inventory schedules covering all items of the particular property classification at the plant or location.

(1) "Plant equipment" means personal property of a capital nature (consisting of machinery, equipment, furniture, vehicles, machine tools, and accessory and auxiliary items, but excluding special tooling) used or capable of use in the manufacture of supplies or in the performance of services or for administrative or general plant purposes.

(m) "Prime contract" means any contract as defined in § 1-1.208 entered into by any executive agency.

(n) "Production equipment" means those items of plant equipment which are located within a manufacturing, processing, assembly, or service establishment, and which are used for cutting, abrading, grinding, shaping, forming, joining, measuring, testing, heating, or treating production materials or work in process.

(o) “Salvage" means property which, because of its worn, damaged, deteriorated, or incomplete condition, or because of its specialized nature, has no reasonable prospect of sale or use as serviceable property without major repairs or alterations but which has some value in excess of its scrap value.

(p) "Scrap" means property which has no reasonable prospect of being sold except for the recovery value of its basic material content.

(q) "Serviceable or usable property" means property which has reasonable prospect of further use or sale either in its existing form or with minor repairs or alterations.

(r) "Settlement agreement” means a written agreement, in the form of an amendment to the contract, between the contractor and the Government settling all or a severable portion of a settlement proposal.

(s) "Settlement proposal" means a termination claim submitted by a contractor or subcontractor in the form, and supported by the data, required by this Part 1-8.

(t) "Special machinery and equipment" means that part of plant equipment which was acquired or constructed solely for the performance of the terminated contract or the terminated contract and other Government con

tracts, and as to which the contractor claims loss of useful value.

(u) "Special tooling" means all jigs, dies, fixtures, molds, patterns, special taps, special gauges, special test equipment, other special equipment and manufacturing aids, and replacements thereof, acquired or manufactured by the contractor for use in the performance of a contract, which are of such a specialized nature that, without substantial modification or alteration, their use is limited to the production of such supplies or parts thereof, or the performance of such services, as are peculiar to the needs of the Government. The term does not include(1) items of tooling or equipment acquired by the contractor prior to the contract, or replacements thereof, whether or not altered or adapted for use in the performance of the contract, (2) consumable small tools, or (3) general or special machine tools, or similar capital items.

(v) "Subcontract" means any contract, as defined in § 1-1.208, other than a prime contract, entered into by a prime contractor or a subcontractor, calling for supplies or services required for the performance of any one or more prime contracts.

(w) "Termination claim" means any claim by a contractor or subcontractor, permitted by the terms of a prime contract, for compensation for the termination, in whole or in part, of the prime contract or a subcontract thereunder, and any other claim which this Part 1-3 authorizes to be asserted and settled in connection with a termination settlement.

(x) "Termination inventory" means any items of physical property purchased, supplied, manufactured, furnished, or otherwise acquired for performance of the terminated contract and properly allocable to the terminated portion of the contract. The term does not include any facilities, material, production or other equipment, or special tooling, which are subject to a separate contract or a special contract provision governing the use or disposition thereof. Termination inventory may include contractoracquired property and Governmentfurnished property.

(y) "Terminated portion of the contract" means that portion of a terminated contract which relates to work or end items not already completed and accepted prior to the effective date of termination and which the contractor is not to continue to perform.

Subpart 1-8.2-General Principles Applicable to the Termination for Convenience and Settlement of Fixed-Price Type and Cost-Reimbursement Type Contracts

§ 1-8.200 Scope of subpart.

This Subpart 1-8.2 deals with general principles applicable to the termination and to the settlement of both fixed-price type and cost-reimbursement type contracts terminated for the convenience of the Government. Additional principles applicable to the settlement of fixed-price and cost-reimbursement types of contracts, terminated for convenience, are set forth in Subparts 1-8.3 and 1-8.4, respectively. § 1-8.201 General.

(a) Contracts shall be terminated for the convenience of the Government when it is determined that such action is in the best interest of the Government, or under the circumstances provided in § 1-8.601(b).

(b) A well-drafted termination for convenience clause defines the rights of the Government and of the contractor in a termination of the contract for the convenience of the Government and provides for the settlement of claims thereunder. Thus, the contractual right to terminate a contract for the convenience of the Government and to make a settlement agreement (as defined in § 1-8.101(r)) is based on such a clause. However, the power of a contracting activity to issue a termination notice does not depend on the existence of a termination for convenience clause in the contract. In the absence of a termination for convenience clause, however, such action normally constitutes a breach of contract. Such a breach of contract may subject the Government to liability for common-law damages, including anticipatory profits, unless the Gov

ernment arrives at a voluntary settlement with the contractor.

(c) A contract which initially does not provide for termination for the convenience of the Government may, with the consent of the contractor, be amended either prior to or after termination to incorporate such a clause. Even though a contract is not so amended, a settlement agreement may be entered into after termination of the contract.

§ 1-8.202 Notice of termination.

