract settlement, the TCO shall generally be guided by the provisions

of this part relating to the settlement of prime contracts, and shall comply with any applicable
requirements of 49.107 and 49.111 relating to accounting and other reviews. After the examination,

the TCO shall notify the contractor in writing of-

(1) Approval or ratification, or

(2) The reasons for disapproval.

49.108-4 Authorization for subcontract settlements without approval or ratification.

(a)

(1) The TCO may, upon written request, give written authorization to the prime contractor to

conclude settlements of subcontracts terminated in whole or in part without approval or ratification

when the amount of settlement (see 49.002(d)) is $100,000 or less, if-

(i) The TCO is satisfied with the adequacy of the procedures used by the contractor in settling

settlement proposals, including proposals for retention, sale, or other disposal of termination

inventory of the immediate and lower tier subcontractors (the TCO shall obtain the advice and

recommendations of-

(A) The appropriate audit agency relating to the adequacy of the contractor’s audit administration,

including personnel, and

(B) The cognizant plant clearance officer relating to the adequacy of the contractor’s procedures and

personnel for the administration of property disposal matters);

(ii) Any termination inventory included in determining the amount of the settlement will be disposed

of as directed by the prime contractor, except that the disposition of the inventory shall not be

subject to-

(A) Review by the TCO under 49.108-3(c); or

(B) The screening requirements in 45.602-3; and

(iii) A certificate similar to the certificate in the settlement proposal form in 49.602-1(a) will

accompany the settlement.

(2) Except as provided in paragraph (a)(4) of this section, authority granted to a prime contractor

under paragraph (a)(1) of this section by any TCO shall apply to all Executive agencies’ prime

contracts that are terminated, or modified by change orders.

(3) Except as provided in paragraph (a)(4) of this section, the TCO shall accept, as part of the prime

contractor’s settlement proposal, settlements of terminated lower tier subcontracts concluded by

any of the prime contractor’s immediate or lower tier subcontractors who have been granted

authority as prime contractors to settle subcontracts; provided, that the settlement is within the

limit of the authority. Authorization to settle proposals of lower tier subcontractors shall not be

granted directly to subcontractors. However, a prime contractor authorized to approve

subcontractor settlements may also exercise this authority in its capacity as a subcontractor, with

respect to its terminated subcontracts and orders. When exercising this authority as a

subcontractor, the contractor shall notify the purchaser.
(4) The provisions of paragraphs (a)(1), (2), and (3) of this section shall not apply to contracts under

the administration of any contracting officer if the contracting officer so notifies the prime

contractor concerned. This notice shall

(i) Be in writing, and

(ii) If paragraph (a)(3) of this section is involved, specify any subcontractor affected.

(b) Section 45.602 shall apply to disposal of completed end items allocable to the terminated

subcontract. However, these items may be disposed of without review by the TCO under 49.108-3

and without screening under 45.602-3, if the items do not require demilitarization and the total

amount (at the subcontract price) when added to the amount of the settlement does not exceed the

amount authorized under this subsection.

(c) A TCO granting the authorization in paragraph (a)(1) of this section shall periodically (at least

annually) make a selective review of settlements and settlement procedures to determine if the

contractor is making adequate reviews and fair settlements, and whether the authorization should

remain in effect. The TCO shall obtain the advice and recommendations of the appropriate audit

agency and the cognizant plant clearance officer. When it is determined that the contractor’s

procedures are not adequate, or that improper settlements are being made, or when the authority

has not been used in the preceding 2 years, the TCO shall revoke the authorization by written notice

to the contractor, effective on the date of receipt.

(d) The contractor may make any number of separate settlements with a single subcontractor but

shall not divide settlement proposals solely to bring them under an authorization limit. Separate

settlement proposals that would normally be included in a single proposal, such as those based on a

series of separate orders for the same item under one contract, shall be consolidated whenever

possible.

(e) Upon written request of the contractor, the TCO may increase an authorization granted under

paragraph (a)(1) of this subsection to authorize the contractor to conclude settlements under a

particular prime contract. The TCO may limit the increased authorization to specific subcontracts or

classes of subcontracts.

(f) Authorizations granted under this 49.108-4 shall not authorize the settlement of requisitions or

orders placed with any unit within the contractor’s corporate entity.

(g) Recommended formats for a request to settle subcontractor settlement proposals and the TCO’s

letter of authorization to the contractor are in 49.605 and 49.606, respectively.

49.108-5 Recognition of judgments and arbitration awards.

(a) When a subcontractor obtains a final judgment against a prime contractor, the TCO shall, for the

purposes of settling the prime contract, treat the amount of the judgment as a cost of settling with

the contractor, to the extent the judgment is properly allocable to the terminated portion of the

prime contract, if-

(1) The prime contractor has made reasonable efforts to include in the subcontract a termination

clause described in 49.502(e), 49.503(c), or a similar clause excluding payment of anticipatory

profits or consequential damages;
(2) The provisions of the subcontract relating to the rights of the parties upon its termination are fair

and reasonable and do not unreasonably increase the common law rights of the subcontractor;

(3) The contractor made reasonable efforts to settle the settlement proposal of the subcontractor;

(4) The contractor gave prompt notice to the contracting officer of the initiation of the proceedings

in which the judgment was rendered and did not refuse to give the Government control of the

defense of the proceedings; and

(5) The contractor diligently defended the suit or, if the Government assumed control of the defense

of the proceedings, rendered reasonable assistance requested by the Government.

(b) If the conditions in paragraphs (a)(1) through (5) of this section are not all met, the TCO may

allow the contractor the part of the judgment considered fair for settling the subcontract settlement

proposal, giving due regard to the policies in this part for settlement of proposals.

(c) When a contractor and a subcontractor submit the subcontractor’s settlement proposal to

arbitration under any applicable law or contract provision, the TCO shall recognize the arbitration

award as the cost of settling the proposal of the contractor to the same extent and under the same

conditions as in paragraphs (a) and (b) of this section.

49.108-6 Delay in settling subcontractor settlement proposals.

When a prime contractor’s inability to settle with a subcontractor delays the settlement of the prime

contract, the TCO may settle with the prime contractor. The TCO shall except the subcontractor

settlement proposal from the settlement in whole or part and reserve the rights of the Government

and the prime contractor with respect to the subcontractor proposal.

49.108-7 Government assistance in settling subcontracts.

In unusual cases the TCO may determine, with the consent of the prime contractor, that it is in the

Government’s interest to provide assistance to the prime contractor in the settlement of a particular

subcontract. In these situations, the Government, the prime contractor, and a subcontractor may

enter into an agreement covering the settlement of one or more subcontracts. In these settlements,

the subcontractor shall be paid through the prime contractor as part of the overall settlement with

the prime contractor.

49.108-8 Assignment of rights under subcontracts.

(a) The termination for convenience clauses in 52.249, except the short-form clauses, obligate the

prime contractor to assign to the Government, as directed by the TCO, all rights, titles, and interest

under any subcontract terminated because of termination of the prime contract. The TCO shall not

require the assignment unless it is in the Government’s interest.

(b) The termination for convenience clauses (except the short-form clauses) also provide the

Government the right, in its discretion, to settle and pay any settlement proposal arising out of the

termination of subcontracts. This right does not obligate the Government to settle and pay

settlement proposals of subcontractors. As a general rule, the prime contractor is obligated to settle
and pay these proposals. However, when the TCO determines that it is in the Government’s interest,

the TCO shall, after notifying the contractor, settle the subcontractor’s proposal using the

procedures for settlement of prime contracts. An example in which the Government’s interest would

be served is when a subcontractor is a sole source and it appears that a delay by the prime

contractor in settlement or payment of the subcontractor’s proposal will jeopardize the financial

position of the subcontractor. Direct settlements with subcontractors are not encouraged.

49.109 Settlement agreements.

49.109-1 General.

When a termination settlement has been negotiated and all required reviews have been obtained,

the contractor and the TCO shall execute a settlement agreement on Standard Form 30 (Amendment

of Solicitation/Modification of Contract) (see 49.603). The settlement shall cover-

(a) Any setoffs that the Government has against the contractor that may be applied against the

terminated contract and

(b) All settlement proposals of subcontractors, except proposals that are specifically excepted from

the agreement and reserved for separate settlement.

49.109-2 Reservations.

(a) The TCO shall-

(1) Reserve in the settlement agreement any rights or demands of the parties that are excepted from

the settlement;

(2) Ensure that the wording of the reservation does not create any rights for the parties beyond

those in existence before execution of the settlement agreement;

(3) Mark each applicable settlement agreement with "This settlement agreement contains a

reservation" and retain the contract file until the reservation is removed;

(4) Ensure that sufficient funds are retained to cover complete settlement of the reserved items; and

(5) At the appropriate time, prepare a separate settlement of reserved items and include it in a

separate settlement agreement.

(b) A recommended format for settlement of reservations appears in 49.603-9.

49.109-3 Government property.

Before execution of a settlement agreement, the TCO shall determine the accuracy of the

Government property account for the terminated contract. If an audit discloses property for which

the contractor cannot account, the TCO shall reserve in the settlement agreement the rights of the

Government regarding that property or make an appropriate deduction from the amount otherwise
due the contractor.

49.109-4 No-cost settlement.

The TCO shall execute a no-cost settlement agreement (see 49.603-6 or 49.603-7, as applicable) if-

(a) The contractor has not incurred costs for the terminated portion of the contract or

(b) The contractor is willing to waive the costs incurred and

(c) No amounts are due the Government under the contract.

49.109-5 Partial settlements.

The TCO should attempt to settle in one agreement all rights and liabilities of the parties under the

contract except those arising from any continued portion of the contract. Generally, the TCO shall

not attempt to make partial settlements covering particular items of the prime contractor’s

settlement proposal. However, when a TCO cannot promptly complete settlement under the

terminated contract, a partial settlement may be entered into if-

(a) The issues on which agreement has been reached are clearly severable from other issues and

(b) The partial settlement will not prejudice the Government’s or contractor’s interests in disposing

of the unsettled part of the settlement proposal.

49.109-6 Joint settlement of two or more settlement proposals.

(a) With the consent of the contractor, the TCO or TCO’s concerned may negotiate jointly two or

more termination settlement proposals of the same contractor under different contracts, even

though the contracts are with different contracting offices or agencies. In such cases, accounting

work shall be consolidated to the greatest extent practical. The resulting settlement may be

evidenced by one settlement agreement covering all contracts involved or by a separate agreement

for each contract involved.

(b) When the settlement agreement covers more than one contract, it shall-

(1) Clearly identify the contracts involved,

(2) Assign an amendment modification number to each contract,

(3) Apportion the total amount of the settlement among the several contracts on some reasonable

basis,

(4) Have attached or incorporated a schedule showing the apportionment, and

(5) Be distributed and attached to each contract involved in the same manner as other contract

modifications.
49.109-7 Settlement by determination.

(a) General. If the contractor and TCO cannot agree on a termination settlement, or if a settlement

proposal is not submitted within the period required by the termination clause, the TCO shall issue a

determination of the amount due consistent with the termination clause, including any cost

principles incorporated by reference. The TCO shall comply with 49.109-1 through 49.109-6 in

making a settlement by determination and with 49.203 in making an adjustment for loss, if any.

