tory profits or consequential damages resulting from the termination of any subcontract (but see § 1-8.208-5).

(b) Except as provided in § 1-8.208-4, (1) all subcontractor termination inventory shall be disposed of and accounted for in accordance with Subpart 1-8.5, and (2) the contracting officer shall require the prime contractor to submit to him for approval or ratification all termination settlements with subcontractors. In submitting each settlement, the prime contractor shall certify that he has examined the subcontractor's claims included therein, that they are allocable to the terminated portion of the prime contract (or are the result of a change ordersee

1-8.000(d)(1)), and that the settlement is fair and reasonable, was negotiated in good faith, and is not more favorable to the subcontractor than if the Government were not involved. The contractor shall also certify that he has received from all his immediate subcontractors certifications substantially in the form of his own certification. With respect to settlements with more remote subcontractors, the contractor shall certify that he has no information leading him to doubt their reasonableness or their allocability to the terminated portion of the prime contract.

(c) The contracting officer shall promptly examine each subcontract settlement required to be submitted to him (including the basis and form of the proposal upon which the settlement was based) to satisfy himself that the subcontract termination was made necessary by the termination of the prime contract (or by issuance of a change order-see § 1-8.000(d)(1)), and that the settlement was arrived at in good faith, is reasonable in amount, and is allocable to the terminated portion of the contract (or, if allocable only in part, that the proposed allocation is reasonable). In considering the reasonableness of any subcontract settlement, the contracting officer shall be guided generally by the provisions of this Part 1-8 relating to the settlement of prime contracts, and shall comply with any applicable requirements of §§ 1-8.207 and 1-8.211 relating to accounting and other reviews. Upon completion of the examination,

the contracting officer shall notify the contractor in writing of (1) his approval or ratification, or (2) his reasons for disapproval.

§ 1-8.208-4 Authorization for subcontract settlements without approval or ratification.

(a) (1) The contracting officer may, upon the written request of the prime contractor, authorize him in writing to conclude settlements of his terminated subcontracts without approval or ratification by the contracting officer when the amount of settlement (see § 1-8.101(a)) is $10,000 or less and if:

(i) The contracting officer is satisfied with the adequacy of the procedures used by the contractor in settling termination claims (including proposals for retention, sale, or other disposal of termination inventory) of his immediate and lower tier subcontractors. (The contracting officer shall obtain the advice and recommendations of (A) the agency audit office with respect to the adequacy of the contractor's audit administration, including personnel, and (B) the cognizant disposal office with respect to the adequacy of the contractor's procedures and personnel for the administration of property disposal matters.);

(ii) Any termination inventory included in determining the amount of the settlement will be disposed of in accordance with § 1-8.513, except that the disposition of such inventory shall not (A) be subject to review by the contracting officer under § 1-8.513-1 or § 1-8.513-3, or (B) be subject to § 18.513-4; and

(iii) The settlement will be accompanied by a certificate substantially similar to the certificate contained in the appropriate settlement proposal format set forth in § 1-8.802.

(2) An authorization granted under (a)(1) of this § 1-8.208-4 may be exercised only in settling subcontracts which have been terminated as a result of termination for convenience or modification of the prime contract by the Government.

(b) Section 1-8.513 shall apply to any disposal of completed end items allocable to the terminated subcontract, except that completed end items allocable to the terminated subcon

tract may be disposed of without review by the contracting officer under § 1-8.513-1 or § 1-8.513-3, and without screening under § 1-8.513-4, if the total amount thereof (at the subcontract price) when added to the amount of the settlement does not exceed the amount authorized under this § 1-8.208-4.

(c) A contracting officer granting the above authorization to a contractor shall be responsible for periodically making a selective review of settlements and settlement procedures to determine (1) whether the contractor is making adequate reviews and fair settlements, and (2) whether such authorization shall remain in effect. In connection with these periodic reviews, the contracting officer should obtain the advice and recommendations of the agency audit office with respect to the auditing aspects of the contractor's review procedures and those of the cognizant disposal office with respect to property disposal aspects of the contractor's review procedures. Whenever the contracting officer determines that the contractor's procedures are not adequate or that improper settlements are being made, he shall revoke the authorization by written notice to the contractor. The revocation shall take effect only from the date of receipt.

(d) Any number of separate settlements may be made with a single subcontractor. However, claims which normally would 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 order to bring them within an authorization. (e) Upon written request of the contractor and with the prior written approval of the head of the procuring activity or of a deputy or principal assistant in the procuring activity responsible for contract matters, an authorization granted under (a)(1) of this § 1-8.208-4 may be increased to authorize the contractor to conclude settlements under a particular prime contract when the amount of settlement is more than $10,000 but not more than $25,000. Such authorization in excess of $10,000 may be limited to

specific subcontracts or classes of subcontracts.

