Based on the provided text of FAR Part 49 - Termination of Contracts, here is a structured summary and analysis of the regulations.
Overview
FAR Part 49 establishes the policies and procedures for the partial or complete termination of government contracts for either the convenience of the Government (T4C) or for contractor default (T4D). It defines the mandatory duties of both the Government and the contractor during the "winding down" phase, focusing on fair settlement of costs and the orderly disposition of inventory and subcontracts.
Key Rules
- Termination for Convenience (T4C) vs. Default (T4D): The Government may terminate a contract when it is in the Government's interest (Convenience) or when a contractor fails to perform (Default).
- The $5,000 Threshold: Under normal circumstances, the Government should not terminate a contract for convenience if the undelivered balance is less than $5,000; it should instead be allowed to run to completion.
- No-Cost Settlements: Contracting Officers (COs) should seek a no-cost settlement if the contractor will accept it, no government property was furnished, and no debts are outstanding.
- Small Business Preference: If a requirement is split between a large and a small business and a partial termination is necessary, the Government must prioritize retaining the small business's contract.
- Audit Thresholds: Settlement proposals valued at or above the threshold for certified cost or pricing data (referenced in FAR 15.403-4) must be referred to the appropriate audit agency for review.
- Subcontractor Rights: Subcontractors have no direct contractual rights against the Government; they must seek settlement through the prime contractor. The Government will not pay for "anticipatory profits" on terminated subcontracts.
- Applicability to Commercial Products/Services: Part 49 serves as administrative guidance for commercial contracts but is subordinate to FAR Part 12 and the clause at 52.212-4.
Responsibilities
- Contracting Officer (CO): Responsible for the initial decision to terminate, issuing the formal written notice, and releasing excess funds.
- Termination Contracting Officer (TCO): Responsible for the "settlement" phase, including negotiating the final payment, reviewing accounting data, conducting settlement conferences, and issuing "determinations" if a mutual agreement cannot be reached.
- Prime Contractor: Must immediately stop work, terminate relevant subcontracts, protect Government property, and submit a settlement proposal supported by cost data.
- Audit Agency: Provides advisory reviews of settlement proposals to ensure costs are allocable and reasonable.
- Contract Administration Office: Receives copies of termination notices to begin the closeout or oversight of the termination process.
Practical Implications
- Mitigation of Damages: Contractors are legally obligated to "stop the bleeding" immediately upon receipt of a notice. Failure to stop work or cancel subcontracts promptly can result in the Government refusing to reimburse costs incurred after the termination notice.
- Subcontract Management: Since the Government expects prime contractors to manage their own "divorces" from subcontractors, primes must ensure their subcontracts contain termination clauses that mirror the Government’s rights. If a prime fails to include a termination clause in a subcontract, they may be liable to the subcontractor for damages that the Government will not reimburse.
- Documentation is Paramount: The settlement process is essentially a specialized audit. Contractors must maintain rigorous accounting records (SF 1439) to prove that costs claimed in a settlement proposal are directly related to the terminated portion of the work.
- Funds Management: The T4C process triggers an immediate "sweep" of excess funds. The TCO must estimate settlement costs within 30 days and recommend the deobligation of excess money, which can impact a program manager's remaining budget.