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placement, and management of subcontracts, settlement of terminated subcontracts, and engineering, technical assistance, and other services rendered, but the profit shall not be measured by the amount of the contractor's payments to subcontractors for settlement of their termination claims; and

(9) The rate of profit both parties contemplated at the time the contract was negotiated.

(c) Profit in settlements by determination. The formula for determining profit, set forth in paragraph (e) (2) (iii) of the termination clause for fixed-price contracts (§ 1-8.701) and subparagraph (e) (1) (iii) of the clause for fixed-price construction contracts (§ 1-8.703), is applicable only to a settlement by determination (see § 1-8.209-7) and shall not be used in establishing the profit allowed in a settlement by negotiation.

§ 1-8.304 Adjustment for loss.

(a) In the negotiation or determination of any settlement, no profit shall be allowed if it appears that the contractor would have incurred a loss had the entire contract been completed. The amount of loss shall be negotiated or determined, and an adjustment in the amount of settlement shall be made as specified in (b) or (c) of this § 1-8.304. In estimating the cost to complete, consideration shall be given to expected production efficiencies and to other factors affecting the cost to complete.

(b) If the settlement is on an inventory basis (see § 1-8.307-2), the contractor shall not be paid more than the total of the amounts in (1) through (3) below, less all disposal credits and all unliquidated advance and progress payments previously made to the contractor under the contract:

(1) The amount negotiated or determined for settlement expenses;

(2) The contract price, as adjusted, for acceptable completed end items (see § 1-8.306); and

(3) The remainder of the settlement amount otherwise agreed or determined (not excluding the allocable portion of initial costs (see § 1-15.205-42 (c)), reduced by multiplying that remainder by the ratio of (i) the total contract price to (ii) the total cost incurred prior to termination plus the estimated cost to complete the entire contract.

(c) If the settlement is on a total cost basis (see § 1-8.307-2), the contractor

shall not be paid more than the total of the amounts in (1) and (2) below, less all disposal and other credits, all advance and progress payments, and all other amounts previously paid to the contractor under the contract:

(1) The amount negotiated or determined for settlement expenses; and

(2) The remainder of the total settlement amount otherwise agreed or determined, reduced by multiplying that remainder by the ratio of (i) the total contract price to (ii) that remainder plus the estimated cost to complete the entire contract.

§ 1-8.305 Deductions.

From the amount payable to the contractor under a settlement, there shall be deducted (a) the agreed price for any part of the termination inventory purchased or retained by the contractor, and the proceeds of sale of any materials sold by hin which have not otherwise been paid or credited to the Government; (b) the fair value, as determined by the contracting officer, or any part of the termination inventory which, prior to transfer of title to the Government or to a buyer pursuant to Subpart 1-8.5, is desrtoyed, lost, stolen, or so damaged as to become undeliverable, except for normal spoilage or to the extent the Government has expressly assumed the risk of loss; and (c) such other amounts as appropriate in the particular case.

§ 1-8.306 Completed end items.

Promptly after the effective date of termination, the contracting officer (a) shall have all undelivered completed end items (1) inspected, and (2) accepted if they comply with the prime contract requirements; and (b) shall determine which accepted end items shall be delivered under the contract. The contractor shall invoice completed end items so accepted and delivered and be paid for them at the contract price in the usual manner. He shall not include such end items in his termination claim. Where completed end items, though accepted, are not to be delivered under the contract, the contractor shall include such end items in his settlement proposal at the contract price, appropriately adjusted for any saving of freight or other charges, together with any credits for their purchase, retention, or sale.

§ 1-8.307

Settlement proposals.

§ 1-8.307-1 Submission of settlement proposals.

(a) Subject to the provisions of the termination clause in the contract, the contractor shall promptly submit to the contracting officer a settlement proposal setting forth the amount claimed to be due by reason of the termination. The proposal shall be submitted within one year after the effective date of the termination or within one or more extensions thereof granted by the contracting officer.

