Overview
Subpart 49.1 establishes the fundamental authorities and procedures for terminating government contracts for either the convenience of the Government or for default. It prescribes the specific duties of Contracting Officers and contractors, the methods for negotiating settlements, and the framework for handling subcontractor claims and inventory disposal.
Key Rules
- Government Interest Standard: Contracts should only be terminated when it is clearly in the Government’s best interest.
- No-Cost Settlements: The Contracting Officer (CO) should seek a no-cost settlement if the contractor will accept it, no government property is involved, and there are no outstanding debts or obligations.
- The $5,000 Threshold: If the undelivered balance of a contract is less than $5,000, it should generally be allowed to run to completion rather than being terminated for convenience.
- Small Business Preference: In partial terminations where the same item is being produced by both large and small businesses, the CO should prioritize continuing the small business contract.
- Written Notice Required: All terminations must be formal, written notices sent via certified mail or electronic means with receipt confirmation, stating the effective date and extent of the termination.
- Settlement Methods: Settlements can be reached via negotiated agreement (preferred), TCO determination (unilateral), or costing-out under vouchers (for cost-reimbursement contracts).
- Audit Requirements: Settlement proposals exceeding the threshold for certified cost or pricing data (referenced in FAR 15.403-4) must be referred to an audit agency for review.
- Subcontractor Privity: Subcontractors have no direct contractual rights against the Government; their claims must be settled through the prime contractor.
Responsibilities
- Contracting Officer (CO):
- Determines if termination is in the Government's interest.
- Issues the formal notice of termination.
- Releases excess funds (unless delegated to the TCO).
- Ensures construction site cleanup and hazard removal.
- Termination Contracting Officer (TCO):
- Negotiates the final settlement and enters into settlement agreements.
- Conducts the initial settlement conference with the contractor.
- Estimates and recommends the release of excess funds within 30 days of termination.
- Establishes and maintains the termination case file.
- Reports suspected fraud or criminal conduct.
- Prime Contractor:
- Stops work immediately on the terminated portion and stops placing subcontracts.
- Terminates all related subcontracts and settles their claims.
- Protects and preserves Government property.
- Submits a timely settlement proposal and disposes of termination inventory.
- Audit Agency:
- Performs accounting reviews and field audits.
- Provides advisory reports to the TCO regarding the reasonableness of settlement proposals.
Practical Implications
- Immediate Stoppage of Work: Contractors must act instantly upon receipt of a notice. Costs incurred after the effective date of termination that could have been avoided by stopping work are generally not reimbursable.
- Administrative Efficiency: The $100,000 authorization limit (FAR 49.108-4) allows prime contractors to settle subcontract claims without TCO approval, significantly speeding up the "close-out" of large contracts.
- Risk Mitigation: Prime contractors are strongly advised to include termination clauses in their own subcontracts. Failure to do so does not increase the Government's liability, meaning the prime could be forced to pay a subcontractor for "loss of anticipatory profits" while being unable to recover those costs from the Government.
- Fund Management: The requirement for the TCO to estimate settlement costs within 30 days is critical for agency budgeting, as it allows "excess" deobligated funds to be redirected to other requirements before the end of a fiscal cycle.