Overview
This section outlines the requirements, timelines, and methodology for a contractor to submit a settlement proposal following a termination for convenience. It defines the specific forms and accounting bases (Inventory vs. Total Cost) that must be used to recover costs, profit, and subcontractor settlements.
Key Rules
- Submission Deadlines: Final settlement proposals must be submitted within one year of the effective date of termination, while inventory disposal schedules (SF 1428) must be submitted within 120 days, unless extensions are granted by the Termination Contracting Officer (TCO).
- Preferred Method (Inventory Basis): The inventory basis is the preferred method for settlement. It requires the contractor to itemize specific costs allocable to the terminated portion, including raw materials, work in process, and tooling.
- Alternative Method (Total Cost Basis): Use of the total cost basis requires prior TCO approval and is generally reserved for situations where production hasn't started, unit costs cannot be readily established, or for specific construction/professional services contracts.
- Threshold for Short Form (SF 1438): Contractors may use the simplified Short Form for settlement proposals totaling less than $10,000, provided they do not artificially break down larger claims to meet this limit.
- Supporting Documentation: Proposals must be supported by adequate accounting data using generally recognized accounting principles. The SF 1439 (Schedule of Accounting Information) is required for all proposals except those using the Short Form.
- Profit and Loss: Proposals must include an allowance for profit or an adjustment for loss, and must deduct all unliquidated progress payments and disposal credits.
Practical Implications
- Strict Time Management: Contractors must move quickly to coordinate with subcontractors and internal accounting teams; missing the one-year window for the final proposal can jeopardize the right to recovery.
- Accounting System Readiness: While the FAR states contractors shouldn't need "unduly elaborate" systems, the requirement for "adequate accounting data" means contractors must be able to segregate termination costs accurately to satisfy the TCO.
- TCO Coordination: Since the Total Cost basis and the use of estimated costs require TCO approval, early and frequent communication with the TCO is essential to ensure the chosen submission format will be accepted.