(b) The settlement proposal shall cover all elements of the contractor's claim, including settlements with subcontractors. With the consent of the contracting officer, proposals may be filed in successive steps covering separate portions of a claim. Such interim proposals shall include all costs of a particular type, except as the contracting officer may authorize otherwise.

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(c) A settlement proposal shall be in the form established by the procuring agency (see § 1-8.802 for suggested formats of forms), but shall be in reasonable detail supported by adequate accounting data and shall include certificate substantially as contained in the appropriate settlement proposal format set forth in § 1-8.802. A suggested format of a form for obtaining accounting information is in § 1-8.804-1. Actual, standard (appropriately adjusted), or average costs, may be used in preparing settlement proposals if such costs are determined in accordance with generally recognized accounting principles consistently followed by the contractor. Where actual, standard, or average costs are not reasonably available, estimated costs may be used if the method of arriving at the estimates is approved by the contracting officer. A contractor shall not be required to maintain unduly elaborate cost accounting systems merely because his contracts may subsequently be terminated.

(d) If the total amount of claim is less than $2,500, a simplified settlement proposal form (see § 1-8.802-3) may be used. Claims which would normally be included in a single settlement proposal, such as those based on a series of separate orders for the same item under one contract, shall be consolidated wherever possible and shall not be divided in such a way as to bring them below $2,500.

§ 1-8.307-2 Bases for settlement proposals.

(a) General. The preferred accounting basis for preparing the settlement proposal is the inventory basis, since the contractor must compute and set forth costs applicable to that portion of the contract which is terminated. However, if costs are so recorded in the contractor's books as to make it impossible to separate costs between completed units and work in process, it will not be possible to use the inventory basis; in which case the contracting officer may approve the total cost basis, which is a more indirect method of arriving at the contractor's costs applicable to terminated portion of the contract. Termination claims shall not be submitted on any basis other than the inventory and total cost bases without the prior approval of the head of the procuring activity or his duly authorized representative.

(b) Inventory basis.

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(1) Under the inventory basis the contractor shall claim only costs chargeable or allocable to that portion of the contract which is terminated, and the settlement proposal shall itemize separately:

(i) At purchase or manufacturing cost, each of the following-metals, raw materials, purchased parts, work in process, finished parts, components, dies, jigs, fixtures, and tooling;

(ii) Charges such as engineering costs, initial costs, and general and adminstrative costs;

(iii) Costs of settlements with subcontractors;

(iv) Settlement expenses; and
(v) Other proper charges.

(2) An allowance for profit (see § 1-8.303) or adjustment for loss (see § 1-8.304 (b)) shall be made to complete the gross termination claim. All unliquidated advance and progress payments, and all disposal and other credits known when the proposal is submitted, shall then be deducted.

(c) Total cost basis.

(1) When use of the inventory basis is not practicable or will unduly delay settlement, the total cost basis may be used if approved in advance by the contracting officer.

(2) When the total cost basis is used under a complete termination, all costs incurred under the contract up to the effective date of termination shall be

itemized and the costs of settlements with subcontractors and applicable settlement expenses shall be added. An allowance for profit (see § 1-8.303) or adjustment for loss (see § 1-8.304 (c)) shall be made. The contract price for all end items which have been or are to be delivered and accepted shall be deducted. All unliquidated advance payments, unliquidated progress payments and disposal and other credits known when the proposal is submitted shall also be deducted.

(3) When the total cost basis is used under a partial termination, the settlement proposal shall not be submitted until completion of the continued portion of the contract. The settlement proposal shall be prepared in accordance with (2) of this §1-8.307-2(c), except that all costs incurred to the date of completion of the continued portion of the contract shall be included.

§ 1-8.308 Limitation on settlements.

Exclusive of settlement costs, the total amount payable to the contractor on account of a settlement, whether through negotiation or by determination, shall not exceed the total contract price as reduced by the amount of payments otherwise made and as further reduced by the contract price of work not terminated. Subpart 1-8.4-Additional Principles

Applicable to the Settlement of Cost-Reimbursement Type Contracts Terminated for Convenience § 1-8.401

General.