Copies of determinations shall receive the same distribution as other contract modifications.

(b) Notice to contractor. Before issuing a determination of the amount due the contractor, the TCO

shall give the contractor at least 15 days notice by certified mail (return receipt requested) to submit

written evidence, so as to reach the TCO on or before a stated date, substantiating the amount

previously proposed.

(c) Justification of settlement proposal.

(1) The contractor has the burden of establishing, by proof satisfactory to the TCO, the amount

proposed.

(2) The contractor may submit vouchers, verified transcripts of books of account, affidavits, audit

reports, and other documents as desired. The TCO may request the contractor to submit additional

documents and data, and may request appropriate accountings, investigations, and audits.

(3) The TCO may accept copies of documents and records without requiring original documents

unless there is a question of authenticity.

(4) The TCO may hold any conferences considered appropriate-

(i) To confer with the contractor,

(ii) To obtain additional information from Government personnel or from independent experts, or

(iii) To consult persons who have submitted affidavits or reports.

(d) Determinations. After reviewing the information available, the TCO shall determine the amount

due and shall transmit a copy of the determination to the contractor by certified mail (return receipt

requested), or by any other method that provides evidence of receipt. The transmittal letter shall

advise the contractor that the determination is a final decision from which the contractor may

appeal under the Disputes clause, except as shown in paragraph (f) of this section. The

determination shall specify the amount due the contractor and will be supported by detailed

schedules conforming generally to the forms for settlement proposals prescribed in 49.602-1 and by

additional information, schedules, and analyses as appropriate. The TCO shall explain each major

item of disallowance. The TCO need not reconsider any other action relating to the terminated

portion of the contract that was ratified or approved by the TCO or another contracting officer.

(e) Preservation of evidence. The TCO shall retain all written evidence and other data relied upon in

making a determination, except that copies of original books of account need not be made. The TCO

shall return books of account, together with other original papers and documents, to the contractor

within a reasonable time.

(f) Appeals. The contractor may appeal, under the Disputes clause, any settlement by determination,
except when the contractor has failed to submit the settlement proposal within the time provided in

the contract and failed to request an extension of time. The pendency of an appeal shall not affect

the authority of the TCO to settle the settlement proposal or any part by negotiation with the

contractor at any time before the appeal is decided.

(g) Decision on the contractor’s appeal. The TCO shall give effect to a decision of the Claims Court

or a board of contract appeals, when necessary, by an appropriate modification to the contract.

When appropriate, the TCO should obtain a release from the contractor. TCO’s are authorized to

modify the formats of settlement agreements in 49.603 to agree with this provision.

49.110 Settlement negotiation memorandum.

(a) The TCO shall, at the conclusion of negotiations, prepare a settlement negotiation memorandum

describing the principal elements of the settlement for inclusion in the termination case file and for

use by reviewing authorities. Pricing aspects of the settlement shall be documented in accordance

with 15.406-3. The memorandum shall be distributed in accordance with 15.406-3.

(b) If the settlement was negotiated on the basis of individual items, the TCO shall specify the

factors considered for each item. If the settlement was negotiated on an overall lump-sum basis, the

TCO need not evaluate each item or group of items individually, but shall support the total amount of

the recommended settlement in reasonable detail. The memorandum shall include explanations of

matters involving differences and doubtful questions settled by agreement, and the factors

considered. The TCO should include any other matters that will assist reviewing authorities in

understanding the basis for the settlement.

49.111 Review of proposed settlements.

Each agency shall establish procedures, when necessary, for the administrative review of proposed

termination settlements. When one agency provides termination settlement services for another

agency, the agency providing the services shall also perform the settlement review function.

49.112 Payment.

49.112-1 Partial payments.

(a) General. If the contract authorizes partial payments on settlement proposals before settlement, a

prime contractor may request them on the form prescribed in 49.602-4 at any time after submission

of interim or final settlement proposals. The Government will process applications for partial

payments promptly. A subcontractor shall submit its application through the prime contractor which

shall attach its own invoice and recommendations to the subcontractor’s application. Partial

payments to a subcontractor shall be made only through the prime contractor and only after the

prime contractor has submitted its interim or final settlement proposal. Except for undelivered

acceptable finished products, partial payments shall not be made for profit or fee claimed under the

terminated portion of the contract. In exercising discretion on the extent of partial payments to be

made, the TCO shall consider the diligence of the contractor in settling with subcontractors and in

preparing its own settlement proposal.
(b) Amount of partial payment. Before approving any partial payment, the TCO shall obtain any

desired accounting, engineering, or other specialized reviews of the data submitted in support of the

contractor’s settlement proposal. If the reviews and the TCO’s examination of the data indicate that

the requested partial payment is proper, reasonable payments may be authorized in the discretion of

the TCO up to-

(1) 100 percent of the contract price, adjusted for undelivered acceptable items completed before

the termination date, or later completed with the approval of the TCO (see 49.205);

(2) 100 percent of the amount of any subcontract settlement paid by the prime contractor if the

settlement was approved or ratified by the TCO under 49.108-3(c) or was authorized under

49.108-4;

(3) 90 percent of the direct cost of termination inventory, including costs of raw materials,

purchased parts, supplies, and direct labor;

(4) 90 percent of other allowable costs (including settlement expense and manufacturing and

administrative indirect costs) allocable to the terminated portion of the contract and not included in

paragraphs (b)(1), (2), or (3) of this section; and

(5) 100 percent of partial payments made to subcontractors under this section.

(c) Recognition of assignments. When an assignment of claims has been made under the contract,

the Government shall not make partial payments to other than the assignee unless the parties to the

assignment consent in writing (see 32.805(e)).

(d) Security for partial payments. If any partial payment is made for completed end items or for costs

of termination inventory, the TCO shall protect the Government’s interest. This shall be done by

obtaining title to the completed end items or termination inventory, or by the creation of a lien in

favor of the Government, paramount to all other liens, on the completed end items or termination

inventory, or by other appropriate means.

(e) Deductions in computing amount of partial payments. The TCO shall deduct from the gross

amount of any partial payment otherwise payable under 49.112-1(b)-

(1) All unliquidated balances of progress and advance payments (including interest) made to the

contractor, which are allocable to the terminated portion of the contract; and

(2) The amounts of all credits arising from the purchase, retention, or sale of property, the costs of

which are included in the application for payment.

(f) Limitation on total amount. The total amount of all partial payments shall not exceed the amount

that will, in the opinion of the TCO, become due to the contractor because of the termination.

(g) Effect of overpayment. If the total of partial payments exceeds the amount finally determined due

on the settlement proposal, the contractor shall repay the excess to the Government on demand,

together with interest. The interest shall be computed at the rate established by the Secretary of the

Treasury under 50 U.S.C. App.1215(b)(2) from the date the excess payment was received by the

contractor to the date of repayment. However, interest will not be charged for any-

(1) Excess payment attributable to a reduction in the settlement proposal because of retention or

other disposition of termination inventory, until 10 days after the date of the retention or disposition,

or a later date determined by the TCO, or
(2) Overpayment under cost-reimbursement research and development contracts without profit or

fee if the overpayments are repaid to the Government within 30 days after demand.

(h) Certification and approval of partial payments.

(1) The contractor shall place the following certification on vouchers or invoices for partial

payments:

The payment covered by this voucher is a partial payment on the Contractor’s settlement proposal

under contract No. _______________ under part 49 of the Federal Acquisition Regulation.

(2) The TCO shall approve the invoice or voucher by noting on it the following:

Payment of $ ____________ is approved.

49.112-2 Final payment.

(a) Negotiated settlement. After execution of a settlement agreement, the contractor shall submit a

voucher or invoice showing the amount agreed upon, less any portion previously paid. The TCO shall

attach a copy of the settlement agreement to the voucher or invoice and forward the documents to

the disbursing officer for payment.

(b) Settlement by determination. If the settlement is by determination and-

(1) There is no appeal within the allowed time, the contractor shall submit a voucher or invoice

showing the amount determined due, less any portion previously paid; or

(2) There is an appeal, the contractor shall submit a voucher or invoice showing the amount finally

determined due on the appeal, less any portion previously paid. Pending determination of any

appeal, the contractor may submit vouchers or invoices for charges that are not directly involved

with the portion being appealed, without prejudice to the rights of either party on the appeal.

(c) Construction contracts. In the case of construction contracts, before forwarding the final

payment voucher, the contracting officer shall ascertain whether there are any outstanding labor

violations. If so, the contracting officer shall determine the amount to be withheld from the final

payment (see subpart 22.4).

(d) Interest. The Government shall not pay interest on the amount due under a settlement agreement

or a settlement by determination. The Government may, however, pay interest on a successful

contractor appeal from a contracting officer’s determination under the Disputes clause at 52.233-1.

49.113 Cost principles.

The cost principles and procedures in the applicable subpart of part 31 shall, subject to the general

principles in 49.201-

(a) Be used in asserting, negotiating, or determining costs relevant to termination settlements under

contracts with other than educational institutions, and
(b) Be a guide for the negotiation of settlements under contracts for experimental, developmental, or

research work with educational institutions (but see 31.104).

49.114 Unsettled contract changes.

(a) Before settlement of a completely terminated contract, the TCO shall obtain from the contracting

office a list of all related unsettled contract changes. The TCO shall settle, as part of final settlement,

all unsettled contract changes after obtaining the recommendations of the contracting office

concerning the changes.

(b) When the contract has been partially terminated, any outstanding unsettled contract changes

will usually be handled by the contracting officer. However, the contracting officer may delegate this

function to the TCO.

49.115 Settlement of terminated incentive contracts.

(a) Fixed-price incentive contracts. The TCO shall settle terminated fixed-price incentive (FPI)

contracts under the provisions of paragraph (j) of the clause at 52.216-16, Incentive Price RevisionFirm Target, and 52.249-2, Termination for Convenience of the Government (Fixed-Price).

(1) Partial termination. Under a partially terminated contract, the TCO shall negotiate a settlement

as provided in the termination clause of the contract, and paragraph (j) of the clause at 52.216-16,

Incentive Price Revision-Firm Target, or paragraph (1) of the clause at 52.216-17, Incentive Price

Revision-Successive Targets. The contracting officer shall apply the incentive price revision

provisions to completed items accepted by the Government, including any for which the contractor

may request reimbursement in the settlement proposal. The TCO shall reimburse the contractor at

target price for completed articles included in the settlement proposal for which a final price has not

been established. The TCO shall incorporate in the settlement agreement an appropriate reservation

as to final price for these completed articles.

(2) Complete termination. If any items were delivered and accepted by the Government, the

contracting officer shall establish prices under the incentive provisions of the contract. On the

terminated portion of the contract, the provisions of the termination clause (see 52.249-2,

Termination for Convenience of the Government (Fixed-Price)) shall govern and the provisions of the

incentive clause shall not apply. The TCO responsible for the termination settlement will ensure, on

the basis of evidence considered proper (including coordination with the contracting officer), that no

portion of the costs considered in the negotiations under the incentive provisions are included in the

termination settlement.

(b) Cost-plus-incentive-fee contracts. The TCO shall settle terminated cost-plus-incentive-fee

contracts under the clause at 52.249-6, Termination (Cost-Reimbursement).

