49.402-2 Effect of termination for default
Source: FAR 49.402-2 on acquisition.gov
After a default termination, contractors are not paid for undelivered work, must transfer completed items as directed, and remain liable for excess costs and damages to the Government.
Overview
FAR 49.402-2 details the consequences and procedures following a termination for default in fixed-price contracts. When a contract is terminated for default, the Government is not responsible for the contractor’s costs on undelivered work and can recover any advance or progress payments related to that work. The Government may also require the contractor to transfer title and deliver completed supplies or manufacturing materials, provided it does not already have title under another contract provision. Payment for completed supplies or materials is made at the contract price or an agreed amount, but only after ensuring the Government is protected from potential liens or overpayment. The contracting officer must take specific steps to mitigate the risk of outstanding claims from laborers or suppliers before making payments. Additionally, the contractor remains liable for any excess costs or damages incurred by the Government in acquiring replacement supplies or services.
Key Rules
- No Liability for Undelivered Work
- The Government is not liable for costs on undelivered work after default termination and can recover advance/progress payments.
- Acquisition of Completed Supplies/Materials
- The Government may require delivery of completed supplies/materials, but only if it does not already have title.
- Payment for Acquired Items
- Payment is made for completed supplies at contract price and for materials at an agreed amount, subject to lien protection.
- Lien Protection Measures
- The contracting officer must ensure the Government is protected from liens before payment, using bonds, lien waivers, agreements, or withholding funds.
- Contractor Liability for Excess Costs
- The contractor is liable for excess costs and damages resulting from the Government’s need to acquire replacement supplies/services.
Responsibilities
- Contracting Officers: Must verify title, ensure lien protection, determine payment, and pursue recovery of excess costs or damages.
- Contractors: Must transfer title/deliver completed items as directed, provide lien waivers/statements, and are liable for excess costs/damages.
- Agencies: Oversee compliance with termination procedures and ensure Government interests are protected.
Practical Implications
- This section protects the Government from financial loss and legal claims after a default termination.
- Contractors must be prepared to transfer completed work and resolve any outstanding claims from suppliers or laborers.
- Failure to comply can result in withheld payments, legal liability, and additional costs for contractors.
(a) Under a termination for default, the Government is not liable for the contractor’s costs on undelivered work and is entitled to the repayment of advance and progress payments, if any, applicable to that work. The Government may elect, under the Default clause, to require the contractor to transfer title and deliver to the Government completed supplies and manufacturing materials, as directed by the contracting officer.
(b) The contracting officer shall not use the Default clause as authority to acquire any completed supplies or manufacturing materials unless it has been ascertained that the Government does not already have title under some other provision of the contract. The contracting officer shall acquire manufacturing materials under the Default clause for furnishing to another contractor only after considering the difficulties the other contractor may have in using the materials.
(c) Subject to paragraph (d) of this section, the Government shall pay the contractor the contract price for any completed supplies, and the amount agreed upon by the contracting officer and the contractor for any manufacturing materials, acquired by the Government under the Default clause.
(d) The Government must be protected from overpayment that might result from failure to provide for the Government’s potential liability to laborers and material suppliers for lien rights outstanding against the completed supplies or materials after the Government has paid the contractor for them. To accomplish this, before paying for supplies or materials, the contracting officer shall take one or more of the following measures:
(1) Ascertain whether the payment bonds, if any, furnished by the contractor are adequate to satisfy all lienors’ claims or whether it is feasible to obtain similar bonds to cover outstanding liens.
(2) Require the contractor to furnish appropriate statements from laborers and material suppliers disclaiming any lien rights they may have to the supplies and materials.
(3) Obtain appropriate agreement by the Government, the contractor, and lienors ensuring release of the Government from any potential liability to the contractor or lienors.
(4) Withhold from the amount due for the supplies or materials any amount the contracting officer determines necessary to protect the Government’s interest, but only if the measures in paragraphs (d)(1), (2), and (3) of this section cannot be accomplished or are considered inadequate.
(5) Take other appropriate action considering the circumstances and the degree of the contractor’s solvency.
(e) The contractor is liable to the Government for any excess costs incurred in acquiring supplies and services similar to those terminated for default (see 49.402-6), and for any other damages, whether or not repurchase is effected (see 49.402-7).