Termination clauses for cost-reimbursement type contracts (see §§ 1-8.702 and 1-8.704) provide for the settlement of costs and of fee, if any. The provisions of the particular contract governing costs shall determine what costs are allowable.

§ 1-8.402 Discontinuance of invoices or vouchers.

(a) Where the contract has been completely terminated, the contractor shall not use invoices or Standard Form 1034 vouchers after the last day of the sixth month following the month in which the termination notice is effective; however, he may elect to discontinue the use of such invoices or vouchers at any time prior thereto. Where the contractor has invoiced or vouchered out all costs within the six-month period, his claim for fee, if any, may be submitted on a form

of the type suggested in § 1-8.802-4 or by letter; but in either case the contractor must substantiate the amount of the fee he claims and submit an appropriate certification. The claim for fee must be submitted to the contracting officer within one year from the effective date of termination, unless the period has been extended in accordance with the terms of the contract. When the use of invoices or vouchers has been discontinued, all uninvoiced or unvouchered costs and claim for fee, if any, shall thereafter be submitted in accordance with § 1-8.404.

(b) Where the contract has been partially terminated, the provisions of § 1-8.405 shall be applied.

§ 1-8.403 Notice to the General Accounting Office.

If the General Accounting Office does not make site audits of an agency's contracts, the contracting officer shall promptly send a copy of the notice of termination to the General Accounting Office; in addition, he shall advise that office of the date on which the six-month vouchering period will expire, or of the contractor's election to discontinue the use of invoices or vouchers prior to expiration of the six-month period. If site audits are conducted, such copy and information shall be included in the file available to the General Accounting Office.

§ 1-8.404 Procedure after invoices or vouchers are discontinued.

§ 1-8.404-1 Submission of settlement proposal.

The contractor shall submit a settlement proposal covering his costs and his claim, if any, for a fee. Such proposal shall be submitted to the contracting officer within one year from the effective date of termination, unless the period has been extended in accordance with the terms of the contract. The proposal shall be submitted in the form required by the procuring agency (see suggested format of form in § 1-8.802-4), but shall include a certificate substantially as contained in the format set forth in § 18.802-4. The proposal shall contain only uninvoiced or unvouchered costs, and the contractor may not include in such proposal those costs which (a) have been finally disallowed by the contracting officer or the General Accounting Office, or (b) are the subject of a reclaim invoice or voucher, or any costs of a similar nature.

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(a) If the contract contains a negotiated overhead rate clause which provides for the negotiation of a final overhead rate and it appears that adjustment of overhead costs applicable to invoiced or vouchered costs under procedures established for determining negotiated final overhead rates will unduly delay final settlement, the contracting officer after obtaining appropriate information from the agency audit office may agree with the contractor:

(1) To negotiate the amount of overhead for the contract for the period for which fixed overhead rates have not previously been negotiated, based upon audit recommendations requested by the contracting officer for such purpose or utilize provisional rates for this period to expeditiously effect final settlement if the provisional rate appears reasonable;

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(a) The contracting officer may proceed with completion of the settlement and execution of an appropriate settlement agreement at any time after development of the information required by § 1-8.404-5.

(b) The fee shall be adjusted as provided in § 1-8.406.

(c) The final settlement agreement may include all claims of the Government and of the contractor under the terminated contract, except that no amount may be allowed for any item of cost which is the subject of a General Accounting Office exception, either cleared by deduction or uncleared, or for any other item of cost of the same nature, unless a reclaim invoice or voucher covering such cost has been presented by the contractor and authorized by the General Accounting Office for payment.

(d) The provisions of the contract governing the types of reimbursable costs shall constitute the basis of negotiation; however, if an overall settlement of costs is agreed upon, agreement on each separate element of cost is not necessary. In appropriate cases, differences may be compromised and doubtful questions settled by agreement. An overall settlement shall not, under any circumstances, be made the means of reimbursing contractors for costs which, under the provisions of the contract, are clearly not allowable.

