As part of the Revolutionary FAR Overhaul, the FAR Council has issued a proposed rule to revise FAR Part 49, Termination of Contracts, that would significantly accelerate the timeline for submitting termination settlement proposals following a termination for convenience. Under the proposed rule, contractors would be required to submit termination settlement proposals to the contracting officer within 90 days after termination—nine months earlier than the current one-year deadline. According to the FAR Council, the change is intended “to improve the efficiency of the settlement process by addressing delays experienced under the current framework.”
Notably, the proposed rule does not reduce the information required in a termination settlement proposal. Within 90 days of termination, contractors would still need to collect and validate cost data, develop profit positions, identify and dispose of inventory, and quantify all subcontractor costs, which requires resolution of all subcontractor claims and subcontractor termination settlement proposals. For many contracts, particularly large programs involving multiple tiers of subcontractors or substantial inventory, completing these tasks within the 90-day timeline may prove difficult.
The compressed timeline may also create risks for both contractors and the government. For example, contractors might find themselves forced to negotiate subcontractor settlements prematurely or submit proposals based on incomplete accounting data. In some cases, contractors might feel pressure to include estimated or protective amounts to account for unresolved subcontractor disputes or uncertain costs, increasing potential exposure under the False Claims Act. At the same time, contracting officers may face additional administrative burdens as they decipher evolving or incomplete termination settlement proposals, process repeated extension requests, and resolve disputes arising from competing efforts to preserve rights before the deadline expires. The proposed rule risks turning a process designed to facilitate negotiated settlements and efficient contract closeout into one that creates additional disputes and litigation.
If the proposed 90-day deadline is implemented in the final rule for FAR Part 49, contractors may want to revisit their termination response procedures and ensure they can quickly assemble cross-functional teams involving contracts, accounting, supply chain, and legal personnel. Contractors may also consider reviewing subcontract terms to confirm that subcontractors can provide timely cost and settlement information in the event of a termination.
Commercial Products and Services
As a practical matter, the proposed 90-day timeline may also impact termination settlement timelines for contracts for commercial products or services. Terminations of contracts for commercial products or services are governed by FAR Part 12.403, not FAR Part 49, so the proposed change does not directly affect those contracts. However, FAR 12.403 does not establish a timeline for submission of termination settlement proposals and provides that contracting officers may look to FAR Part 49 for guidance. As a result, commercial item contractors typically have sought to submit their termination settlement proposals within the one-year period provided in FAR Part 49. The RFO model deviation for FAR Part 12 removes the suggestion to look to FAR Part 49 for guidance, but contracting officers retain the discretion to determine termination settlement proposal requirements on a contract-by-contract basis and may be influenced by the 90-day timeline. It will be important for commercial products and services contractors to obtain an understanding with the contracting officer of when termination settlement proposals must be submitted.
Related Changes
The proposed rule also includes the following related changes to FAR Part 49:
- Extension requests: The deadline to request an extension to the termination settlement proposal deadline is shortened from one year to 60 days after termination.
- Inventory disposal schedules: The deadline to submit inventory disposal schedules is reduced from 120 days to 60 days after termination.
- Subcontractor settlement proposals: The recommended deadline for subcontractors to submit termination settlement proposals is shortened from 6 months to 30 days after termination.
- Audits: Termination settlement proposal audits would no longer be mandatory for proposals that exceed the threshold for certified cost and pricing data. Rather, the contracting officer would first conduct a risk-based assessment to determine whether an audit is needed before referring the proposal to the audit agency. This change potentially allows for quicker final payment and resolution, but the intended efficiency gains may be offset if the 90-day submission deadline results in a higher volume of incomplete or hastily prepared submissions.
The public comment period for the proposed rule is open through July 23, 2026.
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