Overview
FAR 49.606 prescribes the standardized Letter of Authorization format that Contracting Officers use to grant prime contractors the power to settle subcontract termination claims independently. This authorization allows prime contractors to expedite the termination process by settling with subcontractors up to a specific dollar limit without seeking individual government approval for every transaction.
Key Rules
- Monetary Limits: Authorization is capped at a specific dollar threshold inserted by the Contracting Officer; calculations to meet this threshold must include the full settlement amount without deducting advance or partial payments.
- Anti-Fragmentation: Contractors are prohibited from dividing a single settlement proposal into multiple smaller settlements to circumvent the authorized dollar limit.
- Affiliation Restriction: This authority does not apply to any subcontractor or supplier affiliated with the prime contractor (i.e., under common control or shared interest), as these settlements require arm's-length bargaining.
- Inventory Disposal: While certain scrap and salvage screening requirements are waived, the authorization generally does not extend to the disposal of Government-furnished material or completed undelivered articles without specific screening or meeting separate low-value thresholds.
- Revocation Rights: The government maintains oversight through periodic selective examinations of the contractor’s settlement methods and reserves the right to revoke the authorization if the contractor fails to protect the government’s interest.
- Reimbursability: Settlements made within the scope of this authorization are considered reimbursable under FAR Part 49 and the contract’s termination clause without further Contracting Officer approval.
Practical Implications
- Administrative Efficiency: This provision significantly reduces the "bottleneck" effect during large-scale terminations for convenience by shifting the burden of review from the government to the prime contractor.
- Increased Prime Responsibility: Prime contractors must maintain rigorous internal controls and documentation for subcontract settlements, as they effectively act as the government's agent and are subject to audit and potential revocation of authority if their negotiation methods are found lacking.