49.203
Adjustment for loss
When a fixed-price contract terminated for convenience would have resulted in a loss, the contractor cannot receive profit, and the settlement is strictly limited by specific formulas to prevent overpayment.
Overview
FAR 49.203 outlines how the Termination Contracting Officer (TCO) must adjust settlements when a fixed-price contract terminated for convenience would have resulted in a loss for the contractor if completed. The regulation prohibits profit in such cases and requires the TCO to calculate and adjust the settlement amount based on either an inventory or total cost basis, ensuring the contractor does not recover more than their actual costs, minus applicable credits and payments. The TCO must consider production efficiencies and other relevant factors when estimating completion costs.
Key Rules
- No Profit Allowed on Loss Contracts
- If the contractor would have incurred a loss, the TCO cannot allow profit in the settlement and must adjust the amount accordingly.
- Inventory Basis Settlement
- Payment is limited to settlement expenses, the adjusted contract price for completed items, and a calculated portion of other agreed costs, minus credits and prior payments.
- Total Cost Basis Settlement
- Payment is limited to settlement expenses and a calculated portion of the total settlement amount, minus credits and prior payments, using a specific ratio formula.
Responsibilities
- Contracting Officers: Must determine if a loss would have occurred, disallow profit, and apply the correct settlement calculation method.
- Contractors: Must provide accurate cost data and settlement proposals, and understand that profit is not allowed if a loss is projected.
- Agencies: Must ensure oversight of TCO determinations and compliance with settlement calculation procedures.
Practical Implications
- This section ensures the government does not pay profit on contracts that would have lost money, protecting taxpayer funds.
- Contractors must be prepared for detailed cost scrutiny and understand the formulas used to cap settlements.
- Common pitfalls include miscalculating allowable costs or failing to account for all credits and prior payments.