Overview
This section outlines the specific procedures and financial conditions for terminating a cost-reimbursement contract for default, primarily governed by FAR clause 52.249-6. It establishes that while the settlement process mimics a termination for convenience, specific restrictions apply to fee adjustments and cost allowability.
Key Rules
- Mandatory Notice: A 10-day notice to the contractor is strictly required in every case before a termination for default can be executed.
- Settlement Principles: Settlement is handled under the same principles as a termination for convenience (Subparts 49.1 and 49.3), with two critical exceptions:
- Unallowable Costs: The contractor cannot be reimbursed for the costs of preparing their settlement proposal.
- Fee Reduction: While allowable costs are reimbursed, the government must make an appropriate reduction in the contractor's total fee.
- No Excess Repurchase Costs: Unlike fixed-price defaults, the government generally cannot recover excess costs associated with repurchasing supplies or services, unless it pertains to the failure to replace defective supplies under FAR 52.246-3.
- Procedural Guidance: Contracting officers are directed to follow the procedures in FAR 49.402 (Fixed-Price terminations) to the extent they are applicable.
Practical Implications
- Financial Mitigation: For contractors, a default on a cost-reimbursement contract is less financially catastrophic than a fixed-price default because they still recover allowable performance costs and are not liable for the government's "cover" costs (excess reprocurement costs).
- Administrative Burden: Because settlement proposal preparation costs are unallowable, contractors must bear the administrative and legal expenses of the termination process themselves, which can be significant in complex cost-reimbursable environments.