This is a photo of a man reading a termination settlement proposal. Text in the image reads "Preparing a Termination Settlement Proposal: Key Procedures for Contractors"

Preparing a Strong Termination Settlement for Maximum Contractor Recovery

By Marcos Gonzalez | April 7, 2025

For the past several weeks, GovSpring has been covering termination of contracts rippling through executive agencies. In a previous article on termination for convenience, Marcos Gonzalez reviewed one option for contractors facing termination: submitting a termination settlement proposal (“TSP”). To summarize, if you were terminated for convenience, unless the agency insists on a no-cost settlement, the FAR permits a contractor to submit a TSP to recover the cost of performance up until termination and costs related to settlement (e.g., attorneys’ and accountants’ fees). This document provides a brief overview of procedures for termination and preparation of the termination settlement proposal. It highlights the main issues involved in a settlement, not a comprehensive guide. Specific requirements may vary, and you can contact the managing attorney, Marcos Gonzalez at marcos@govspringlegal.com (or (202) 407-3556) to discuss your particular circumstances.

Common Termination Clauses by Contract Type

Termination procedures differ by contract type and dollar threshold, but your contract may include any of the following clauses, depending on the nature of your contract:

Understanding the Termination Notice and Immediate Obligations

When a contractor is terminated, the contracting officer will provide a notice of termination with specific instructions derived from a letter template at FAR 49.601-1 (electronic notice) or 49.601-2 (letter notice). The template in the FAR won’t appear verbatim, since several of the instructions may not apply to your contract. There are several obligations under FAR 49.104, “Duties of prime contractor after receipt of notice of termination.” But the termination notice will include the scope of termination (full or partial) and direct the contractor to do the following:

  • Stop all work
  • Notify subcontractors of termination
  • If applicable, assign subcontracts to the agency for termination and settlement
  • Notify agency of lawsuits with subcontractors, if applicable
  • If applicable, prepare termination inventory for disposal

Contractors should review the full list of obligations at 49.104 with counsel, as some factors may or may not apply to them. Moreover, the FAR does not list several practical requirements, such as documenting costs related to termination in detail rather than submitting a lump sum. This means a contractor should create relevant cost codes for termination costs and ensure that accountants and attorneys adequately document costs.

In some circumstances, the contracting officer may instruct you to continue performance of work. This would include circumstances where stopping would result in “spoilage” of work-in-process or would result in “undue loss to the government.”  If you anticipate that termination may result in such loss to the government, but the contracting officer has not included this information in the notice, you should also contact the contracting officer to request modification of the termination notice.

The Basis for T4C Compensation: Aiming for “Fair Settlement”

It is sometimes noted that a termination for convenience of a fixed-price contract transforms it into a cost-type contract. But cost-type contracts are governed by a strict adherence to the allowability and allocability principles applicable to FAR Part 30, whereas termination settlements aim to achieve a “fair settlement.” In other words, there is a bit more subjectivity involved in determining a fair negotiated settlement. Note that there are caveats to this for contracts covered by the Truth in Negotiations Act, which require more details cost and pricing data backed by certifications.

FAR Subpart 49.201 outlines a contractor’s ability to propose and negotiate a settlement with the agency to receive “fair compensation” for all work performed, any preparation costs for terminated work, and a reasonable allowance of profit. Profit does not include anticipated profit for periods extending past the termination date, for settlement costs, and it would not allow for consequential damages. FAR Subpart 49.202(b) provides several factors which may help guide parties negotiate profit, including the extent and difficulty of work performed, the contractor’s efficiency, and the rate of profit both parties contemplated at the inception of the contract, among other factors.

Choosing a Basis for Your Settlement Proposal

When constructing a settlement proposal, contractors may rely on two bases for determining a settlement amount: (a) inventory basis; or (b) total cost basis. The inventory method requires itemizing the following costs:

  • Metals, raw materials, purchased parts, work in process, finished parts, components, dies, jigs, fixtures, and tooling, at purchase or manufacturing cost;
  • Charges such as engineering costs, initial costs, and general administrative costs;
  • Costs of settlements with subcontractors;
  • Settlement expenses; and
  • Other proper charges

As you may imagine, it’s important to accurately track these costs throughout the contract lifecycle. The inventory method allows contractors to propose costs allocable to the terminated portion of the contract and separately itemize other costs (e.g., manufacturing, administrative, and settlement costs), and provide an allowance for profit or loss. In contrast, the total cost method requires approval from the contracting officer under certain circumstances (such as if production has not commenced and all costs are attributed to planning or preparatory expenses). This method permits the contractor to itemize costs incurred up to the effective termination date. It includes allowances for profits or losses and deductions for end items that have been delivered, are to be delivered, or have been accepted by the agency. The contractor must submit the final settlement proposal within one year of notice of termination, unless extended by the contracting officer. If the contractor misses that deadline, the contracting officer will issue its own settlement.

Contractors may submit proposals at successive stages for different portions of the contractor’s costs. All proposals must be submitted using the applicable form at FAR Subpart 49.602-1, along with reasonable accounting data including actual, standard, or average costs, or estimated costs (in lieu of the others, if this is the only data in the contractor’s possession).

What if the Government Denies the Proposal?

Settlements are negotiations, and an initial proposal is a request to open negotiations, not a formal demand under the Contract Disputes Act (“CDA”). This means that, if the contractor and government are unable to reach a settlement, a contractor may not immediately appeal the initial rejection; they must either modify the settlement or file a formal claim with the contracting officer and request a final decision. If there are formal mistakes with the proposal, the contractor will be able to correct those. Settlement proposals are not always straightforward, and it is critical for contractors to ensure they properly account for all their allowable, allocable, and reasonable costs to submit to a contracting officer.

If you would like to discuss whether it is in your interest to prepare a settlement proposal, challenge the termination, or recommend an alternative to the agency, schedule a consultation with GovSpring Legal. You can also click here to tell us about your legal needs, and the managing attorney will be in contact as his earliest convenience. 

This article was co-authored with Aaron Silva. Aaron is currently a third-year law student at The George Washington University Law School, with a focus in Government Procurement and International & Comparative Law.

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