FAR 52.249-1 Termination for Convenience: Settlement and Recovery

FAR 52.249-1, the Termination for Convenience of the Government (Fixed-Price) (Short Form), lets a federal contracting officer cancel a smaller fixed-price contract whenever cancellation serves the government’s interest, even if you’ve done nothing wrong. It appears in fixed-price contracts at or below the simplified acquisition threshold, and it pulls in the full settlement procedures of FAR Part 49 by reference. If you receive a notice under this clause, your job shifts from performing the work to documenting what you’re owed and filing a settlement proposal within one year.

When Your Contract Contains This Clause

FAR 49.502(a)(1) directs contracting officers to insert 52.249-1 in fixed-price solicitations and contracts when the amount is not expected to exceed the simplified acquisition threshold. As of October 1, 2025, that threshold rose from $250,000 to $350,000 for most federal purchases.¹ Higher ceilings apply in contingency, disaster response, and overseas humanitarian or peacekeeping operations.²

Not every below-threshold fixed-price contract gets the short form. FAR 49.502(a)(1) carves out services contracts (which use 52.249-4), research and development with educational or nonprofit institutions on a no-profit basis, architect-engineer work, and contracts calling for the specialized clauses prescribed at FAR 49.505(a) or (c).³ Fixed-price contracts above the threshold use FAR 52.249-2, the long form, which writes the settlement procedures directly into the clause instead of incorporating Part 49 by reference.

What Happens When You Receive the Notice

The contracting officer starts the process with a written Notice of Termination stating how much of the contract is ending and the effective date. It can end everything or only specific line items.⁴

Your duties begin the moment you receive it. Stop the work covered by the notice. Stop placing new orders for related materials and services. Terminate subcontracts tied to the discontinued portion. These obligations apply regardless of any delay in figuring out what you’re owed, so you cannot wait for a settlement number before winding down. Costs you continue to rack up after the notice are far harder to recover.⁴

Partial Terminations and the Price of What’s Left

When the government terminates only part of the contract, you keep performing the rest at the original price. That’s a problem when the terminated portion was carrying a share of your fixed costs. Part 49 lets the contractor and contracting officer negotiate an equitable adjustment to the price of the remaining work, though the total agreed amount for the terminated portion cannot exceed the original contract price minus payments already made and the price of continuing work.⁴ Raise the pricing issue during settlement, not after you’ve absorbed the loss.

Filing the Settlement Proposal

Your settlement proposal must cover all cost elements, including subcontractor settlements and proposed profit, and it must be backed by adequate accounting data.⁵

Which Form to Use

For proposals under $10,000, you may use Standard Form 1438, the Settlement Proposal (Short Form), unless the Termination Contracting Officer (TCO) directs otherwise. Above $10,000, you use the longer form prescribed in FAR 49.602-1, plus Standard Form 1439 (Schedule of Accounting Information).⁶ Do not split a proposal into pieces to stay under the SF 1438 threshold. The FAR explicitly bars dividing proposals that would normally be consolidated, such as those based on a series of separate orders for the same item.⁵

The One-Year Deadline

You have one year from the effective date of termination to submit the final proposal. The TCO can extend that, but only if you request it in writing before the year expires.⁵ Miss it and the contracting officer can set the settlement unilaterally on whatever information is available, which almost always means a lower number than you would have claimed.⁴

With TCO consent, you can file interim proposals covering separate portions of your costs as you compile the full picture. Each interim proposal has to include all costs of a particular type.⁵

What You Can Recover

The government pays for work actually performed, costs legitimately incurred, and a reasonable profit on the completed portion. Several limits apply.

The Contract Price Ceiling

The total settlement plus previous payments plus the price of any work that continued cannot exceed the original total contract price.⁴ A cancelled contract will never pay more than a completed one would have.

No Anticipatory Profits or Consequential Damages

The TCO must allow a reasonable profit on work you actually performed on the terminated portion, but anticipatory profits and consequential damages are not recoverable.⁷ Earnings you expected on work never performed, and downstream harms like lost business relationships or idle equipment beyond immediate wind-down, are off the table.