(a) Contracts shall be terminated for convenience only by a written notice to the contractor (see § 1-8.801 for suggested formats of notices of termination for convenience), stating:

(1) That the contract is being terminated for the convenience of the Government (citing the appropriate contract clause, if any, authorizing such termination);

(2) The effective date of termination;

(3) The extent of termination and, if a partial termination, the portion of the contract to be continued; and

(4) Any special instructions.

(b) A copy of the notice of termination shall be sent to each known assignee guarantor, or surety of the contractor.

§ 1-8.203 Methods of settlement.

Settlement of cost-reimbursement type contracts and of fixed-price type contracts terminated for convenience may be effected by (a) negotiated agreement, (b) determination by the contracting officer, (c) costing out under proper invoices or vouchers (in the case of costs under cost-reimbursement type contracts), or (d) a combination of these methods. Every effort shall be made to reach a fair and prompt settlement with the contractor. The negotiated agreement is the most expeditious and most satisfactory method of settling termination claims and shall be used whenever feasible. Settlement by determination shall be used only when a termination claim cannot be settled by agreement.

§ 1-8.204 Duties of prime contractor after receipt of notice of termination.

After receipt of the notice of termination, the contractor must comply with the termination clause of the contract and the notice of termination, except as otherwise directed by the contracting officer under the authority of the clause. The clause and the notice generally should require, among other things, that the contractor:

(a) Stop work on the terminated portion of the contract and discontinue placing subcontracts thereunder;

(b) Terminate all subcontracts related to the terminated portion of the prime contract;

(c) Immediately advise the contracting officer of any special circumstances precluding the stoppage of work;

(d) If the termination is partial, perform the continued portion of the contract and submit promptly any request for an equitable adjustment of price with respect to the continued portion of the contract, supported by evidence of any increase in the cost thereof;

(e) Take such action as may be necessary, or as the contracting officer may direct, to protect and preserve property in the possession of the contractor in which the Government has or may acquire an interest; and, to the extent directed by the contracting officer, deliver such property to the Government;

(f) Promptly notify the contracting officer in writing of any legal proceedings against the contractor growing out of any subcontract or other commitment related to the terminated portion of the contract;

(g) Settle all outstanding liabilities and all claims arising out of termination of subcontracts, obtaining any approvals or ratifications required by the contracting officer;

(h) Promptly submit his own settlement proposal, supported by appropriate schedules; and

(i) Disposed of any termination inventory, as directed or authorized by the contracting officer.

§ 1-8.205 Duties of contracting officer after issuance of notice of termination. (a) In accordance with the termination clause in the contract and with the notice of termination, the contracting officer shall, among other things:

(1) Direct the action required of the prime contractor;

(2) Examine the settlement proposal of the prime contractor and, when appropriate, the settlement proposals of subcontractors;

(3) Promptly negotiate settlement with the contractor and enter into a settlement agreement; and

(4) To the extent that he is unable to negotiate settlement after due and diligent effort, promptly settle the contractor's claim by determination.

(b) To expedite settlement, the contracting officer shall seek assistance from specially qualified personnel (such as legal, accounting, inspecting, engineering, and property disposal personnel) so that such personnel may:

(1) Assist in dealing with the contractor;

(2) Render advice on legal and contractual matters;

(3) Conduct accounting reviews and render advice and assistance on accounting matters; and

(4) Perform the following functions with respect to the termination inventory

(i) Verify its existence;

(ii) Determine qualitative and quantitative allocability;

(iii) Make recommendations concerning serviceability and unserviceability; (iv) Undertake necessary screening and redistribution; and

(v) Assist the contractor in accomplishing other disposition.

(c) An initial conference shall be held with the contractor as promptly as possible to develop a definite program for effecting the settlement. Where appropriate in the judgment of the contracting officer after consulting the prime contractor, principal subcontractors should be present. Topics discussed at the conference should include:

(1) General principles relating to the settlement of any termination claim, including obligations of the contractor

40-104 O-79-30

under the termination clause of the contract;

(2) Extent of the termination, point at which work is stopped, and status of any plans, drawings, and information which would have been delivered had the contract been completed;

(3) Status of any continuing work;

(4) Obligation of the contractor to terminate subcontracts and general principles to be followed in settlement of subcontractor claims;

(5) Names of subcontractors involved and the respective dates termination notices were issued to them;

(6) Contractor personnel handling, and methods for, review and settlement of subcontractor claims;

(7) Arrangements for transfer of title and delivery to the Government of any material required by the Government;

(8) General principles and procedures to be followed in the protection, preservation, and disposition of contractor's and subcontractors' termination inventories, including the preparation of termination inventory schedules;

(9) Contractor accounting practices and submission of accounting data (see § 1-8.307-1(c));

(10) Form in which settlement proposals shall be submitted;

(11) Accounting review of settlement proposals;

(12) Any requirement for interim financing in the nature of partial payments; and

(13) Tentative time schedule for negotiation of the settlement, including submission by the contractor and subcontractors of settlement proposals, termination inventory schedules, and accounting information schedules.

