Overview
FAR 49.202 establishes the criteria and factors for determining a fair and reasonable profit allowed to a contractor on the terminated portion of a fixed-price contract. It emphasizes rewarding actual work performed and effort expended while explicitly prohibiting profit on settlement expenses or speculative future earnings.
Key Rules
- Allowable Profit: Profit is permitted only on preparations made and work actually performed by the contractor on the terminated portion of the contract.
- Prohibitions: Profit is strictly prohibited on settlement expenses, anticipatory profits (future earnings), and consequential damages.
- Subcontracting Limitations:
- Profit on settling subcontractor proposals must be based on the prime contractor's effort, not the total dollar value of the settlement.
- No profit is allowed for subcontractor materials or services that remained undelivered as of the termination date.
- Construction Specifics: For construction contracts, profit is allowed on subcontractor settlements for "work in place" at the site, but excluded for "materials on hand" or preparations to complete work.
- Evaluation Factors: The Termination Contracting Officer (TCO) must consider the difficulty of work, contractor efficiency, amount of risk assumed, and the profit rate originally contemplated during negotiations.
Practical Implications
- Documentation of Effort: Contractors should maintain detailed records of the "effort" expended in managing and negotiating subcontractor settlements, as the dollar value of the subcontracts cannot be used as the sole basis for profit.
- Negotiation Leverage: Because the TCO has the authority to use "any reasonable method" to determine profit, contractors must be prepared to justify their profit request using the specific qualitative factors listed in the regulation, such as efficiency and complexity.
- No Windfalls: The exclusion of profit on undelivered materials prevents contractors from receiving a markup on items for which they have not yet added significant value or assumed physical custody.