49.202
Profit
Profit in contract terminations for convenience is strictly limited to work performed and preparations made, with specific exclusions and factors guiding fair determination.
Overview
FAR 49.202 outlines the principles for determining profit in the settlement of fixed-price contracts terminated for convenience. It specifies how profit should be calculated for work performed, preparations made, and subcontractor settlements, while excluding anticipatory profits, consequential damages, and undelivered materials or services. The section also lists factors to consider when negotiating profit, such as the extent of work completed, efficiency, risk, and the nature of the business. Special rules apply to construction contracts, particularly regarding profit on subcontractor settlements for work in place versus materials on hand.
Key Rules
- Profit Allowance
- Profit is allowed only on work done and preparations made, not on settlement expenses or undelivered materials/services.
- Exclusions
- No profit for anticipatory profits, consequential damages, or undelivered subcontractor materials/services.
- Subcontractor Settlements
- Contractor’s efforts in settling subcontracts are considered, but profit is not based on the dollar value of settlements.
- Profit Determination Factors
- Factors include work completed, efficiency, risk, inventive contributions, and contemplated profit rates.
- Construction Contracts
- Profit is allowed on actual work in place but not on materials on hand or preparations for incomplete work.
Responsibilities
- Contracting Officers: Must use reasonable methods to determine fair profit, consider all listed factors, and apply special rules for construction contracts.
- Contractors: Must provide accurate records of work performed, preparations made, and subcontractor settlements; cannot claim profit on excluded items.
- Agencies: Ensure oversight and compliance with profit determination rules in terminations for convenience.
Practical Implications
- Ensures fair compensation for contractors without overcompensating for unperformed work or speculative profits.
- Requires careful documentation and negotiation of profit elements in termination settlements.
- Common pitfalls include claiming profit on undelivered items or misunderstanding allowable profit bases.