(1) Partial termination. Under a partial termination, the TCO shall limit the settlement to an

adjustment of target fee as provided in paragraph (e) of the clause at 52.216-10, Incentive Fee. The

settlement agreement shall include a reservation regarding any adjustment of target cost resulting

from the partial termination. The contracting officer shall adjust the target cost, if required.

(2) Complete termination. The parties shall negotiate the settlement under the provisions of subpart 

49.3 and the clause at 52.249-6, Termination (Cost Reimbursement). The fee shall be adjusted on the
basis of the target fee, and the incentive provisions shall not be applied or considered.

Subpart 49.2 - Additional Principles for Fixed-Price

Contracts Terminated for Convenience

49.201 General.

(a) A settlement should compensate the contractor fairly for the work done and the preparations

made for the terminated portions of the contract, including a reasonable allowance for profit. Fair

compensation is a matter of judgment and cannot be measured exactly. In a given case, various

methods may be equally appropriate for arriving at fair compensation. The use of business

judgment, as distinguished from strict accounting principles, is the heart of a settlement.

(b) The primary objective is to negotiate a settlement by agreement. The parties may agree upon a

total amount to be paid the contractor without agreeing on or segregating the particular elements of

costs or profit comprising this amount.

(c) Cost and accounting data may provide guides, but are not rigid measures, for ascertaining fair

compensation. In appropriate cases, costs may be estimated, differences compromised, and doubtful

questions settled by agreement. Other types of data, criteria, or standards may furnish equally

reliable guides to fair compensation. The amount of recordkeeping, reporting, and accounting

related to the settlement of terminated contracts should be kept to a minimum compatible with the

reasonable protection of the public interest.

49.202 Profit.

(a) The TCO shall allow profit on preparations made and work done by the contractor for the

terminated portion of the contract but not on the settlement expenses. Anticipatory profits and

consequential damages shall not be allowed (but see 49.108-5). Profit for the contractor’s efforts in

settling subcontractor proposals shall not be based on the dollar amount of the subcontract

settlement agreements but the contractor’s efforts will be considered in determining the overall rate

of profit allowed the contractor. Profit shall not be allowed the contractor for material or services

that, as of the effective date of termination, have not been delivered by a subcontractor, regardless

of the percentage of completion. The TCO may use any reasonable method to arrive at a fair profit.

(b) In negotiating or determining profit, factors to be considered include-

(1) Extent and difficulty of the work done by the contractor as compared with the total work

required by the contract (engineering estimates of the percentage of completion ordinarily should

not be required, but if available should be considered);

(2) Engineering work, production scheduling, planning, technical study and supervision, and other

necessary services;

(3) Efficiency of the contractor, with particular regard to-

(i) Attainment of quantity and quality production;
(ii) Reduction of costs;

(iii) Economic use of materials, facilities, and manpower; and

(iv) Disposition of termination inventory;

(4) Amount and source of capital and extent of risk assumed;

(5) Inventive and developmental contributions, and cooperation with the Government and other

contractors in supplying technical assistance;

(6) Character of the business, including the source and nature of materials and the complexity of

manufacturing techniques;

(7) The rate of profit that the contractor would have earned had the contract been completed;

(8) The rate of profit both parties contemplated at the time the contract was negotiated; and

(9) Character and difficulty of subcontracting, including selection, placement, and management of

subcontracts, and effort in negotiating settlements of terminated subcontracts.

(c) When computing profit on the terminated portion of a construction contract, the contracting

officer shall-

(1) Comply with paragraphs (a) and (b) of this section;

(2) Allow profit on the prime contractor’s settlements with construction subcontractors for actual

work in place at the job site; and

(3) Exclude profit on the prime contractor’s settlements with construction subcontractors for

materials on hand and for preparations made to complete the work.

49.203 Adjustment for loss.

(a) In the negotiation or determination of any settlement, the TCO shall not allow profit if it appears

that the contractor would have incurred a loss had the entire contract been completed. The TCO

shall negotiate or determine the amount of loss and make an adjustment in the amount of settlement

as specified in paragraph (b) or (c) of this section. In estimating the cost to complete, the TCO shall

consider expected production efficiencies and other factors affecting the cost to complete.

(b) If the settlement is on an inventory basis (see 49.206-2(a)), the contractor shall not be paid more

than the total of the amounts in paragraphs (b)(1), (2), and (3) of this section, less all disposal credits

and all unliquidated advance and progress payments previously made under the contract:

(1) The amount negotiated or determined for settlement expenses.

(2) The contract price, as adjusted, for acceptable completed end items (see 49.205).

(3) The remainder of the settlement amount otherwise agreed upon or determined (including the

allocable portion of initial costs (see 31.205-42(c)), reduced by multiplying the remainder by the

ratio of-
(i) The total contract price to

(ii) The total cost incurred before termination plus the estimated cost to complete the entire

contract.

(c) If the settlement is on a total cost basis (see 49.206-2(b)), the contractor shall not be paid more

than the total of the amounts in paragraphs (c)(1) and (2) of this section, less all disposal and other

credits, all advance and progress payments, and all other amounts previously paid under the

contract:

(1) The amount negotiated or determined for settlement expenses.

(2) The remainder of the total settlement amount otherwise agreed upon or determined (lines 7 and

14 of SF 1436, Settlement Proposal (Total Cost Basis)) reduced by multiplying the remainder by the

ratio of-

(i) The total contract price to

(ii) The remainder plus the estimated cost to complete the entire contract.

49.204 Deductions.

From the amount payable to the contractor under a settlement, the TCO shall deduct-

(a) The agreed price for any part of the termination inventory purchased or retained by the

contractor, and the proceeds from any materials sold that have not been paid or credited to the

Government;

(b) The fair value, as determined by the TCO, of any part of the termination inventory that, before

transfer of title to the Government or to a buyer under part 45, is lost or so damaged as to become

undeliverable (normal spoilage is excepted, as is inventory for which the Government has expressly

assumed the risk of loss); and

(c) Any other amounts as appropriate in the particular case.

49.205 Completed end items.

(a) Promptly after the effective date of termination, the TCO shall (1) have all undelivered completed

end items inspected and accepted if they comply with the contract requirements, and (2) determine

which accepted end items are to be delivered under the contract. The contractor shall invoice

accepted and delivered end items at the contract price in the usual manner and shall not include

them in the settlement proposal. When completed end items, though accepted, are not to be

delivered under the contract, the contractor shall include them in the settlement proposal at the

contract price, adjusted for any saving of freight or other charges, together with any credits for their

purchase, retention, or sale.

(b) Work in place accepted by the Government under a construction contract is not considered a

completed item even though that work may have been paid for at unit prices specified in the

contract.
49.206 Settlement proposals.

49.206-1 Submission of settlement proposals.

(a) Subject to the provisions of the termination clause, the contractor should promptly submit to the

TCO a settlement proposal for the amount claimed because of the termination. The final settlement

proposal must be submitted within oneyear from the effective date of the termination, unless the

period is extended by the TCO. Termination charges under a single prime contract involving two or

more divisions or units of the prime contractor may be consolidated and included in a single

settlement proposal.

(b) The settlement proposal must cover all cost elements including settlements with subcontractors

and any proposed profit. With the consent of the TCO, proposals may be filed in successive steps

covering separate portions of the contractor’s costs. Such interim proposals shall include all costs of

a particular type, except as the TCO may authorize otherwise.

(c) Settlement proposals must be on the forms prescribed in 49.602 unless the forms are inadequate

for a particular contract. Settlement proposals must be in reasonable detail supported by adequate

accounting data. Actual, standard (appropriately adjusted), or average costs may be used in

preparing settlement proposals if they are determined under generally recognized accounting

principles consistently followed by the contractor. When actual, standard, or average costs are not

reasonably available, estimated costs may be used if the method of arriving at the estimates is

approved by the TCO. Contractors shall not be required to maintain unduly elaborate cost

accounting systems merely because their contracts may subsequently be terminated.

(d) The contractor may use the Settlement Proposal (Short Form), SF 1438 (see 49.602-1(d) and

53.249), when the total proposal is less than $10,000, unless otherwise instructed by the TCO.

Settlement proposals that would normally be included in a single settlement proposal; e.g., those

based on a series of separate orders for the same item under one contract, should be consolidated

whenever possible and not divided to bring them below $10,000.

(e) The Schedule of Accounting Information, SF 1439, must be submitted for each termination under

a contract for which a settlement proposal is submitted, except when the Standard Form 1438 is

used. Although several interim proposals may be submitted, SF 1439 need be submitted only once

unless, subsequent to filing the original form, major changes occur in the information submitted.

49.206-2 Bases for settlement proposals.

(a) Inventory basis.

(1) Use of the inventory basis for settlement proposals is preferred. Under this basis, the contractor

may propose only costs allocable to the terminated portion of the contract, and the settlement

proposal must itemize separately-

(i) Metals, raw materials, purchased parts, work in process, finished parts, components, dies, jigs,

fixtures, and tooling, at purchase or manufacturing cost;

(ii) Charges such as engineering costs, initial costs, and general administrative costs;
(iii) Costs of settlements with subcontractors;

(iv) Settlement expenses; and

(v) Other proper charges.

(2) An allowance for profit (49.202) or adjustment for loss (49.203(b)) must be made to complete the

gross settlement proposal. All unliquidated advance and progress payments and all disposal and

other credits known when the proposal is submitted must then be deducted.

(3) This inventory basis is also appropriate for use under the following circumstances:

(i) The partial termination of a construction or related professional services contract.

(ii) The partial or complete termination of supply orders under any terminated construction contract.

(iii) The complete termination of a unit-price (as distinguished from a lump-sum) professional

services contract.

(b) Total cost basis.

(1) When use of the inventory basis is not practicable or will unduly delay settlement, the total-cost

basis (SF 1436) may be used if approved in advance by the TCO as in the following examples:

(i) If production has not commenced and the accumulated costs represent planning and

preproduction or "get ready" expenses.

(ii) If, under the contractor’s accounting system, unit costs for work in process and finished products

cannot readily be established.

(iii) If the contract does not specify unit prices.

(iv) If the termination is complete and involves a letter contract.

(2) When the total-cost basis is used under a complete termination, the contractor must itemize costs

incurred under the contract up to the effective date of termination. The costs of settlements with

subcontractors and applicable settlement expenses must also be added. An allowance for profit

(49.202) or adjustment for loss (49.203(c)) must be made. The contract price for all end items

delivered or to be delivered and accepted must be deducted. All unliquidated advance and progress

payments and disposal and other credits known when the proposal is submitted must also be

deducted.

(3) When the total-cost basis is used under a partial termination, the settlement proposal shall not be

submitted until completion of the continued portion of the contract. The settlement proposal must be

prepared as in paragraph (b)(2) of this section, except that all costs incurred to the date of

completion of the continued portion of the contract must be included.

(4) If a construction contract or a lump-sum professional services contract is completely terminated,

the contractor shall-

(i) Use the total cost basis of settlement;

(ii) Omit Line 10 "Deduct-Finished Product Invoiced or to be Invoiced" from Section II of SF 1436
Settlement Proposal (Total Cost Basis); and

(iii) Reduce the gross amount of the settlement by the total of all progress and other payments.

(c) Other basis. Settlement proposals may not be submitted on any basis other than paragraph (a) or

(b) of this section without the prior approval of the chief of the contracting or contract

administration office.

