FAR Part 49 — Termination (explainer)

FAR Part 49 — Termination of Contracts

What this Part does

Part 49 governs how the government ends a contract before performance completes. There are two fundamentally different species:

1. Termination for convenience (T4C) — the government’s unilateral right to end the contract at its convenience, for any reason or no reason. Contractor recovers actual costs incurred, a reasonable profit on work performed (but not on unperformed work), and settlement expenses. Governed by Subparts 49.1, 49.2, and 49.6.
2. Termination for default (T4D) — an adverse action, triggered by contractor nonperformance. Contractor may be liable for excess reprocurement costs (the delta between the original contract price and what the government pays to reprocure), plus potential suspension/debarment risk. Governed by Subpart 49.4.

The difference between these two outcomes can be a 9-figure swing for a major contractor. Converting a T4D into a T4C via a COFC or board appeal is one of the most common and most lucrative federal-contract litigation posture changes.

When you’d look here

• Your client received a cure notice (FAR 49.402-3(e)) or a show cause notice and has 10 days to respond.
• A T4C notice just landed and the client needs a termination settlement proposal (TSP).
• The agency is signaling intent to T4D and you need to assess conversion strategy — push the agency toward T4C during the show- cause process, or fight the T4D at the board afterward.
• Your client is downstream — a subcontractor whose prime just got T4C’d — and needs to understand how far the termination flows down.
• You’re negotiating a commercial-item contract and want to understand why FAR 52.212-4’s T4C clause differs dramatically from FAR 52.249-2 (which doesn’t apply to commercial items).

Case study: fighting the T4D

Northwind Aviation (hypothetical) held a $38M Air Force contract to modify a fleet of T-6 trainer aircraft with a new avionics suite. Eighteen months in, Northwind was running four months behind schedule. The Contracting Officer issued a cure notice under FAR 49.402-3(e) citing “failure to make progress.” Northwind’s response described supply-chain delays, subcontractor performance failures, and proposed a 90-day recovery plan with independent verification milestones.

The CO was unconvinced. Six weeks after the cure notice, a show cause notice issued. The show cause notice is the last formal warning — the contractor must provide a “reason” the government should not T4D. Northwind’s lawyers advised a detailed response documenting the timeline, attributing delay to government-caused factors (late GFE delivery, late type certification by FAA of a required component), and expressly offering to accept a negotiated T4C settlement of specific unfinished modifications.

The CO T4D’d anyway. The T4D notice cited failure to make progress and accrued liquidated damages of $2.2M.Threemonthslater,theAirForcereprocuredtheremaining9aircraftat$48M (vs. the remaining $22MofNorthwin{d}^{\prime }soriginalcontract).Northwindwasinvoicedfor$26M in excess reprocurement costs plus the $2.2M in LDs.

Northwind appealed to the ASBCA. The appeal argued (a) the delay was not the contractor’s fault because GFE was delivered 7 months late and the type certification was outside Northwind’s control (excusable delay under FAR 52.249-8(c)), and (b) even if some delay was Northwind’s, the T4D was not a reasonable exercise of the CO’s discretion given the recovery plan on the table.

The Board converted the T4D to a T4C after a three-year fight. The key findings: the GFE delay was partially excusable (the 7-month late delivery absorbed most of Northwind’s schedule slip), and the show- cause response had presented a credible recovery plan that the government hadn’t meaningfully evaluated. The $26Minexcessreprocurementcostsfellaway;NorthwindrecovereditsT4Csettlementontheincompletework(about$5.4M) plus appeal costs.

Teaching points:

1. T4D is always challengeable. The government’s T4D is an “exercise of discretion” that must be “reasonable” — boards apply meaningful scrutiny. The burden of proof is on the government to justify the T4D, not on the contractor to disprove it (FAR 49.402-3(f) + common law).
2. Excusable delay is a conversion lever. If any material cause of delay is outside the contractor’s control — government-caused, act of God, strike, unusually severe weather — the T4D conversion argument has traction. Document the timeline ferociously.
3. The show-cause response is the key document. Boards look at what the contractor offered, what the government considered, and whether the government’s T4D decision was reasonably open on the record. A perfunctory show-cause response is a disaster.

Case study: T4C settlement proposals

Riverton Robotics (hypothetical) held a $12M Army contract for autonomous mine-detection drones. After 8 months of performance with prototypes under development, the Army T4C’d — the program had been restructured and this specific variant was no longer needed. The T4C notice, issued under FAR 49.201, gave Riverton 1 year to submit a termination settlement proposal (TSP).

Riverton’s TSP under FAR 49.206-2 recovered:

• Direct costs incurred through the T4C effective date: $4.3Minengineeringlabor,$1.1M in materials on order or delivered.
• Settlement expenses (cost of preparing the TSP, cost of disposing of unused materials, subcontract settlement costs): $380K.
• A reasonable profit on work performed (Riverton proposed 9% based on its forward pricing rates): $405K.

The Army pushed back on the profit percentage (the T4C happened before Riverton had demonstrated performance) and negotiated to 6%. Final settlement: $5.9M paid within 60 days.

Teaching points:

1. No “anticipatory profit.” T4C settles actual costs, not expected profit on unperformed work. This is the single biggest factual difference from ordinary breach damages.
2. Settlement expenses are their own bucket. TSPs should include the cost of preparing the TSP itself. Contractors routinely leave this on the table.
3. Subcontract settlements flow up. The prime is responsible for settling subcontract T4Cs and can include those costs in the upstream TSP (FAR 49.108-3). Document the sub settlements carefully.

Key sections

• FAR 49.101 — Authorities and responsibilities.
• FAR 49.102 — Notice of termination.
• FAR 49.105 — Duties of the TCO (Termination Contracting Officer, distinct from the original PCO).
• FAR 49.108 — Subcontract settlements in prime T4Cs.
• FAR 49.201 — General (T4C principles).
• FAR 49.206-2 — Termination settlement proposal content.
• FAR 49.207 — Limitation on settlement for fixed-price contracts.
• FAR 49.402 — T4D procedures. Read 49.402-1 through 49.402-8 as a unit — cure notices, show cause, excusable delay, alternatives to T4D, effect of T4D.
• FAR 49.402-3 — Procedure for T4D.
• FAR 49.402-6 — Repurchase against contractor’s account (excess reprocurement costs).
• FAR 49.402-7 — Other damages (liquidated damages, actual damages).
• FAR 49.6 (Subpart) — Contract forms, clauses, and settlement vouchers.

Related

• FAR Part 43 — Contract modifications (sometimes a negotiated mod is the alternative to termination).
• FAR Part 33 — Disputing the T4D (appeals to ASBCA/CBCA or COFC).
• FAR Part 52.249 — The termination clauses themselves — 49-series numbering:
  • FAR 52.249-1 — T4C (for a fixed-price contract).
  • FAR 52.249-2 — T4C or T4D (for a fixed-price contract).
  • FAR 52.249-6 — T4C (for a cost-reimbursement contract).
  • FAR 52.249-8 — Default (for a fixed-price supply / service contract).
  • FAR 52.249-10 — Default (for a fixed-price construction contract).
• FAR 52.212-4 — Commercial items T&Cs, which have their own self-contained termination regime replacing Part 49.