FAR Part 49: Termination of Contracts

In plain English

FAR Part 49 establishes policies and procedures for terminating Government contracts, either for the convenience of the Government or for default. It covers the rights and duties of contractors and contracting officers, settlement methods, and required clauses. This part matters because it governs how terminations are handled, affecting contractors' recovery of costs and potential liability.

Key rules

• The contracting officer must terminate contracts for convenience or default only by written notice to the contractor. (49.102)
• After receiving a termination notice, the prime contractor must comply with the notice and the termination clause, except as directed by the termination contracting officer (TCO). (49.104)
• The TCO must direct the prime contractor's actions, examine settlement proposals, and negotiate settlements. (49.105)
• A subcontractor has no contractual rights against the Government upon termination of a prime contract, but may have rights against the prime contractor. (49.108-1)
• Settlement of terminated cost-reimbursement contracts and fixed-price contracts terminated for convenience may be by negotiated agreement, determination by the TCO, or costing-out under the termination clause. (49.103)
• The TCO must refer each prime contractor settlement proposal at or above the threshold for certified cost or pricing data to the appropriate audit agency. (49.107)
• If the contractor and TCO cannot agree on a settlement, or if a proposal is not submitted timely, the TCO shall issue a determination. (49.109-7)
• The total amount payable for a settlement, before deductions and excluding settlement costs, must not exceed the contract price less payments otherwise made. (49.207)

Who does what

In practice

• When you receive a termination notice, immediately follow the instructions in the notice and the contract's termination clause to protect your rights to recovery.
• Submit a complete settlement proposal on time, using the correct basis (inventory or total cost) as specified in the termination clause.
• If you are a prime contractor, you are responsible for settling with your subcontractors, but you may need TCO authorization for larger settlements.
• If you disagree with the TCO's settlement determination, you may have appeal rights under the Disputes clause, but you must follow the specified procedures.

Common pitfalls

• Failing to submit a settlement proposal within the time required by the termination clause may result in the TCO issuing a determination without your input.
• Assuming that a subcontractor can claim directly against the Government; subcontractors have no privity of contract with the Government.
• Overlooking the limitation that the total settlement cannot exceed the contract price less prior payments, which may reduce your recovery.
• Not reserving rights or demands in the settlement agreement may waive them permanently.

Written by AI from this part's codified text (2026-10-04); cited sections are checked against the part. A guide, not legal advice: the regulation text, the solicitation and your contract rule.