49.206-3 Submission of inventory disposal schedules.

Subject to the terms of the termination clause, and whenever termination inventory is involved, the

contractor shall submit complete inventory disposal schedules to the TCO reflecting inventory that is

allocable to the terminated portion of the contract. The inventory disposal schedules shall be

submitted within 120 days from the effective date of termination unless otherwise extended by the

TCO based on a written justification to support the extension. The inventory schedules shall be

prepared on Standard Form 1428, Inventory Disposal Schedule.

49.207 Limitation on settlements.

The total amount payable to the contractor for a settlement, before deducting disposal or other

credits and exclusive of settlement costs, must not exceed the contract price less payments

otherwise made or to be made under the contract.

49.208 Equitable adjustment after partial termination.

Under the termination clause, after partial termination, a contractor may request an equitable

adjustment in the price or prices of the continued portion of a fixed-price contract. The TCO shall

forward the proposal to the contracting officer except when negotiation authority is delegated to the

TCO. The contractor shall submit the proposal in the format of Table 15-2 of 15.408.

(a) When the contracting officer retains responsibility for negotiating the equitable adjustment and

executing a supplemental agreement, the contracting officer shall ensure that no portion of an

increase in price is included in a termination settlement made or in process.

(b) The TCO shall also ensure that no portion of the costs included in the equitable adjustment are

included in the termination settlement.

Subpart 49.3 - Additional Principles for Cost-Reimbursement

Contracts Terminated for Convenience

49.301 General.

Termination clauses for cost-reimbursement contracts (see 49.503(a)) provide for the settlement of

costs and fee, if any. The contract clauses governing costs shall determine what costs are allowable.
49.302 Discontinuance of vouchers.

(a) When the contract has been completely terminated, the contractor shall not use

Standard Form 1034 (Public Voucher for Purchases and Services Other than Personal) after the last

day of the sixth month following the month in which the termination is effective. The contractor may

elect to stop using vouchers at any time during the 6-month period. When the contractor has

vouchered out all costs within the 6-month period, a proposal for fee, if any, may be submitted on

SF 1437 (see 49.602-1) or by letter appropriately certified. The contractor must submit a

substantiated proposal for fee to the TCO within 1 year from the effective date of termination, unless

the period is extended by the TCO. When the use of vouchers is discontinued, the contractor shall

submit all unvouchered costs and the proposed fee, if any, as specified in 49.303.

(b) When the contract is partially terminated, 49.304 shall apply.

49.303 Procedure after discontinuing vouchers.

49.303-1 Submission of settlement proposal.

The contractor shall submit a final settlement proposal covering unvouchered costs and any

proposed fee to within 1 year from the effective date of termination, unless the period is extended by

the TCO. The contractor shall use the form prescribed in 49.602-1, unless the TCO authorizes

otherwise. The proposal shall not include costs that have been-

(a) Finally disallowed by the contracting officer; or

(b) Previously vouchered and formally questioned by the Government but not yet decided as to

allowability.

49.303-2 Submission of inventory disposal schedules.

Subject to the terms of the termination clause, and whenever termination inventory is involved, the

contractor shall submit complete inventory disposal schedules to the TCO reflecting inventory that is

allocable to the terminated portion of the contract. The inventory disposal schedules shall be

submitted within 120 days from the effective date of termination unless otherwise extended by the

TCO based on a written justification to support the extension. The inventory disposal schedules shall

be prepared on Standard Form 1428 Inventory Disposal Schedule.

49.303-3 Audit of settlement proposal.

The TCO shall submit the settlement proposal to the appropriate audit agency for review (see

49.107). However, if the settlement proposal is limited to an adjustment of fee, no referral to the

audit agency is required.
49.303-4 Adjustment of indirect costs.

(a) If the contract contains the clause at 52.216-7, Allowable Cost and Payment, and it appears that

adjustment of indirect costs will unduly delay final settlement, the TCO, after obtaining information

from the appropriate audit agency, may agree with the contractor to-

(1) Negotiate the amount of indirect costs for the contract period for which final indirect cost rates

have not been negotiated, or to use billing rates as final rates for this period if the billing rates

appear reasonable; or

(2) Reserve any indirect cost adjustment in the final settlement agreement, pending establishment of

negotiated rates under subpart 42.7.

(b) When an amount of indirect cost is negotiated under paragraph (a)(1) of this section, the

contractor shall eliminate the indirect cost and the related direct costs on which it was based from

the total pool and base used to compute indirect costs for other contracts performed during the

applicable accounting period.

49.303-5 Final settlement.

(a) The TCO shall proceed with the settlement and execution of a settlement agreement upon receipt

of the audit report, if applicable, and the contract audit closing statement covering vouchered costs.

(b) The TCO shall adjust the fee as provided in 49.305.

(c) The final settlement agreement may include all demands of the Government and proposals of the

contractor under the terminated contract. However, no amount shall be allowed for any item of cost

disallowed by the Government, nor for any other item of cost of the same nature.

(d) If an overall settlement of costs is agreed upon, agreement on each element of cost is not

necessary. If appropriate, differences may be compromised and doubtful questions settled by

agreement. An overall settlement shall not include costs that are clearly not allowable under the

terms of the contract.

49.304 Procedure for partial termination.

49.304-1 General.

(a) In a partial termination, the TCO shall limit the settlement to an adjustment of the fee, if any, and

with the concurrence of the contracting office to a reduction in the estimated cost. The TCO shall

adjust the fee as provided in 49.304-2 and 49.305, unless-

(1) The terminated portion is clearly severable from the balance of the contract; or

(2) Performance of the contract is virtually complete, or performance of any continued portion is

only on subsidiary items or spare parts, or is otherwise not substantial.

(b) In the case of the exceptions in paragraph (a), the procedures in 49.302 and 49.303 apply.
49.304-2 Submission of settlement proposal (fee only).

The contractor shall limit the settlement proposal to a proposed reduction in the amount of fee. The

final settlement proposal shall be submitted to the TCO within oneyear from the effective date of

termination, unless the period is extended by the TCO. The proposal may be submitted in the form

prescribed in 49.602-1 or by letter appropriately certified. The contractor shall substantiate the

amount of fee claimed (see 49.305).

49.304-3 Submission of vouchers.

When a partial termination settlement is limited to adjustment of fee, the contractor shall continue

to submit the SF 1034, Public Voucher for Purchases and Services Other than Personal, for costs

reimbursable under the contract. The contractor shall not be reimbursed for costs of settlements

with subcontractors unless required approvals or ratifications have been obtained (see 49.108).

49.305 Adjustment of fee.

49.305-1 General.

(a) The TCO shall determine the adjusted fee to be paid, if any, in the manner provided by the

contract. The determination is generally based on a percentage of completion of the contract or of

the terminated portion. When this basis is used, factors such as the extent and difficulty of the work

performed by the contractor (e.g., planning, scheduling, technical study, engineering work,

production and supervision, placing and supervising subcontracts, and work performed by the

contractor in (1) stopping performance, (2) settling terminated subcontracts, and (3) disposing of

termination inventory) shall be compared with the total work required by the contract or by the

terminated portion. The contractor’s adjusted fee shall not include an allowance for fee for

subcontract effort included in subcontractors’ settlement proposals.

(b) The ratio of costs incurred to the total estimated cost of performing the contract or the

terminated portion is only one factor in computing the percentage of completion. This percentage

may be either greater or less than that indicated by the ratio of costs incurred, depending upon the

evaluation by the TCO of other pertinent factors.

49.305-2 Construction contracts.

(a) The percentage of completion basis refers to the contractor’s total effort and not solely to the

actual construction work. Generally, the effort of a contractor under a cost-reimbursement

construction or professional services contract can be segregated into factors such as-

(1) Mobilization including organization,

(2) Use of finances,

(3) Contracting for and receipt of materials,
(4) Placement of subcontracts,

(5) Preparation of shop drawings,

(6) Work in place performed by own forces,

(7) Supervision of subcontractors’ work,

(8) Job administration, and

(9) Demobilization.

(b) Each of the applicable factors in paragraph (a) of this section shall be assigned a weighted value

depending on its importance and difficulty. The total weight value of all factors should be easily

divisible (e.g., by 100) to determine percentages. The percentage of completion of each factor must

be established based upon the specific facts of each contract. When totaled, the percentage of

completion of each factor applied to the weighted value of each factor results in the overall

percentage of contract completion. The percentage of completion is then applied to the total

contract fee or to the fee applicable to the terminated portion of the contract to arrive at an

equitable adjustment.

Subpart 49.4 - Termination for Default

49.401 General.

(a) Termination for default is generally the exercise of the Government’s contractual right to

completely or partially terminate a contract because of the contractor’s actual or anticipated failure

to perform its contractual obligations.

(b) If the contractor can establish, or it is otherwise determined that the contractor was not in

default or that the failure to perform is excusable; i.e., arose out of causes beyond the control and

without the fault or negligence of the contractor, the default clauses prescribed in 49.503 and

located at 52.249 provide that a termination for default will be considered to have been a

termination for the convenience of the Government, and the rights and obligations of the parties

governed accordingly.

(c) The Government may, in appropriate cases, exercise termination or cancellation rights in

addition to those in the contract clauses (see for example, paragraph (h) of the Default clause at

52.249-8).

(d) For default terminations of orders under Federal Supply Schedule contracts, see subpart 8.4.

(e) Notwithstanding the provisions of this 49.401, the contracting officer may, with the written

consent of the contractor, reinstate the terminated contract by amending the notice of termination,

after a written determination is made that the supplies or services are still required and

reinstatement is advantageous to the Government.
49.402 Termination of fixed-price contracts for default.

49.402-1 The Government’s right.

Under contracts containing the Default clause at 52.249-8, the Government has the right, subject to

the notice requirements of the clause, to terminate the contract completely or partially for default if

the contractor fails to-

(a) Make delivery of the supplies or perform the services within the time specified in the contract,

(b) Perform any other provision of the contract, or

(c) Make progress and that failure endangers performance of the contract.

49.402-2 Effect of termination for default.

(a) Under a termination for default, the Government is not liable for the contractor’s costs on

undelivered work and is entitled to the repayment of advance and progress payments, if any,

applicable to that work. The Government may elect, under the Default clause, to require the

contractor to transfer title and deliver to the Government completed supplies and manufacturing

materials, as directed by the contracting officer.

(b) The contracting officer shall not use the Default clause as authority to acquire any completed

supplies or manufacturing materials unless it has been ascertained that the Government does not

already have title under some other provision of the contract. The contracting officer shall acquire

manufacturing materials under the Default clause for furnishing to another contractor only after

considering the difficulties the other contractor may have in using the materials.

(c) Subject to paragraph (d) of this section, the Government shall pay the contractor the contract

price for any completed supplies, and the amount agreed upon by the contracting officer and the

contractor for any manufacturing materials, acquired by the Government under the Default clause.

(d) The Government must be protected from overpayment that might result from failure to provide

for the Government’s potential liability to laborers and material suppliers for lien rights outstanding

against the completed supplies or materials after the Government has paid the contractor for them.

