49.203 Adjustment for loss
Source: FAR 49.203 on acquisition.gov
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.
(a) In the negotiation or determination of any settlement, the TCO shall not allow profit if it appears that the contractor would have incurred a loss had the entire contract been completed. The TCO shall negotiate or determine the amount of loss and make an adjustment in the amount of settlement as specified in paragraph (b) or (c) of this section. In estimating the cost to complete, the TCO shall consider expected production efficiencies and other factors affecting the cost to complete.
(b) If the settlement is on an inventory basis (see 49.206-2(a)), the contractor shall not be paid more than the total of the amounts in paragraphs (b)(1), (2), and (3) of this section, less all disposal credits and all unliquidated advance and progress payments previously made under the contract:
(1) The amount negotiated or determined for settlement expenses.
(2) The contract price, as adjusted, for acceptable completed end items (see 49.205).
(3) The remainder of the settlement amount otherwise agreed upon or determined (including the allocable portion of initial costs (see 31.205-42(c)), reduced by multiplying the remainder by the ratio of-
(i) The total contract price to
(ii) The total cost incurred before termination plus the estimated cost to complete the entire contract.
(c) If the settlement is on a total cost basis (see 49.206-2(b)), the contractor shall not be paid more than the total of the amounts in paragraphs (c)(1) and (2) of this section, less all disposal and other credits, all advance and progress payments, and all other amounts previously paid under the contract:
(1) The amount negotiated or determined for settlement expenses.
(2) The remainder of the total settlement amount otherwise agreed upon or determined (lines 7 and 14 of https://www.gsa.gov/forms-library/settlement-proposal-total-cost-basis" target="_blank">SF 1436, Settlement Proposal (Total Cost Basis)) reduced by multiplying the remainder by the ratio of-
(i) The total contract price to
(ii) The remainder plus the estimated cost to complete the entire contract.