49.206-2 Bases for settlement proposals
Source: FAR 49.206-2 on acquisition.gov
Contractors must use the inventory basis for settlement proposals after contract termination unless the total cost basis is approved, ensuring all costs and deductions are properly itemized and justified.
Overview
FAR 49.206-2 outlines the acceptable bases for contractors to use when preparing settlement proposals following the termination of a government contract. The regulation establishes the inventory basis as the preferred method, requiring detailed itemization of costs directly allocable to the terminated portion of the contract. It also provides for the use of the total cost basis under specific circumstances, such as when inventory accounting is impractical or would cause undue delay, and details the requirements for each method. The section further stipulates that any other basis for settlement proposals requires prior approval from the chief of the contracting or contract administration office.
Key Rules
- Inventory Basis (Preferred Method)
- Contractors must itemize costs such as materials, work in process, administrative costs, subcontractor settlements, and other proper charges. Profit or loss adjustments and deductions for payments and credits are required.
- Total Cost Basis (Alternative Method)
- Used when inventory basis is impractical, with prior TCO approval. Contractors must itemize all incurred costs, settlements, and expenses, and deduct delivered items, payments, and credits. Special rules apply for construction and lump-sum professional services contracts.
- Other Bases
- Any other basis for settlement proposals requires prior approval from the chief of the contracting or contract administration office.
Responsibilities
- Contracting Officers: Approve use of total cost or other bases, ensure compliance with itemization and deduction requirements.
- Contractors: Prepare settlement proposals using the correct basis, itemize costs, apply required deductions, and obtain necessary approvals for alternative methods.
- Agencies: Oversee and review settlement proposals for compliance with FAR requirements.
Practical Implications
- This section ensures consistency and transparency in settlement proposals after contract termination, reducing disputes and facilitating timely settlements. Contractors must carefully document and justify all costs and deductions, and failure to follow the prescribed bases or obtain necessary approvals can delay or jeopardize settlement payments.
(a) Inventory basis.
(1) Use of the inventory basis for settlement proposals is preferred. Under this basis, the contractor may propose only costs allocable to the terminated portion of the contract, and the settlement proposal must itemize separately-
(i) Metals, raw materials, purchased parts, work in process, finished parts, components, dies, jigs, fixtures, and tooling, at purchase or manufacturing cost;
(ii) Charges such as engineering costs, initial costs, and general administrative costs;
(iii) Costs of settlements with subcontractors;
(iv) Settlement expenses; and
(v) Other proper charges.
(2) An allowance for profit (49.202) or adjustment for loss (49.203(b)) must be made to complete the gross settlement proposal. All unliquidated advance and progress payments and all disposal and other credits known when the proposal is submitted must then be deducted.
(3) This inventory basis is also appropriate for use under the following circumstances:
(i) The partial termination of a construction or related professional services contract.
(ii) The partial or complete termination of supply orders under any terminated construction contract.
(iii) The complete termination of a unit-price (as distinguished from a lump-sum) professional services contract.
(b) Total cost basis.
(1) When use of the inventory basis is not practicable or will unduly delay settlement, the total-cost basis (https://www.gsa.gov/forms-library/settlement-proposal-total-cost-basis" target="_blank">SF 1436) may be used if approved in advance by the TCO as in the following examples:
(i) If production has not commenced and the accumulated costs represent planning and preproduction or "get ready" expenses.
(ii) If, under the contractor’s accounting system, unit costs for work in process and finished products cannot readily be established.
(iii) If the contract does not specify unit prices.
(iv) If the termination is complete and involves a letter contract.
(2) When the total-cost basis is used under a complete termination, the contractor must itemize costs incurred under the contract up to the effective date of termination. The costs of settlements with subcontractors and applicable settlement expenses must also be added. An allowance for profit (49.202) or adjustment for loss (49.203(c)) must be made. The contract price for all end items delivered or to be delivered and accepted must be deducted. All unliquidated advance and progress payments and disposal and other credits known when the proposal is submitted must also be deducted.
(3) When the total-cost basis is used under a partial termination, the settlement proposal shall not be submitted until completion of the continued portion of the contract. The settlement proposal must be prepared as in paragraph (b)(2) of this section, except that all costs incurred to the date of completion of the continued portion of the contract must be included.
(4) If a construction contract or a lump-sum professional services contract is completely terminated, the contractor shall-
(i) Use the total cost basis of settlement;
(ii) Omit Line 10 "Deduct-Finished Product Invoiced or to be Invoiced" from Section II of https://www.gsa.gov/forms-library/settlement-proposal-total-cost-basis" target="_blank"> SF 1436 Settlement Proposal (Total Cost Basis); and
(iii) Reduce the gross amount of the settlement by the total of all progress and other payments.
(c) Other basis. Settlement proposals may not be submitted on any basis other than paragraph (a) or (b) of this section without the prior approval of the chief of the contracting or contract administration office.