To accomplish this, before paying for supplies or materials, the contracting officer shall take one or

more of the following measures:

(1) Ascertain whether the payment bonds, if any, furnished by the contractor are adequate to satisfy

all lienors’ claims or whether it is feasible to obtain similar bonds to cover outstanding liens.

(2) Require the contractor to furnish appropriate statements from laborers and material suppliers

disclaiming any lien rights they may have to the supplies and materials.

(3) Obtain appropriate agreement by the Government, the contractor, and lienors ensuring release

of the Government from any potential liability to the contractor or lienors.

(4) Withhold from the amount due for the supplies or materials any amount the contracting officer

determines necessary to protect the Government’s interest, but only if the measures in paragraphs

(d)(1), (2), and (3) of this section cannot be accomplished or are considered inadequate.
(5) Take other appropriate action considering the circumstances and the degree of the contractor’s

solvency.

(e) The contractor is liable to the Government for any excess costs incurred in acquiring supplies

and services similar to those terminated for default (see 49.402-6), and for any other damages,

whether or not repurchase is effected (see 49.402-7).

49.402-3 Procedure for default.

(a) When a default termination is being considered, the Government shall decide which type of

termination action to take (i.e., default, convenience, or no-cost cancellation) only after review by

contracting and technical personnel, and by counsel, to ensure the propriety of the proposed action.

(b) The administrative contracting officer shall not issue a show cause notice or cure notice without

the prior approval of the contracting office, which should be obtained by the most expeditious

means.

(c) Subdivision (a)(1)(i) of the Default clause covers situations when the contractor has defaulted by

failure to make delivery of the supplies or to perform the services within the specified time. In these

situations, no notice of failure or of the possibility of termination for default is required to be sent to

the contractor before the actual notice of termination (but see paragraph (e) of this section).

However, if the Government has taken any action that might be construed as a waiver of the

contract delivery or performance date, the contracting officer shall send a notice to the contractor

setting a new date for the contractor to make delivery or complete performance. The notice shall

reserve the Government’s rights under the Default clause.

(d) Subdivisions (a)(1)(ii) and (a)(1)(iii) of the Default clause cover situations when the contractor

fails to perform some of the other provisions of the contract (such as not furnishing a required

performance bond) or so fails to make progress as to endanger performance of the contract. If the

termination is predicated upon this type of failure, the contracting officer shall give the contractor

written notice specifying the failure and providing a period of 10 days (or longer period as

necessary) in which to cure the failure. When appropriate, this notice may be made a part of the

notice described in paragraph (e)(1) of this section. Upon expiration of the 10 days (or longer

period), the contracting officer may issue a notice of termination for default unless it is determined

that the failure to perform has been cured. A format for a cure notice is in 49.607.

(e)

(1) If termination for default appears appropriate, the contracting officer should, if practicable,

notify the contractor in writing of the possibility of the termination. This notice shall call the

contractor’s attention to the contractual liabilities if the contract is terminated for default, and

request the contractor to show cause why the contract should not be terminated for default. The

notice may further state that failure of the contractor to present an explanation may be taken as an

admission that no valid explanation exists. When appropriate, the notice may invite the contractor to

discuss the matter at a conference. A format for a show cause notice is in 49.607.

(2) When a termination for default appears imminent, the contracting officer shall provide a written

notification to the surety. If the contractor is subsequently terminated for default, a copy of the

notice of default shall be sent to the surety.
(3) If requested by the surety, and agreed to by the contractor and any assignees, arrangements may

be made to have future checks mailed to the contractor in care of the surety. In this case, the

contractor must forward a written request to the designated disbursing officer specifically directing

a change in address for mailing checks.

(4) If the contractor is a small business firm, the contracting officer shall immediately provide a copy

of any cure notice or show cause notice to the contracting office’s small business specialist and the

Small Business Administration Area Office nearest the contractor. The contracting officer should,

whenever practicable, consult with the small business specialist before proceeding with a default

termination (see also 49.402-4).

(f) The contracting officer shall consider the following factors in determining whether to terminate a

contract for default:

(1) The terms of the contract and applicable laws and regulations.

(2) The specific failure of the contractor and the excuses for the failure.

(3) The availability of the supplies or services from other sources.

(4) The urgency of the need for the supplies or services and the period of time required to obtain

them from other sources, as compared with the time delivery could be obtained from the delinquent

contractor.

(5) The degree of essentiality of the contractor in the Government acquisition program and the effect

of a termination for default upon the contractor’s capability as a supplier under other contracts.

(6) The effect of a termination for default on the ability of the contractor to liquidate guaranteed

loans, progress payments, or advance payments.

(7) Any other pertinent facts and circumstances.

(g) If, after compliance with the procedures in paragraphs (a) through (f) of this 49.402-3, the

contracting officer determines that a termination for default is proper, the contracting officer shall

issue a notice of termination stating-

(1) The contract number and date;

(2) The acts or omissions constituting the default;

(3) That the contractor’s right to proceed further under the contract (or a specified portion of the

contract) is terminated;

(4) That the supplies or services terminated may be purchased against the contractor’s account, and

that the contractor will be held liable for any excess costs;

(5) If the contracting officer has determined that the failure to perform is not excusable, that the

notice of termination constitutes such decision, and that the contractor has the right to appeal such

decision under the Disputes clause;

(6) That the Government reserves all rights and remedies provided by law or under the contract, in

addition to charging excess costs; and

(7) That the notice constitutes a decision that the contractor is in default as specified and that the
contractor has the right to appeal under the Disputes clause.

(h) The contracting officer shall make the same distribution of the termination notice as was made of

the contract. A copy shall also be furnished to the contractor’s surety, if any, when the notice is

furnished to the contractor. The surety should be requested to advise if it desires to arrange for

completion of the work. In addition, the contracting officer shall notify the disbursing officer to

withhold further payments under the terminated contract, pending further advice, which should be

furnished at the earliest practicable time.

(i) In the case of a construction contract, promptly after issuance of the termination notice, the

contracting officer shall determine the manner in which the work is to be completed and whether

the materials, appliances, and plant that are on the site will be needed.

(j) If the contracting officer determines before issuing the termination notice that the failure to

perform is excusable, the contract shall not be terminated for default. If termination is in the

Government’s interest, the contracting officer may terminate the contract for the convenience of the

Government.

(k) If the contracting officer has not been able to determine, before issuance of the notice of

termination whether the contractor’s failure to perform is excusable, the contracting officer shall

make a written decision on that point as soon as practicable after issuance of the notice of

termination. The decision shall be delivered promptly to the contractor with a notification that the

contractor has the right to appeal as specified in the Disputes clause.

49.402-4 Procedure in lieu of termination for default.

The following courses of action, among others, are available to the contracting officer in lieu of

termination for default when in the Government’s interest:

(a) Permit the contractor, the surety, or the guarantor, to continue performance of the contract

under a revised delivery schedule.

(b) Permit the contractor to continue performance of the contract by means of a subcontract or other

business arrangement with an acceptable third party, provided the rights of the Government are

adequately preserved.

(c) If the requirement for the supplies and services in the contract no longer exists, and the

contractor is not liable to the Government for damages as provided in 49.402-7, execute a no-cost

termination settlement agreement using the formats in 49.603-6 and 49.603-7 as a guide.

49.402-5 Memorandum by the contracting officer.

When a contract is terminated for default or a procedure authorized by 49.402-4 is followed, the

contracting officer shall prepare a memorandum for the contract file explaining the reasons for the

action taken.

49.402-6 Repurchase against contractor’s account.
(a) When the supplies or services are still required after termination, the contracting officer shall

repurchase the same or similar supplies or services against the contractor’s account as soon as

practicable. The contracting officer shall repurchase at as reasonable a price as practicable,

considering the quality and delivery requirements. The contracting officer may repurchase a

quantity in excess of the undelivered quantity terminated for default when the excess quantity is

needed, but excess cost may not be charged against the defaulting contractor for more than the

undelivered quantity terminated for default (including variations in quantity permitted by the

terminated contract). Generally, the contracting officer will make a decision whether or not to

repurchase before issuing the termination notice.

(b) If the repurchase is for a quantity not over the undelivered quantity terminated for default, the

Default clause authorizes the contracting officer to use any terms and acquisition method deemed

appropriate for the repurchase. However, the contracting officer shall obtain competition to the

maximum extent practicable for the repurchase. The contracting officer shall cite the Default clause

as the authority. If the repurchase is for a quantity over the undelivered quantity terminated for

default, the contracting officer shall treat the entire quantity as a new acquisition.

(c) If repurchase is made at a price over the price of the supplies or services terminated, the

contracting officer shall, after completion and final payment of the repurchase contract, make

written demand on the contractor for the total amount of the excess, giving consideration to any

increases or decreases in other costs such as transportation, discounts, etc. If the contractor fails to

make payment, the contracting officer shall follow the procedures in subpart 32.6 for collecting

contract debts due the Government.

49.402-7 Other damages.

(a) If the contracting officer terminates a contract for default or follows a course of action instead of

termination for default (see 49.402-4), the contracting officer promptly must assess and demand any

liquidated damages to which the Government is entitled under the contract. Under the contract

clause at 52.211-11, these damages are in addition to any excess repurchase costs.

(b) If the Government has suffered any other ascertainable damages, including administrative costs,

as a result of the contractor’s default, the contracting officer must, on the basis of legal advice, take

appropriate action as prescribed in subpart 32.6 to assert the Government’s demand for the

damages.

49.402-8 Reporting Information.

The contracting officer, in accordance with agency procedures, shall ensure that information

relating to the termination for default notice and a subsequent withdrawal or a conversion to a

termination for convenience is reported in accordance with 42.1503(h).

49.403 Termination of cost-reimbursement contracts for default.

(a) The right to terminate a cost-reimbursement contract for default is provided for in the

Termination for Default or for Convenience of the Government clause at 52.249-6. A 10-day notice to

the contractor before termination for default is required in every case by the clause.
(b) Settlement of a cost-reimbursement contract terminated for default is subject to the principles in

subparts 49.1 and 49.3 the same as when a contract is terminated for convenience, except that-

(1) The costs of preparing the contractor’s settlement proposal are not allowable (see paragraph

(h)(3) of the clause); and

(2) The contractor is reimbursed the allowable costs, and an appropriate reduction is made in the

total fee, if any, (see paragraph (h)(4) of the clause).

(c) The contracting officer shall use the procedures in 49.402 to the extent appropriate in

considering the termination for default of a cost-reimbursement contract. However, a costreimbursement contract does not contain any provision for recovery of excess repurchase costs after

termination for default (but see paragraph (g) of the clause at 52.246-3 with respect to failure of the

contractor to replace or correct defective supplies).

49.404 Surety-takeover agreements.

(a) The procedures in this section apply primarily, but not solely, to fixed-price construction

contracts terminated for default.

(b) Since the surety is liable for damages resulting from the contractor’s default, the surety has

certain rights and interests in the completion of the contract work and application of any

undisbursed funds. Therefore, the contracting officer must consider carefully the surety’s proposals

for completing the contract. The contracting officer must take action on the basis of the

Government’s interest, including the possible effect upon the Government’s rights against the

surety.

(c) The contracting officer should permit surety offers to complete the contract, unless the

contracting officer believes that the persons or firms proposed by the surety to complete the work

are not competent and qualified or the proposal is not in the best interest of the Government.