§ 1-8.206 Fraud or other criminal conduct.

Whenever the contracting officer has reason to suspect fraud or other criminal conduct in connection with the settlement of a terminated contract, he shall discontinue all negotiations with the contractor and shall report the facts in accordance with agency procedures.

§ 1-8.207 Accounting review of prime contract settlement proposals and of subcontract settlements.

(a) Each settlement proposal submitted by a prime contractor shall be referred by the contracting officer to the agency audit office for appropriate examination and recommendation when the amount of claim (see § 18.101(a)) is $2,500 or over. The contracting officer may, when circumstances indicate the necessity therefor, refer a settlement proposal to the agency audit office when the amount of claim is less than $2,500. The referral shall be in writing, shall indicate any specific information or data which the contracting officer desires to have developed, and shall include any facts or circumstances within the knowledge of the contracting officer which will assist the agency audit office in the performance of its function. The agency audit office should develop such information and should make such further accounting review as it deems appropriate. The agency audit office should submit written comments and recommendations to the contracting officer, in accordance with agency procedures.

(b) Subcontract settlements submitted by a contractor to the contracting officer for approval or ratification in accordance with § 1-8.208 shall be referred to the agency audit office for review and recommendations if (1) the amount of settlement is $25,000 or more, unless an accounting review of the settlement proposal has been performed by the agency audit office, or (2) the contracting officer considers an accounting review, in whole or in part, desirable. The review under (1) or (2) does not relieve the prime contractor or higher tier subcontractor of the responsibility for performing an accounting review. The agency audit office should submit written comments and recommendations to the contracting officer, in accordance with agency procedures.

(c) (1) The responsibility of the prime contractor and of each subcontractor, set forth in § 1-8.208-1, for settlement of immediate subcontractors' settlement proposals includes responsibility for performing accounting reviews and any necessary field audits.

However, in the situations outlined in (i) through (iv) of this § 1-8.207(c)(1), the agency audit office generally should be requested to perform the accounting review of a subcontractor's settlement proposal where:

(i) A subcontractor objects to an accounting review of his records by an upper tier contractor for competitive reason;

(ii) The agency audit office currently is performing audit work at the subcontractor's plant, or where it can be performed more economically or efficiently;

(iii) Audit by the agency audit office is necessary for consistent audit treatment and orderly administration; or

(iv) The contractor has a substantial or controlling financial interest in the subcontractor.

(2) Duplication by the agency audit office of accounting reviews performed by the upper tier contractor on subcontractor settlement proposals should be avoided to the extent possible. However, when appropriate, the Government should make additional reviews. Where the contractor is performing accounting reviews in accordance with this § 1-8.207, the contracting officer should request the agency audit office to examine periodically the contractor's accounting review procedures (including but not limited to audit programs, cost principles applied, working papers, and audit reports) and performance thereunder and make such comments and recommendations to the contracting officer as may be deemed appropriate. § 1-8.208 Settlement of claims.

subcontract

§ 1-8.208-1 Subcontractor's rights. Unless otherwise specifically provided, a subcontractor has no contractual rights against the Government upon the termination of a prime contract. The rights of a subcontractor are against the prime contractor or intermediate subcontractor with whom he has contracted. Upon termination of a prime contract, the prime contractor and each subcontractor are responsible for the prompt settlement of the termination claims of their immediate subcontractors.

§ 1-8.208-2 Prime contractor's rights and obligations.

Each termination for convenience clause provides that, after receipt of a notice of termination, the prime contractor shall (except as otherwise directed by the contracting officer) terminate all subcontracts to the extent that they relate to the performance of any work terminated by a notice of termination. Prime contractors should, for their own protection, include a termination clause in their subcontracts. A suggested subcontract termination clause is set forth in § 1-8.706. The failure of a prime contractor to include an appropriate termination clause in any subcontract, or to exercise his rights thereunder, shall not (a) affect the right of the Government to require the termination of the subcontract, or (b) increase the obligation of the Government beyond that which would have arisen if the subcontract had contained an appropriate termination clause. In any such case, the reasonableness of the prime contractor's settlement with the subcontractor should normally be measured by the aggregate amount which would be due under subparagraphs (1), (2), and (3) of paragraph (e) of the suggested subcontract termination clause. Reimbursement in excess of that amount shall be allowed only in unusual cases, and then only when the contracting officer is satisfied that the terms of the subcontract were negotiated in good faith and did not unreasonably increase the rights of the subcontractor.

§ 1-8.208-3 Settlement procedure.

(a) Settlements with subcontractors shall be made in general conformity with the policies and principles relating to settlement of prime contracts as set forth in this Subpart 1-8.2 and in Subparts 1-8.3 or 1-8.4, as applicable. However, the basis and form of the subcontractor's settlement proposal must be acceptable to the prime contractor or the next higher tier subcontractor. Each such settlement shall be supported by accounting and other data sufficient for adequate review by the Government. In no event shall the Government pay to the prime contractor any amount for loss of anticipa