Settlement procedure
Prime contractors must settle subcontractor claims after termination in accordance with FAR policies, provide adequate documentation, and obtain TCO approval for all settlements.
Overview
FAR 49.108-3 outlines the procedures for settling subcontractor claims when a prime contract is terminated. It requires that settlements with subcontractors generally follow the same policies and principles as those for prime contracts, ensuring consistency and fairness. The section mandates that subcontractor settlement proposals must be acceptable to the prime contractor and supported by sufficient accounting data for government review. The Government will not reimburse the prime contractor for anticipatory profits or consequential damages from subcontract terminations. The Termination Contracting Officer (TCO) must ensure that all subcontractor termination inventory is properly disposed of and accounted for, and that all settlements are submitted for approval or ratification. The TCO is responsible for reviewing each settlement to confirm necessity, good faith, reasonableness, and proper allocation, and must notify the contractor of approval or disapproval in writing.
Key Rules
- Subcontractor Settlement Conformity
- Settlements must align with the policies for prime contracts and be acceptable to the next higher tier.
- Supporting Documentation
- Settlements must be backed by sufficient accounting data for government review.
- No Payment for Anticipatory Profits
- The government will not pay for lost profits or consequential damages from subcontract terminations.
- Inventory Disposal
- Subcontractor termination inventory must be handled per FAR 52.245-1(j).
- TCO Review and Approval
- All settlements must be submitted to the TCO for approval or ratification, who will review for necessity, good faith, reasonableness, and allocation.
Responsibilities
- Contracting Officers (TCOs): Review and approve/ratify subcontract settlements, ensure inventory is properly accounted for, and provide written notification of decisions.
- Contractors: Settle with subcontractors per FAR policies, provide adequate supporting data, dispose of inventory properly, and submit settlements for approval.
- Agencies: Oversee compliance and ensure settlements are reasonable and justified.
Practical Implications
- Ensures consistency and fairness in subcontractor settlements after contract termination.
- Requires thorough documentation and government oversight, reducing risk of improper payments.
- Common pitfalls include insufficient documentation, improper inventory handling, and seeking reimbursement for unallowable costs.