(d) There may be conflicting demands for the defaulting contractor’s assets, including unpaid prior

earnings (retained percentages and unpaid progress estimates). Therefore, the surety may include a

"takeover" agreement in its proposal, fixing the surety’s rights to payment from those funds. The

contracting officer may (but not before the effective date of termination) enter into a written

agreement with the surety. The contracting officer should consider using a tripartite agreement

among the Government, the surety, and the defaulting contractor to resolve the defaulting

contractor’s residual rights, including assertions to unpaid prior earnings.

(e) Any takeover agreement must require the surety to complete the contract and the Government to

pay the surety’s costs and expenses up to the balance of the contract price unpaid at the time of

default, subject to the following conditions:

(1) Any unpaid earnings of the defaulting contractor, including retained percentages and progress

estimates for work accomplished before termination, must be subject to debts due the Government

by the contractor, except to the extent that the unpaid earnings may be used to pay the completing

surety its actual costs and expenses incurred in the completion of the work, but not including its

payments and obligations under the payment bond given in connection with the contract.

(2) The surety is bound by contract terms governing liquidated damages for delays in completion of

the work, unless the delays are excusable under the contract.
(3) If the contract proceeds have been assigned to a financing institution, the surety must not be

paid from unpaid earnings, unless the assignee provides written consent.

(4) The contracting officer must not pay the surety more than the amount it expended completing

the work and discharging its liabilities under the defaulting contractor’s payment bond. Payments to

the surety to reimburse it for discharging its liabilities under the payment bond of the defaulting

contractor must be only on authority of-

(i) Mutual agreement among the Government, the defaulting contractor, and the surety;

(ii) Determination of the Comptroller General as to payee and amount; or

(iii) Order of a court of competent jurisdiction.

49.405 Completion by another contractor.

If the surety does not arrange for completion of the contract, the contracting officer normally will

arrange for completion of the work by awarding a new contract based on the same plans and

specifications. The new contract may be the result of sealed bidding or any other appropriate

contracting method or procedure. The contracting officer shall exercise reasonable diligence to

obtain the lowest price available for completion.

49.406 Liquidation of liability.

(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.

Subpart 49.5 - Contract Termination Clauses

49.501 General.

This subpart prescribes the principal contract termination clauses. This subpart does not apply to

contracts that use the clause at 52.213-4, Terms and Conditions-Simplified Acquisitions (Other Than

Commercial Products and Commercial Services). In appropriate cases, agencies may authorize the

use of special purpose clauses, if consistent with this chapter.

49.502 Termination for convenience of the Government.

(a) Fixed-price contracts that do not exceed the simplified acquisition threshold (short form)-
(1) General use. The contracting officer shall insert the clause at 52.249-1, Termination for

Convenience of the Government (Fixed-Price) (Short Form), in solicitations and contracts when a

fixed-price contract is contemplated and the contract amount is not expected to exceed the

simplified acquisition threshold, except-

(i) If use of the clause at 52.249-4, Termination for Convenience of the Government (Services) (Short

Form) is appropriate,

(ii) In contracts for research and development work with an educational or nonprofit institution on a

no-profit basis,

(iii) In contracts for architect-engineer services, or

(iv) If one of the clauses prescribed or cited at 49.505(a) or (c), is appropriate.

(2) Dismantling and demolition. If the contract is for dismantling, demolition, or removal of

improvements, the contracting officer shall use the clause with its AlternateI.

(b) Fixed-price contracts that exceed the simplified acquisition threshold-

(1)

(i) General use. The contracting officer shall insert the clause at 52.249-2, Termination for

Convenience of the Government (Fixed-Price), in solicitations and contracts when a fixed-price

contract is contemplated and the contract amount is expected to exceed the simplified acquisition

threshold except in contracts for -

(A) Dismantling and demolition,

(B) Research and development work with an educational or nonprofit institution on a no-profit basis,

or

(C) Architect-engineer services; it shall not be used if the clause at 52.249-4, Termination for

Convenience of the Government (Services) (Short Form), is appropriate (see 49.502(c)), or one of the

clauses prescribed or cited at 49.505(a) or (c), is appropriate.

(2) Construction. If the contract is for construction, the contracting officer shall use the clause with

its AlternateI.

(i) Partial payments. If the contract is with an agency of the U.S. Government or with State, local, or

foreign governments or their agencies, and if the contracting officer determines that the

requirement to pay interest on excess partial payments is inappropriate, the contracting officer shall

use the clause with its AlternateII. In such contracts for construction, the contracting officer shall

use the clause with its AlternateIII.

(ii) Dismantling and demolition. The contracting officer shall insert the clause at 52.249-3,

Termination for Convenience of the Government (Dismantling, Demolition, or Removal of

Improvements) in solicitations and contracts for dismantling, demolition, or removal of

improvements, when a fixed-price contract is contemplated and the contract amount is expected to

exceed the simplified acquisition threshold. If the contract is with an agency of the U.S. Government

or with State, local, or foreign governments or their agencies, and if the contracting officer

determines that the requirement to pay interest on excess partial payments is inappropriate, the
contracting officer shall use the clause with its AlternateI.

(c) Service contracts (short form). The contracting officer shall insert the clause at 52.249-4,

Termination for Convenience of the Government (Services) (Short Form), in solicitations and

contracts for services, regardless of value, when a fixed-price contract is contemplated and the

contracting officer determines that because of the kind of services required, the successful offeror

will not incur substantial charges in preparation for and in carrying out the contract, and would, if

terminated for the convenience of the Government, limit termination settlement charges to services

rendered before the date of termination. Examples of services where this clause may be appropriate

are contracts for rental of unreserved parking space, laundry and dry cleaning, etc.

(d) Research and development contracts. The contracting officer shall insert the clause at 52.249-5,

Termination for the Convenience of the Government (Educational and Other Nonprofit Institutions),

in solicitations and contracts when either a fixed-price or cost-reimbursement contract is

contemplated for research and development work with an educational or nonprofit institution on a

nonprofit or no-fee basis.

(e) Subcontracts-

(1) General use. The prime contractor may find the clause at 52.249-1, Termination for Convenience

of the Government (Fixed-Price) (Short Form), or at 52.249-2, Termination for Convenience of the

Government (Fixed-Price), as appropriate, suitable for use in fixed-price subcontracts, except as

noted in paragraph (e)(2) of this section; provided, that the relationship between the contractor and

subcontractor is clearly indicated. Inapplicable conditions (e.g., paragraph (d)) in 52.249-2 should be

deleted and the periods reduced for submitting the subcontractor’s termination settlement proposal

(e.g.,6 months), and for requesting an equitable price adjustment (e.g.,45 days).

(2) Research and development. The prime contractor may find the clause at 52.249-5, Termination

for the Convenience of the Government (Educational and Other Nonprofit Institutions), suitable for

use in subcontracts placed with educational or nonprofit institutions on a no-profit or no-fee basis;

provided, that the relationship between the contractor and subcontractor is clearly indicated.

Inapplicable conditions (e.g., paragraph (h)) should be deleted, the period for submitting the

subcontractor’s termination settlement proposal should be reduced (e.g.,6 months), the subcontract

should be placed on a no-profit or no-fee basis, and the subcontract should incorporate or be

negotiated on the basis of the cost principles in part 31 of the Federal Acquisition Regulation.

49.503 Termination for convenience of the Government and default.

(a) Cost-reimbursement contracts-

(1) General use. Insert the clause at 52.249-6, Termination (Cost-Reimbursement), in solicitations

and contracts when a cost-reimbursement contract is contemplated, except contracts for research

and development with an educational or nonprofit institution on a no-fee basis.

(2) Construction. If the contract is for construction, the contracting officer shall use the clause with

its AlternateI.

(3) Partial payments. If the contract is with an agency of the U.S. Government or with State, local, or

foreign governments or their agencies, and if the contracting officer determines that the
requirement to pay interest on excess partial payments is inappropriate, the contracting officer shall

use the clause with its AlternateII. In such contracts for construction, the contracting officer shall

use the clause with its AlternateIII.

(4) Time-and-material and labor-hour contracts. If the contract is a time-and-material or labor-hour

contract, the contracting officer shall use the clause with its AlternateIV. If the contract is with an

agency of the U.S. Government or with State, local, or foreign governments or their agencies, and if

the contracting officer determines that the requirement to pay interest on excess partial payments is

inappropriate, the contracting officer shall use the clause with its Alternate V.

(b) Insert the clause at 52.249-7, Termination (Fixed-Price Architect-Engineer), in solicitations and

contracts for architect-engineer services, when a fixed-price contract is contemplated.

(c) Subcontracts. The prime contractor may find the clause at 52.249-6, Termination (CostReimbursement), suitable for use in cost-reimbursement subcontracts; provided, that the

relationship between the contractor and subcontractor is clearly indicated. Inapplicable conditions

(e.g., paragraphs (e), (j) and (n)) should be deleted and the period for submitting the subcontractor’s

termination settlement proposal should be reduced (e.g.,6 months).

49.504 Termination of fixed-price contracts for default.

(a)

(1) Supplies and services. The contracting officer shall insert the clause at 52.249-8, Default (FixedPrice Supply and Service), in solicitations and contracts when a fixed-price contract is contemplated

and the contract amount is expected to exceed the simplified acquisition threshold. The contracting

officer may use the clause when the contract amount is at or below the simplified acquisition

threshold, if appropriate (e.g., if the acquisition involves items with a history of unsatisfactory

quality).

(2) Transportation. If the contract is for transportation or transportation-related services, the

contracting officer shall use the clause with its AlternateI.

(b) Research and development. The contracting officer shall insert the clause at 52.249-9, Default

(Fixed-Price Research and Development), in solicitations and contracts for research and

development when a fixed-price contract is contemplated and the contract amount is expected to

exceed the simplified acquisition threshold, except those with educational or nonprofit institutions

on a no-profit basis. The contracting officer may use the clause when the contract amount is at or

below the simplified acquisition threshold;, if appropriate (e.g., if the contracting officer believes

that key personnel essential to the work may be devoted to other programs).

(c)

(1) Construction. The contracting officer shall insert the clause at 52.249-10, Default (Fixed-Price

Construction), in solicitations and contracts for construction, when a fixed-price contract is

contemplated and the contract amount is expected to exceed the simplified acquisition threshold.

The contracting officer may use the clause when the contract amount is at or below the simplified

acquisition threshold, if appropriate (e.g., if completion dates are essential).
(2) Dismantling and demolition. If the contract is for dismantling, demolition, or removal of

improvements, the contracting officer shall use the clause with its AlternateI.

(3) National emergencies. If the contract is to be awarded during a period of national emergency,

the contracting officer may use the clause-

(i) With its AlternateII when a fixed-price contract for construction is contemplated, or

(ii) With its AlternateIII when a contract for dismantling, demolition, or removal of improvements is

contemplated.

49.505 Other termination clauses.

(a) Personal service contracts. The contracting officer shall insert the clause at 52.249-12,

Termination (Personal Services), in solicitations and contracts for personal services (see part 37).

(b) Excusable delays. The contracting officer shall insert the clause at 52.249-14, Excusable Delays,

in solicitations and contracts for supplies, services, construction, and research and development on a

fee basis, when a cost-reimbursement contract is contemplated. The contracting officer shall also

insert the clause in time-and-material contracts, and labor-hour contracts.