How the TCO Sets Profit

Profit is neither automatic nor formulaic. The TCO weighs the extent of the work you completed, your efficiency in using materials and labor, the complexity of the job, the capital you had at risk, and the profit rate the parties contemplated at contract negotiation. No profit is allowed on settlement expenses themselves, or on materials and services a subcontractor had not yet delivered by the termination date.⁷

Government Setoffs

The final settlement agreement, executed on Standard Form 30, has to account for any setoffs the government holds against you.⁸ Common ones include unliquidated progress payments, excess or unaccounted-for government property, and amounts owed on other contracts. These come off the top.

Settlement Preparation Costs Are Reimbursable

Putting the proposal together takes real work, and FAR 31.205-42(g) treats accounting, legal, and clerical costs as allowable when reasonably necessary for preparing and presenting the claim. Allowable settlement expenses also include the costs of terminating and settling subcontracts, plus indirect costs tied to salary and wages for the settlement effort (payroll taxes, fringe benefits, occupancy costs, and immediate supervision).⁹

If those costs are significant, set up a separate cost account or work order from day one to track them independently. Reconstructing them later is far harder than capturing them in real time.⁹

Inventory Disposal

Materials and partially completed items bought for the terminated work are not yours to keep or discard. FAR 49.206-3 requires complete inventory disposal schedules within 120 days of the effective termination date, unless the TCO grants a written extension.¹⁰ Schedules go on Standard Form 1428 and must describe each item in enough detail for the government to decide how to dispose of it.¹¹

Before signing the settlement, the TCO verifies the government property account. Property you can’t account for either gets reserved in the settlement or deducted from your payment.¹² Poor inventory records shrink settlements fast.

Subcontractor Claims

You, not the TCO, are responsible for promptly settling termination claims from your immediate subcontractors. The government expects you to negotiate those settlements rather than pass them upstream.

The effort you put into that work matters. The TCO won’t base your profit on the dollar value of subcontractor settlement agreements, but the effort you expended negotiating them factors into the profit rate on your own settlement.⁷ Your proposal to the government must include all subcontractor settlements as a cost element,⁵ and the costs you incur to terminate and settle those subcontracts are separately allowable as settlement expenses.⁹

If Negotiations Break Down

Most short-form settlements close through negotiation and a supplemental agreement on Standard Form 30. When they don’t, the Contract Disputes Act sets the path. If the contracting officer issues a final decision you disagree with, you can appeal to the relevant agency board of contract appeals within 90 days, or file directly in the United States Court of Federal Claims within 12 months.¹³ Both deadlines are strict. For contracts at or below the simplified acquisition threshold, the amounts at stake usually make the board route more practical than federal court. Either way, the strength of any appeal depends on the documentation you built during the settlement proposal.

The Narrow Bad Faith Exception

The government’s convenience-termination right is broad but not unlimited. A termination for convenience is valid only in the absence of bad faith or a clear abuse of discretion. If the government terminated the contract to steer the work to a preferred competitor or to punish you for exercising a contractual right, the termination can be challenged as a breach rather than a legitimate convenience action.

The difference in damages is large. Under a valid convenience termination, recovery is capped at costs incurred plus reasonable profit on work performed. Under breach, lost profits on the whole contract may be available. Proving bad faith is hard: courts require clear and convincing evidence of a specific intent to injure the contractor, not just an unwise or badly communicated decision. But where a termination was genuinely pretextual, the potential recovery is dramatically higher than what the standard settlement process allows.

1
Acquisition.GOV. FAR 2.101 – Definitions
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Acquisition.GOV. Threshold Changes – October 1st, 2025
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Acquisition.GOV. FAR 49.502 – Termination for Convenience of the Government
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Acquisition.GOV. 48 CFR 52.249-2 – Termination for Convenience of the Government (Fixed-Price)
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Acquisition.GOV. FAR 49.206-1 – Submission of Settlement Proposals
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Acquisition.GOV. 48 CFR 49.602-1 – Termination Settlement Proposal Forms
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Acquisition.GOV. FAR 49.202 – Profit
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Acquisition.GOV. FAR 49.109-1 – General
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Acquisition.GOV. FAR 31.205-42 – Termination Costs
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Acquisition.GOV. FAR 49.206-3 – Submission of Inventory Disposal Schedules
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General Services Administration. Inventory Disposal Schedule
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Acquisition.GOV. FAR 49.109-3 – Government Property
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Office of the Law Revision Counsel. 41 USC 7104 – Contractor Appeals