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§ 1-8.405-1 General.

(a) In the event of a partial termination, the settlement shall be limited to adjustment of the fee, if any, in accordance with §§ 1-8.405-2 and 1-8.406, unless the contracting officer determines that:

(1) The terminated portion is clearly severable from the balance of the contract; or

(2) Performance of the contract is virtually complete, or that performance of any continued portion is only on subsidiary items or spare parts, or is otherwise not substantial.

(b) In the case of the exception in (a) of this § 1-8.405-1, the procedures in

§§ 1-8.402, 1-8.403, and 1-8.404 are applicable.

§ 1-8.405-2

Submission of settlement proposal (fee only).

The contractor shall submit a settlement proposal which shall be limited to the amount of his claim, if any, for a fee. Such proposal shall be submitted to the contracting officer within one year from the effective date of termination, unless the period has been extended in accordance with the terms of the contract. The proposal may be submitted on a form of the type suggested in § 1-8.802-4 or by letter; but in either case the contractor must substantiate the amount of the fee he claims and submit an appropriate certification.

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In the event of a partial termination where settlement is limited to adjustment of fee, if any, the contractor shall continue to submit by invoice or voucher all costs reimbursable under the contract, including (a) his own costs allocable to the terminated portion of the contract, (b) costs of settlements with subcontractors properly identified as such, and (c) applicable settlement expenses. The contractor shall not be reimbursed for costs of settlements with subcontractors unless the approvals or ratifications required pursuant to the contract have been obtained (see § 1-8.208).

§ 1-8.406 Adjustment of fee.

The adjusted fee to be paid, if any, shall be determined in the manner provided by the contract, generally based on percentage of completion of the contract or of the terminated portion thereof. Where this basis is used, factors such as the extent and difficulty of the work performed by the contractor (including but not limited to planning, scheduling, technical study, engineering work production and supervision, placing and supervising subcontracts to the extent reasonably required, and work performed by the contractor in (a) stopping performance, (b) settling claims of subcontractors, and (c) disposing of termination inventory) shall be compared with the total work required by the contract or by the terminated portion thereof. The ratio of costs incurred to the total estimated cost of performing the contract or the terminated portion thereof is only one factor in computing the per

centage of completion of the contract. This percentage may be either greater or less than that indicated by the ratio of costs incurred, depending upon the evaluation by the contracting officer of the above factors and other relevant considerations.

Subpart 1-8.5-Disposition of Termination Inventory

§ 1-8.501 General.

§ 1-8.501-1 Methods of disposal.

Subject to the Government exercising its right under the termination clause in a contract to acquire title to, and require delivery of, any items of termination inventory, termination inventory shall be disposed of in the manner most favorable to the Government. As hereinafter set forth in this subpart 1-8.5, methods of disposal include purchase or retention by the prime contractor or subcontractor at cost; return to suppliers; utilization, donation, or sale (after screening as provided in § 18.505); and destruction or abandonment. § 1-8.501-2 General restrictions on contractor's authority.

The following general restrictions are in addition to specific restrictions set forth in this Subpart 1-8.5:

(a) The authority of a contractor to purchase, retain, or dispose of termination inventory or to authorize or approve a purchase, retention, or disposition by a subcontractor is subject to (1) any applicable Government restrictions on the disposition of property which is either classified for security reasons or is dangerous to public health, safety, or welfare, and (2) any contract provisions regarding the disposition of material subject to a lien.

(b) Contractors shall not sell termination inventory to persons known by them to be officers or employees of the Federal Government, except to the extent determined by the heads of the contracting agencies to be in the best interest of the Government and except under procedures and safeguards, prescribed by the heads of such agencies, adequate to preclude collusion and fraud.

(c) With respect to termination inventory, the authority of a higher tier contractor to approve a sale by a subcontractor or to approve a purchase or retention at less than cost by a subcontractor, and the authority of a subcontractor to sell with the approval of the

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