(c) Communication service contracts. This regulation does not prescribe a clause for the cancellation

or termination of orders under communication service contracts with common carriers because of

special agency requirements that apply to these services. An appropriate clause, however, shall be

prescribed at agency level, within those agencies contracting for these services.

Subpart 49.6 - Contract Termination Forms and Formats

49.601 Notice of termination for convenience.

(See 49.402-3(g) for notice of termination for default.)

49.601-1 Electronic notice.

The contracting officer may provide expedited notice of termination by electronic means that

includes a requirement for the contractor to confirm receipt. If the contractor does not confirm

receipt promptly, the contracting officer shall resend the notice electronically, and expedite the

letter notice described in 49.601-2. If confirmation of the electronic notice is received, and the

electronic notice includes all content in 49.601-2, the contracting officer need not send the letter

notice described in 49.601-2.

(a) Complete termination: The following electronic notice is suggested for use if a supply contract is

being completely terminated for convenience. If appropriately modified, the notice may be used for

other than supply contracts.

Date ____________
XYZ Corporation New York, NY 12345

Contract No. ___________________ is completely terminated under clause ___________, effective

__________________ [insert "immediately, (today’s date)" or "on ______________, 20_____," or "as soon as

you have delivered, including prior deliveries, the following items:" (list)]. Immediately stop all work,

terminate subcontracts, and place no further orders except to the extent [insert if applicable

"necessary to complete items not terminated or"] that you or a subcontractor wish to retain and

continue for your own account any work-in-process or other materials. Provide by electronic means

similar instructions to all subcontractors and suppliers. Detailed instructions follow.

_______________________________________________________________________________

(Contracting Officer)

(b) Partial termination:The following electronic notice is suggested for use if a supply contract is

being partially terminated for convenience. If appropriately modified, the notice may be used for

other than supply contracts.

Date ____________

XYZ Corporation New York, NY 12345

Contract No.______________ is partially terminated under clause ___________, effective ____________

[insert "immediately, (today’s date)" or "on ________, 20____"]. Reduce items to be delivered as

follows: [insert instructions]. Immediately stop all work, terminate subcontracts, and place no

further orders except as necessary to perform the portion not terminated or that you or a

subcontractor wish to retain and continue for your account any work-in-process or other materials.

Provide by electronic means similar instructions to all subcontractors and suppliers. Detailed

instructions follow.

_____________________________________________________________________________

(Contracting Officer)

49.601-2 Letter notice.

The following letter notice of termination is suggested for use if a contract for supplies is being

terminated for convenience. With appropriate modifications, it may be used in terminating contracts

for other than supplies and in terminating subcontracts. This notice shall be sent by certified mail,

return receipt requested, or electronically, provided evidence of receipt is received by the

contracting officer. If no prior electronic notice was issued, or if no confirmation of an electronic

notice was received, use the alternate notice that follows this notice.

Notice of Termination to Prime Contractors

[At the top of the notice, set out all special details relating to the particular termination; e.g.,name

and address of company, contract number of terminated contract, line items, etc.]

(a) Effective date of termination. This confirms the Government’s electronic notice to you dated

_____________, 20_____, terminating _____________ [insert "completely" or "in part"] Contract

No._________ (referred to as "the contract") for the Government’s convenience under the clause
entitled ___________ [insert title of appropriate termination clause]. The termination is effective on

the date and in the manner stated in the electronic notice.

(b) Cessation of work and notification to immediate subcontractors. You shall take the following

steps:

(1) Stop all work, make no further shipments, and place no further orders relating to the contract,

except for-

(i) The continued portion of the contract, if any;

(ii) Work-in-process or other materials that you may wish to retain for your own account; or

(iii) Work-in-process that the Contracting Officer authorizes you to continue (A) for safety

precautions, (B)to clear or avoid damage to equipment, (C)to avoid immediate complete spoilage of

work-in-process having a definite commercial value, or (D)to prevent any other undue loss to the

Government. (If you believe this authorization is necessary or advisable, immediately notify the

Contracting Officer by telephone or personal conference and obtain instructions.)

(2) Keep adequate records of your compliance with paragraph (b)(1) of this section showing the-

(i) Date you received the Notice of Termination;

(ii) Effective date of the termination; and

(iii) Extent of completion of performance on the effective date.

(3) Furnish notice of termination to each immediate subcontractor and supplier that will be affected

by this termination. In the notice-

(i) Specify your Government contract number;

(ii) State whether the contract has been terminated completely or partially;

(iii) Provide instructions to stop all work, make no further shipments, place no further orders, and

terminate all subcontracts under the contract, subject to the exceptions in paragraph (b)(1) of this

section;

(iv) Provide instructions to submit any settlement proposal promptly; and

(v) Request that similar notices and instructions be given to its immediate subcontractors.

(4) Notify the Contracting Officer of all pending legal proceedings that are based on subcontracts or

purchase orders under the contract, or in which a lien has been or may be placed against

termination inventory to be reported to the Government. Also, promptly notify the Contracting

Officer of any such proceedings that are filed after receipt of this Notice.

(5) Take any other action required by the Contracting Officer or under the Termination clause in the

contract.

(c) Termination inventory.(1)As instructed by the Contracting Officer, transfer title and deliver to the

Government all termination inventory of the following types or classes, including subcontractor

termination inventory that you have the right to take: [Contracting Officer insert proper

identification or "None"].
(2) To settle your proposal, it will be necessary to establish that all prime and subcontractor

termination inventory has been properly accounted for. For detailed information, see part 45.

(d) Settlements with subcontractors. You remain liable to your subcontractors and suppliers for

proposals arising because of the termination of their subcontracts or orders. You are requested to

settle these settlement proposals as promptly as possible. For purposes of reimbursement by the

Government, settlements will be governed by the provisions of part 49.

(e) Completed end items.(1) Notify the Contracting Officer of the number of items completed under

the contract and still on hand and arrange for their delivery or other disposal (see 49.205).

(2) Invoice acceptable completed end items under the contract in the usual way and do not include

them in the settlement proposal.

(f) Patents. If required by the contract, promptly forward the following to the Contracting Officer:

(1) Disclosure of all inventions, discoveries, and patent applications made in the performance of the

contract.

(2) Instruments of license or assignment on all inventions, discoveries, and patent applications made

in the performance of the contract.

(g) Employees affected.(1)If this termination, together with other outstanding terminations, will

necessitate a significant reduction in your work force, you are urged to-

(i) Promptly inform the local State Employment Service of your reduction-in-force schedule in

numbers and occupations, so that the Service can take timely action in assisting displaced workers;

(ii) Give affected employees maximum practical advance notice of the employment reduction and

inform them of the facilities and services available to them through the local State Employment

Service offices;

(iii) Advise affected employees to file applications with the State Employment Service to qualify for

unemployment insurance, if necessary;

(iv) Inform officials of local unions having agreements with you of the impending reduction-in-force;

and

(v) Inform the local Chamber of Commerce and other appropriate organizations which are prepared

to offer practical assistance in finding employment for displaced workers of the impending

reduction-in-force.

(2) If practicable, urge subcontractors to take similar actions to those described in paragraph (1) of

this section.

(h) Administrative. The contract administration office named in the contract will identify the

Contracting Officer who will be in charge of the settlement of this termination and who will, upon

request, provide the necessary settlement forms. Matters not covered by this notice should be

brought to the attention of the undersigned.

(i) Please acknowledge receipt of this notice as provided below.

__________________________________________________ (Contracting Officer)
__________________________________________________ __________________________________________________

(Name of Office)

__________________________________________________ (Address)

Acknowledgment of Notice

The undersigned acknowledges receipt of a signed copy of this notice on ____________, 20____. Two

signed copies of this notice are returned.

__________________________________________________ (Name of Contractor)

By _______________________________________________ (Name)

__________________________________________________ (Title)

(End of notice)

Alternate notice. Substitute the following paragraph (a) for paragraph (a) of 49.601-2, Notice of

Termination to Prime Contractors, if no prior electronic notice was issued, or if no confirmation of an

electronic notice was received:

(a) Effective date of termination. You are notified that Contract No. ______________ (referred to as

"the contract") is terminated __________ [insert "completely" or "in part"] for the Government’s

convenience under the clause entitled _____________[insert title of appropriate termination clause].

The termination is effective __________________ [insert either "immediately upon receipt of this

Notice" or "on ____________, 20____," or "as soon as you have delivered, including prior deliveries, the

following items:" (list)]. Reduce items to be delivered as follows: [insert instructions].

49.602 Forms for settlement of terminated contracts.

The standard forms listed below shall be used for settling terminated prime contracts. The forms at

49.602-1 and 49.601-2 may also be used for settling terminated subcontracts. A listing of the

Standard forms is located in subpart 53.3.

49.602-1 Termination settlement proposal forms.

(a) Standard Form 1435, Settlement Proposal (Inventory Basis), shall be used to submit settlement

proposals resulting from the termination of fixed-price contracts if the proposals are computed on an

inventory basis (see 49.206-2(a)).

(b) Standard Form 1436, Settlement Proposal (Total Cost Basis), shall be used to submit settlement

proposals resulting from the termination of fixed-price contracts if the proposals are computed on a

total cost basis (see 49.206-2(b)).

(c) Standard Form 1437, Settlement Proposal for Cost- Reimbursement Type Contracts, shall be

used to submit settlement proposals resulting from the termination of cost-reimbursement contracts

(see 49.302).

(d) Standard Form 1438, Settlement Proposal (Short Form), shall be used to submit settlement
proposals resulting from the termination of fixed-price contracts if the total proposal is less than

$10,000 (see 49.206-1(d)).

49.602-2 Inventory forms.

Standard Form (SF) 1428, Inventory Disposal Schedule, and SF 1429, Inventory Disposal ScheduleContinuation Sheet, shall be used to support settlement proposals submitted on the forms specified

in 49.602-1(b) and (d).

49.602-3 Schedule of accounting information.

Standard Form 1439, Schedule of Accounting Information, shall be filed in support of a settlement

proposal unless the proposal is filed on Standard Form 1438, Settlement Proposal (Short Form) (see

49.206-1(e)).

49.602-4 Partial payments.

Standard Form 1440, Application for Partial Payment, shall be used to apply for partial payments

(see 49.112-1).

49.602-5 Settlement agreement.

Standard Form30 (SF 30), Amendment of Solicitation/Modification of Contract, shall be used to

execute a settlement agreement (see 49.109-1).

49.603 Formats for termination for convenience settlement agreements.

The formats to be used for termination for convenience settlement agreements should be

substantially as shown in this section (see 49.109). Termination contracting officers (TCO’s) may,

however, modify the contents of these agreements to conform with special termination clauses

prescribed or authorized by their agencies (e.g., see 49.501 and 49.505(c)).

49.603-1 Fixed price contracts-complete termination.

[Insert the following in Block 14 of SF 30 for settlements of fixed-price contracts completely

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 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 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.

(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 items delivered,

under the completed portion of the contract. The Government confirms the right of the Contractor,

subject to paragraph (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 $________ [for proposals on an inventory basis insert gross amount of

settlement; for proposals on a total cost basis, insert gross amount of settlement less amount shown

in subdivision(6)(i) of this sub-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 (7) of this section."]

