The Settlement Proposal After a Contract Is Ended Early
When the government ends a contract for its own convenience, the contractor is made whole for what it spent and did, not for what it expected to earn. The settlement proposal is the only route to that money, and it has a filing deadline measured in a year.
The rule in short
On a convenience termination the contractor stops work, terminates subcontracts, protects and disposes of property, and submits a settlement proposal within one year of the effective date unless the period is extended in writing. Recoverable amounts include preparations and work done, initial costs, settlement expenses, subcontractor settlements, and reasonable profit on work performed. Anticipatory profit is not recoverable, and a loss contract carries no profit.
A convenience termination is not a breach and is not compensated as one. The government reserves the right to end the work when it suits the government, and the contractor's remedy is a settlement that makes it whole for what it spent and did. Lost profit on the unperformed portion is not part of that, and no argument recovers it.
The duties that attach immediately
The notice of termination states the effective date and the extent of the termination. On receipt, the contractor must stop work on the terminated portion and place no further orders except as needed to complete any continued portion. It must terminate its subcontracts relating to the terminated work and settle the resulting claims. It must protect and preserve property in which the government has or may acquire an interest, and transfer title and deliver it as directed.
Two further duties run alongside. The contractor must use its best efforts to sell property that is not to be delivered, in the manner and to the extent directed. And it must continue performing any portion of the contract that was not terminated, on the original terms, subject to a possible adjustment in the price of that portion.
One year, and the consequence of missing it
The settlement proposal must be submitted within one year from the effective date of termination, unless the contracting officer extends the period in writing. Extensions are routinely granted for good reason, and they must be requested before the year expires rather than afterward.
A contractor that fails to submit within the period does not lose everything, but it loses control. The contracting officer may determine the amount due on the basis of information available, and that determination becomes the starting point. A contractor arguing upward from an agency-constructed number is in a much weaker position than one presenting its own accounting.
The accounting, legal and clerical costs of preparing and settling the proposal are themselves a recoverable category, along with the cost of storing, transporting, protecting and disposing of termination inventory, and the cost of settling subcontractor claims. Contractors regularly absorb this expense as overhead and then complain about the cost of the process. Open a charge number for the settlement effort on the day the notice arrives and record time against it.
The categories, and the one that is excluded
The measure is the cost of preparations made and work done, plus a reasonable profit on that work, plus settlement expenses and subcontractor settlements, less amounts already paid and the value of property retained. Initial costs are separately recognized: starting load costs such as training, unfamiliarity and preliminary planning, and preparatory costs incurred to prepare for production that a full run would have absorbed.
| Category | Recoverable | Measure | Evidence relied on |
|---|---|---|---|
| Work performed and preparations made | Yes | Allowable cost incurred, plus reasonable profit | Job cost records segregated to the contract |
| Initial and preparatory costs | Yes | The unabsorbed portion attributable to the terminated work | Production curves, planning and training records |
| Settlement expenses | Yes | Actual accounting, legal, clerical and inventory costs | Time records for the settlement effort |
| Subcontractor settlements | Yes | Amounts settled, with approval above stated levels | The subcontract, the settlement and the approval |
| Anticipatory profit | No | Not applicable | Not applicable |
| Profit where the contract was heading for a loss | No, and an adjustment reduces the recovery | A factor applied to the incurred cost | The estimate to complete against the contract price |
The loss adjustment surprises contractors more than the exclusion of anticipatory profit. Where the evidence shows the contract would have been completed at a loss, no profit is allowed and the recovery is reduced by a factor reflecting the proportion the loss bore to the whole. A termination does not convert a losing job into a paying one.
When only part of the work is ended
A partial termination leaves the contractor performing a smaller quantity at a price set for a larger one, which usually raises the unit cost of what remains. An equitable adjustment in the price of the continued portion is available, and the clause requires the contractor to request it promptly, within a short period measured from the effective date of the termination. The settlement of the terminated portion runs on the separate one-year track.
Those two requests are frequently conflated and then filed together at the end. The adjustment request has the earlier deadline and is the one that gets lost. Where the change to the remaining work resembles a directed alteration rather than a quantity reduction, the analysis in changes clauses and the request for equitable adjustment may apply instead.
Negotiation, determination and appeal
Settlement by agreement is the preferred outcome and produces a modification that pays the agreed amount. Where agreement fails, the contracting officer determines the amount due, and that determination is challengeable as a claim through the route described in claims, certification and the disputes process. Interest does not run on the proposal itself, which is a practical reason not to let negotiation drift indefinitely.
Everything claimed is tested against the cost principles, including the termination-specific provisions covering costs continuing after termination, loss of useful value of special tooling, and unexpired leases. The general framework is set out in the three cost tests. Where the contract was ended for default rather than convenience, an improper default is converted to a convenience termination and settled on this basis, which is the central practical reason to contest a default, as explained in cure notices, excusable delay and reprocurement costs.
Points to carry away
- The settlement proposal is due within one year of the effective date of termination.
- Missing the deadline lets the contracting officer determine the amount unilaterally.
- Profit is allowed on preparations made and work done, never on work not performed.
- Settlement expenses, including accounting and legal costs of preparing the proposal, are recoverable.
- A contract that would have finished at a loss carries no profit and a downward adjustment.
- On a partial termination, an adjustment to the price of the continued work must be requested promptly.
Questions readers ask
What is the difference between the inventory basis and the total cost basis?
The inventory basis is the preferred method and prices the settlement from the termination inventory: metals, raw materials, purchased parts, work in process and finished goods allocable to the terminated portion, plus other allowable items. The total cost basis starts from all costs incurred on the contract, deducts the cost of items delivered and accepted and the residual value of retained property, and adds profit and settlement expenses. The total cost basis is used where the inventory basis is impracticable, and it requires the contracting officer's approval.
How are subcontractor settlements handled?
The prime settles with its subcontractors and includes the settled amounts in its own proposal. Subcontractors have no direct route to the government, so their recovery depends entirely on the prime's flow-down clause and on the prime pursuing it. Settlements above a stated amount require the contracting officer's approval or ratification before they are included. A prime that settles generously without approval risks having the excess disallowed while still owing the money it agreed to pay.
What happens if the parties cannot agree on the amount?
The contracting officer issues a determination of the amount due. That determination is a decision the contractor may dispute, and the dispute proceeds as a claim under the disputes clause with the ordinary appeal deadlines. The determination is not the end of the matter, but it does shift the posture: the contractor is now challenging a decision rather than negotiating a proposal, and interest runs only from receipt of a properly submitted certified claim.
Sources
- Acquisition.gov — FAR Part 49, Termination of ContractsThe full termination framework, including notices, settlement and disposal of property.
- Acquisition.gov — FAR Subpart 49.1, General PrinciplesThe termination notice, the contractor's duties and the settlement principles.
- Acquisition.gov — FAR Subpart 49.2, Additional Principles for Fixed-Price Contracts Terminated for ConvenienceThe one-year filing period, the settlement bases and the treatment of loss contracts.
- Acquisition.gov — FAR 52.249-2, Termination for Convenience of the Government (Fixed-Price)The clause itself, its duties on the contractor and the partial termination adjustment.
- Acquisition.gov — FAR 31.205-42, Termination CostsThe specific cost categories arising only because a contract ended early.
- Acquisition.gov — FAR 52.212-4, Contract Terms and Conditions: Commercial Products and Commercial ServicesThe simplified commercial termination provision and what it pays.
- Acquisition.gov — FAR Subpart 31.2, Contracts With Commercial OrganizationsThe cost principles applied to everything claimed in a settlement proposal.
Lawwise is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
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