Overview
FAR Subpart 49.6 provides the standardized templates, mandatory forms, and specific language required for the notification and settlement of contract terminations for convenience. It serves as the procedural "toolkit" for Contracting Officers and contractors to ensure that work is stopped, inventory is accounted for, and final payments are legally documented in a consistent manner across the federal government.
Key Rules
- Notice Delivery: Termination notices may be sent electronically but must require a confirmation of receipt. If no electronic confirmation is received, a formal letter must be sent via certified mail, return receipt requested.
- Immediate Cessation of Work: Upon receipt of a notice, contractors must immediately stop all work, cancel existing orders, and terminate subcontracts related to the terminated portion of the contract, except as specifically authorized for safety or to prevent damage.
- Mandatory Forms: Specific Standard Forms (SF) are required based on the settlement method:
- SF 1435 (Inventory Basis): For fixed-price contracts using the inventory method.
- SF 1436 (Total Cost Basis): For fixed-price contracts using the total cost method.
- SF 1437: For cost-reimbursement contracts.
- SF 1438 (Short Form): Used for settlements under $10,000.
- SF 30 (Modification): The vehicle used to execute the final settlement agreement.
- Flow-Down Requirements: Prime contractors are legally obligated to provide similar termination instructions to their subcontractors and suppliers.
- Certification Requirements: In the final settlement, the contractor must certify that all termination inventory has been properly accounted for and that subcontractors have provided similar certifications.
Responsibilities
- Contracting Officer (CO/TCO):
- Issues the initial electronic and/or letter notice of termination.
- Authorizes work to continue only for specific reasons (e.g., safety, avoiding equipment damage).
- Identifies the specific items of inventory the Government wishes to take title to.
- Reviews and negotiates the final settlement proposal.
- Prime Contractor:
- Stops work and prevents further shipments/orders immediately.
- Notifies all affected subcontractors and manages their settlement proposals.
- Maintains records of compliance regarding the termination date and extent of completion.
- Notifies the CO of any pending legal proceedings related to the subcontracts.
- Assists displaced employees by notifying state employment agencies and unions.
- Subcontractor:
- Complies with the Prime's notice to stop work.
- Submits settlement proposals and inventory certificates to the Prime Contractor.
Practical Implications
- Avoiding Unallowable Costs: From the moment a termination notice is received, any costs incurred for work that was supposed to stop become "unallowable." Contractors must have a robust internal system to "freeze" charge codes immediately to avoid losing money in the settlement.
- The "Mini-CO" Role: Prime contractors must realize that during a termination, they effectively act as the "Contracting Officer" for their subcontractors. They are responsible for reviewing their subs' claims and ensuring they are compliant with FAR Part 49 before passing those costs to the Government.
- Inventory Accuracy: Because the contractor must certify that inventory is "properly allocable" to the terminated portion of the contract, errors in inventory reporting (SF 1428) can lead to delays in payment or potential audits for overcharging.
- Reservation of Rights: Settlement agreements are rarely "total." Standard language in 49.603-1(b)(7) ensures the Government retains rights regarding patent infringements, warranties, and defective pricing even after the settlement is paid. Contractors should carefully review these "reserved rights" to understand their post-termination liabilities.