(iii) The net settlement of $____ in subdivision(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 all other demands and liabilities of the Contractor and the

Government under the contract, except as provided in paragraph (b)(7) of 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) 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)
49.603-2 Fixed-price contracts-partial termination.

[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)

49.603-3 Cost reimbursement contracts-complete termination, if settlement includes cost.

[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)
49.603-4 Cost-reimbursement contracts-complete termination, with settlement limited to

fee.

[Insert the following in Block 14 of SF 30 for settlement of cost-reimbursement contracts that are

completely terminated, if settlement is limited to fee.]

(a) This supplemental agreement settles the amount of fee due under the contract, terminated in its

entirety by Notice of Termination dated ______.

(b) The parties agree to the following:

(1) The Contractor has received $______ on account of its fee under the contract before the effective

date of termination.

(2) The Government agrees to pay to the Contractor or its assignee, upon presentation of a proper

invoice or voucher, $______ [insert net amount to be paid on account of fee]. This sum, with sums

previously paid, constitutes payment in full and complete settlement of the amount due the

Contractor on account of its fee under the contract.

(3) The Contractor’s allowable costs under the contract will be paid under the terms and conditions

of the contract and parts 31 and 49 of the Federal Acquisition Regulation. [Insert paragraph (a)(3)

of this subsection only if there are costs to be vouchered out (see 49.302) or if there are costs to be

covered later by a separate settlement agreement.]

(4) 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 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.]

(iii) 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.

(iv) 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.
(v) 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.

(vi) All rights and liabilities of the parties relating to Government property furnished to, or acquired

by, the Contractor for the performance of the contract.

(vii) 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.

(viii) 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)

49.603-5 Cost-reimbursement contracts-partial termination.

[Insert the following in Block 14 of SF 30, Amendment of Solicitation/Modification of Contract, for

settlement agreements for cost-reimbursement contracts as a result of partial termination.]

(a) This supplemental agreement settles the termination settlement proposal resulting from the

Notice of Termination dated _________.

(b) The parties agree as follows:

(1) The contract is amended by deleting the terminated portion as follows: [specify the terminated

portion clearly as to-

(i) Line item numbers,

(ii) Descriptions,

(iii) Quantity terminated,

(iv) Unit and total price of terminated items, and

(v) Any other explanation necessary to avoid uncertainty or misunderstanding].

(2) The fee stated in the contract is decreased by $____, from $____ to $____ [Insert, if

appropriate,"(3) The estimated cost of the contract is decreased by $____, from $____ to $____"].

(c) The Contractor’s allowable costs and earned fee, if any, for the terminated portion of the contract

will continue to be reimbursed on SF 1034, Public Voucher for Purchase and Services Other Than

Personal, under the applicable provisions of the contract and part 31 of the Federal Acquisition

Regulation.

(End of agreement)

49.603-6 No-cost settlement agreement-complete termination.

[Insert the following in Block 14 of SF 30 if a no-cost settlement agreement, under a complete
termination, is to be executed.]

(a) This supplemental agreement [insert "modifies the contract to reflect a no-cost settlement

agreement with respect to the Notice of Termination dated ____" or, if not previously terminated,

"terminates the contract in its entirety"].

(b) The parties agree as follows:

The Contractor unconditionally waives any charges against the Government because of the

termination of the contract and, except as set forth below, releases it from all obligations under the

contract or due to its termination. The Government agrees that all obligations under the contract are

concluded, except as follows: [List reserved or excepted rights and liabilities. See 49.109-2 and

49.603-1(b)(7).]

(End of agreement)

49.603-7 No-cost settlement agreement-partial termination.

[Insert the following in Block 14 of SF 30 if a no-cost settlement agreement, under partial

termination, is to executed.]

(a) This supplemental agreement modifies the contract to reflect a no-cost settlement agreement

with respect to the Notice of Termination dated ____.

(b) The parties agree as follows:

(1) The terminated portion of the contract is as follows: [Specify-

(i) Line item numbers,

(ii) descriptions,

(iii) quantity terminated,

(iv) unit and total price of terminated items, and

(v) any other explanation necessary to avoid uncertainty or misunderstanding.]

(2) The Contractor unconditionally waives any charges against the Government arising under the

terminated portion of the contract or by reason of its termination, including, without limitation, all

obligations of the Government to make further payments or to carry out any further undertakings

under the terminated portion of the contract. The Government acknowledges that the Contractor has

no obligation to perform further work or services or to make further deliveries under the terminated

portion of the contract. Nothing in this paragraph affects any other covenants, terms, or conditions

of the contract. Under the terminated portion of the contract, the following rights and liabilities of

the parties are reserved: [List reserved or excepted rights and liabilities. See 49.109-2 and

49.603-1(b)(7).]

(End of agreement)
49.603-8 Fixed-price contracts-settlements with subcontractors only.

[Insert the following in Block 14 of SF 30 for settlements of fixed-price contracts covering only

settlements with subcontractors.]

(a) This agreement settles that portion of the settlement proposal of the contractor that is based

upon termination of the following subcontracts entered into in performing this contract: [Insert a list

of the terminated subcontracts included in this settlement.]

(b) The parties agree to the following:

(1) The Contractor certifies that each immediate subcontractor, whose settlement proposal is

included in the proposal settled by the 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.

(2) 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.

(3) 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.

(4) 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.

(5) The Government agrees to pay the Contractor or its assignee, upon presentation of a proper

invoice or voucher, $____ [insert net amount of settlement], which, together with the amount of $____

previously paid the Contractor as partial, progress, or advance payments, constitutes payment in full

and complete settlement, except as provided in paragraph (b)(6) of this section, of the amount due

the Contractor for that portion of its settlement proposal that is based upon termination of the

subcontracts listed above.
(6) Regardless of any other provision of this agreement, the following rights and liabilities of the

parties under the contract are reserved: [List reserved or excepted rights and liabilities. See

49.109-2 and 49.603-1(b)(7).]

(End of agreement)

49.603-9 Settlement of reservations.

[Insert the following in Block14 of SF 30 for settlement of reservations.]

(a) Supplemental Agreement No. ____, dated ____, was executed to reflect the settlement of the

termination of this contract. The supplemental agreement excepted from the settlement certain

items described in the agreement including the items described in paragraph (b) of this section. This

supplemental agreement settles those items listed in paragraph (b) of this section.

(b) The parties agree to the following:

(1) The Government agrees to pay the contractor $_____ for the following reserved or excepted

items:* [List items.]

(2) The Contractor releases and forever discharges the Government from all liability and from all

existing and future claims and demands that it may have under this contract, insofar as it pertains to

the contract, for the items described in paragraph (1) of this section.*

*When payment is due the Government, reverse the words "Government" and "contractor" in

paragraphs (b)(1) and (b)(2).

(End of agreement)

49.604 Release of excess funds under terminated contracts.

The following format shall be used to recommend the release of excess funds under terminated

contracts, except if the contracting office retains responsibility for settlement of the termination:

: Termination Contracting Officer __________ [address]

To: Contracting office ______________[address]

Subj: Terminated Contract No ________ with _______ [Contractor]

Refs:

(a) [Cite termination notice and effective date.]

(b) [Cite prior letters releasing excess funds, if any.]

(1) Referenced termination notice, ____ [insert "completely" or "partially"] terminated contract

__________.

(2) Based on the best information available, it is estimated that the gross settlement cost will be

$_____ The amount available for release as excess to the contract is $___. Any payments previously
made to the Contractor for terminated items have been considered in arriving at the above amounts.

[If prior letters recommending release of excess funds are cited, use the following as paragraph 2:

The estimated settlement costs previously reported by reference (b) in the amount of $____ are

revised. On the best evidence now available, it is estimated that the settlement costs will be $___ The

additional amount available for release is $_____.]

(3) The related appropriations and amounts involved are:

Appropriations Allocated Amounts

____________ ____________

____________ ____________

Copies to: Paying Office Accounting and Finance Office Other

49.605 Request to settle subcontractor settlement proposals.

Contractors requesting authority to settle subcontractor settlement proposals shall furnish

applicable information from the list below and any additional information required by the

contracting officer:

(a) Name of contractor and address of principal office.

(b) Name and location of divisions of the applicant’s plant for which authorization is requested.

(c) An explanation of the necessity and justification for the authorization requested.

(d) A full description of the applicant’s organization for handling terminations, including the names

of the officials in charge of processing and settling proposals.

(e) The number and dollar amount (estimated if necessary) of uncompleted contracts with

Government agencies and the percentage applicable to each agency.

(f) The number and dollar amount (estimated if necessary) of uncompleted subcontracts under

Government contracts and the percentage applicable to each agency.

(g) The extent of the applicant’s experience in termination matters, including the handling of

proposals of subcontractors.

(h) The approximate amount and general nature of terminations of the applicant currently in

process.

(i) A statement that no other application has been made for any division of the applicant’s plant

covered by the application or, if one has been made, a full statement of the facts.

(j) The limit of authorization requested.
49.606 Granting subcontract settlement authorization.

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)

49.607 Delinquency notices.

The formats of the delinquency notices in this section may be used to satisfy the requirements of

49.402-3. All notices will be sent with proof of delivery requested. (See subpart 42.13 for stop-work

orders.)

(a) Cure notice. If a contract is to be terminated for default before the delivery date, a "Cure Notice"

is required by the Default clause. Before using this notice, it must be ascertained that an amount of

time equal to or greater than the period of "cure" remains in the contract delivery schedule or any

extension to it. If the time remaining in the contract delivery schedule is not sufficient to permit a

realistic "cure" period of 10 days or more, the "Cure Notice" should not be issued. The "Cure Notice"

may be in the following format:

Cure Notice

You are notified that the Government considers your ____ [specify the contractor’s failure or failures]

a condition that is endangering performance of the contract. Therefore, unless this condition is

cured within 10 days after receipt of this notice [or insert any longer time that the Contracting

Officer may consider reasonably necessary], the Government may terminate for default under the

terms and conditions of the _______ [insert clause title] clause of this contract.

(End of notice)

(b) Show cause notice. If the time remaining in the contract delivery schedule is not sufficient to

permit a realistic "cure" period of 10 days or more, the following "Show Cause Notice" may be used.

It should be sent immediately upon expiration of the delivery period.

Show Cause Notice

Since you have failed to ____ [insert "perform Contract No. ___ within the time required by its terms,"

or "cure the conditions endangering performance under Contract No _____ as described to you in the

Government’s letter of _____ (date)"], the Government is considering terminating the contract under

the provisions for default of this contract. Pending a final decision in this matter, it will be necessary

to determine whether your failure to perform arose from causes beyond your control and without

fault or negligence on your part. Accordingly, you are given the opportunity to present, in writing,
any facts bearing on the question to ____ [insert the name and complete address of the contracting

officer], within 10 days after receipt of this notice. Your failure to present any excuses within this

time may be considered as an admission that none exist. Your attention is invited to the respective

rights of the Contractor and the Government and the liabilities that may be invoked if a decision is

made to terminate for default.

Any assistance given to you on this contract or any acceptance by the Government of delinquent

goods or services will be solely for the purpose of mitigating damages, and it is not the intention of

the Government to condone any delinquency or to waive any rights the Government has under the

contract.

(End of notice)