Termination costs
FAR 31.205-42 sets strict rules for the allowability and documentation of costs arising from contract terminations, requiring contractors to justify, segregate, and mitigate such costs to ensure compliance.
Overview
FAR 31.205-42 outlines the principles for determining the allowability of costs arising from the termination of government contracts. It addresses specific cost categories unique to termination situations, such as common items, continuing costs, initial and preparatory costs, loss of useful value, rental under unexpired leases, alterations of leased property, settlement expenses, and subcontractor claims. These rules are to be applied in conjunction with the general cost principles in FAR Subpart 31.2.
Key Rules
- Common Items
- Costs for items usable on other work are not allowable unless the contractor proves they cannot be retained without loss.
- Costs Continuing After Termination
- Costs that cannot be immediately discontinued are generally allowable unless due to contractor negligence or willful failure.
- Initial and Preparatory Costs
- Initial and preparatory costs are allowable under specific conditions and must be properly segregated and allocated.
- Loss of Useful Value
- Losses on special tooling or equipment are allowable if not usable elsewhere and the government’s interest is protected.
- Rental Under Unexpired Leases
- Rental costs are allowable if necessary for contract performance and efforts are made to mitigate costs.
- Alterations of Leased Property
- Costs for required alterations and restorations are allowable if necessary for contract performance.
- Settlement Expenses
- Reasonable settlement expenses are allowable and must be separately identified if significant.
- Subcontractor Claims
- Allowable if properly allocated and not duplicative of other claimed costs.
Responsibilities
- Contracting Officers: Evaluate and approve termination cost claims, ensure compliance with allocation and documentation requirements, and protect government interests.
- Contractors: Segregate and document costs, demonstrate allowability, mitigate continuing and lease costs, and avoid duplicative claims.
- Agencies: Oversee compliance and ensure proper settlement of termination costs.
Practical Implications
This section ensures fair and consistent treatment of costs when contracts are terminated, protecting both government and contractor interests. Contractors must carefully document and justify all claimed costs, avoid double-counting, and take steps to minimize ongoing and lease-related expenses. Common pitfalls include insufficient segregation of costs, failure to mitigate continuing costs, and improper allocation of indirect expenses.