49.202 Profit
Source: FAR 49.202 on acquisition.gov
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.
(a) The TCO shall allow profit on preparations made and work done by the contractor for the terminated portion of the contract but not on the settlement expenses. Anticipatory profits and consequential damages shall not be allowed (but see 49.108-5). Profit for the contractor’s efforts in settling subcontractor proposals shall not be based on the dollar amount of the subcontract settlement agreements but the contractor’s efforts will be considered in determining the overall rate of profit allowed the contractor. Profit shall not be allowed the contractor for material or services that, as of the effective date of termination, have not been delivered by a subcontractor, regardless of the percentage of completion. The TCO may use any reasonable method to arrive at a fair profit.
(b) In negotiating or determining profit, factors to be considered include-
(1) Extent and difficulty of the work done by the contractor as compared with the total work required by the contract (engineering estimates of the percentage of completion ordinarily should not be required, but if available should be considered);
(2) Engineering work, production scheduling, planning, technical study and supervision, and other necessary services;
(3) Efficiency of the contractor, with particular regard to-
(i) Attainment of quantity and quality production;
(ii) Reduction of costs;
(iii) Economic use of materials, facilities, and manpower; and
(iv) Disposition of termination inventory;
(4) Amount and source of capital and extent of risk assumed;
(5) Inventive and developmental contributions, and cooperation with the Government and other contractors in supplying technical assistance;
(6) Character of the business, including the source and nature of materials and the complexity of manufacturing techniques;
(7) The rate of profit that the contractor would have earned had the contract been completed;
(8) The rate of profit both parties contemplated at the time the contract was negotiated; and
(9) Character and difficulty of subcontracting, including selection, placement, and management of subcontracts, and effort in negotiating settlements of terminated subcontracts.
(c) When computing profit on the terminated portion of a construction contract, the contracting officer shall-
(1) Comply with paragraphs (a) and (b) of this section;
(2) Allow profit on the prime contractor’s settlements with construction subcontractors for actual work in place at the job site; and
(3) Exclude profit on the prime contractor’s settlements with construction subcontractors for materials on hand and for preparations made to complete the work.