Overview
FAR Subpart 49.3 establishes the specialized procedures and accounting principles for settling cost-reimbursement contracts that have been terminated for the convenience of the Government. It focuses on the transition from standard vouchering to formal settlement proposals, the auditing of unvouchered costs, and the equitable adjustment of the contractor’s fee based on the percentage of work completed.
Key Rules
- Voucher Transition: In a complete termination, contractors must stop using Standard Form (SF) 1034 (Public Vouchers) no later than six months after the termination date. All remaining costs and fees must then be moved to a formal settlement proposal (SF 1437).
- Submission Deadlines: Contractors must submit a substantiated settlement proposal for costs and fees within one year of the termination effective date. Inventory disposal schedules (SF 1428) must be submitted within 120 days.
- Audit Requirements: The Termination Contracting Officer (TCO) must submit settlement proposals to the appropriate audit agency for review, unless the proposal is strictly limited to an adjustment of the fee.
- Indirect Cost Handling: To avoid settlement delays, the TCO may negotiate final indirect costs using current billing rates or "reserve" the indirect cost adjustment for a later date if final rates have not yet been established.
- Fee Adjustment Logic: The fee is adjusted based on the "percentage of completion" rather than a simple ratio of costs incurred. The TCO considers the difficulty and nature of the work performed (e.g., planning, engineering, and even the effort required to terminate subcontracts).
- Exclusions: Settlement proposals cannot include costs already disallowed by the Contracting Officer or costs previously questioned by the Government that remain undecided.
Responsibilities
- Contractor:
- Discontinue standard vouchering within the six-month window.
- Submit timely settlement proposals and inventory disposal schedules.
- Substantiate the "percentage of completion" to justify fee retention.
- Remove negotiated indirect costs from future overhead pools to prevent "double-dipping."
- Termination Contracting Officer (TCO):
- Review and negotiate the final settlement agreement.
- Request and review audits of cost proposals.
- Determine the equitable adjustment of the fee based on work performed.
- Execute the final settlement agreement (SF 30).
- Audit Agency:
- Perform audits of settlement proposals to verify the allowability and allocability of unvouchered costs.
Practical Implications
- Administrative Shift: For contractors, a termination for convenience shifts the relationship from a standard "pay-as-you-go" voucher system to a legalistic "claims" environment. Accounting departments must be prepared to reconcile unvouchered costs and justify their fee through performance metrics rather than just financial burn rates.
- Fee Recovery Strategy: Because the FAR explicitly states that the ratio of costs-incurred to total-estimated-cost is only one factor, contractors should document the "difficulty" and "technical effort" of early-stage work (like mobilization and engineering) to argue for a higher fee percentage than their spending might suggest.
- Subcontractor Management: Contractors are reminded that they do not earn a fee on the settlement amounts paid to subcontractors. This can lead to a reduction in expected profit if a large portion of the contract was intended to be performed by subs.
- Expediting Settlements: The ability to "reserve" indirect costs is a critical tool for contractors facing multi-year delays in DCAA (Defense Contract Audit Agency) rate audits, allowing them to receive the majority of their settlement money without waiting for final indirect rate closures.