§ 1-8.208-5 Recognition of judgments and arbitration awards.

(a) In the event a subcontractor obtains a final judgment against a prime contractor, the contracting officer shall for the purposes of settling the prime contract, treat the amount of the judgment as a cost of settling with the subcontractor, to the extent such judgment is properly allocable to the terminated portion of the prime contract, if:

(1) The prime contractor has made reasonable efforts to include in his subcontract the termination clause in § 1-8.706 or a similar clause excluding payment of anticipatory profits or consequential damages;

(2) The provisions of the subcontract relating to the rights of the parties upon its termination, in whole or in part, are fair and reasonable and do not unreasonably increase the common law rights of the subcontractor;

(3) The contractor has made reasonable efforts to settle the claim of the subcontractor;

(4) The contractor has given prompt notice to the contracting officer of the initiation of the proceedings in which the judgment was rendered and has not refused to give the Government control of the defense of the proceedings; and

(5) The contractor has diligently defended the suit or, if the Government has assumed control of the defense of the proceedings, has rendered such reasonable assistance as has been requested by the Government.

(b) If the conditions stated in (1) through (5) of § 1-8.208-5(a) are not all met, the contracting officer may allow the contractor such part of the judgment as he considers a fair amount for settling the termination claim under the subcontract, giving due regard to the policies set forth in this Part 1-8 for settlement of such claims.

(c) Where a contractor and his subcontractor submit a subcontractor termination claim to arbitration under any applicable law or contract provision, the contracting officer shall rec

ognize the amount of the arbitration award as the cost of settling the claim of the subcontractor to the same extent and under the same conditions as specified in (a) and (b) of this § 18.208-5.

§ 1-8.208-6 Delay in settlement of subcontractor claims.

Where a prime contractor is unable to settle with a subcontractor and such inability is delaying the settlement of the prime contract, the contracting officer may settle with the prime contractor, excepting from the settlement the whole or any part of the claim of such subcontractor and reserving the rights of the Government and of the prime contractor with respect thereto.

§ 1-8.208-7 Government assistance in settlement of subcontracts.

In unusual cases the contracting officer may determine that it is in the best interest of the Government to offer assistance to the prime contractor in the settlement of a particular subcontract. Such a situation may exist when the prime contractor has made all reasonable efforts to negotiate the settlement without success and the contracting officer believes that with the assistance of the Government a settlement can be reached. Such assistance shall be furnished only with the consent of the prime contractor. In such cases, the Government may concurrently approve an agreement entered into by the prime contractor and a subcontractor covering the settlement of one or more subcontracts. In any such case, payment to the subcontractor shall be effected through the prime contractor as part of the overall settlement with the latter.

§ 1-8.208-8 Assignment of rights under subcontracts.

(a) The termination for convenience clauses set forth in Subpart 1-8.7, except the short-form clauses, obligate the prime contractor to assign to the Government, in the manner, at the times, and to the extent directed by the contracting officer, all his right, title, and interest under any subcontracts terminated by reason of termination of the prime contract. The con

tracting officer shall not require such assignment unless he determines that it is in the best interest of the Government.

(b) In giving the Government the right to require the assignment of the prime contractor's interest in terminated subcontracts, the termination for convenience clauses set forth in Subpart 1-8.7 (except the short-form clauses) also provide that the Government shall have the right, in its discretion, to settle and pay any or all claims arising out of the termination of such subcontracts. This right does not obligate the Government to settle and pay termination claims of subcontractors. As a general rule, the prime contractor is obligated to settle and pay such claims. Where, however, the contracting officer determines that it is in the best interest of the Government to settle and pay direct a subcontractor's termination claim, he shall first obtain approval in accordance with agency procedures. An example of a situation in which the best interest of the Government would be served by effecting a direct settlement would be where a subcontractor is the sole source for a product and it appears that a delay by the prime contractor in settlement or payment of the subcontractor's claim would jeopardize the financial position of the subcontractor. Direct settlements with subcontractors are not encouraged.

When a settlement has been negotiated with respect to the terminated portion of a contract and all required reviews have been obtained, the contractor and the contracting officer shall enter into a settlement agreement, substantially in the appropriate format set forth in § 1-8.806. The settlement shall cover (a) any setoffs and counterclaims which the Government may have against the contractor and which may be applied against the terminated contract, and (b) all claims of subcontractors except claims which are specifically excepted from the agreement and reserved for separate settlement.

§ 1-8.209-2 Excepted items.

Where any rights or claims of the Government or of the contractor are to be excepted from the settlement, the settlement agreement shall specify the nature and extent of the excepted items. However, care shall be taken so that the wording of the exception does not create any new rights in the parties beyond those in existence prior to the execution of the settlement agreement. The separate settlement of excepted items shall be in accordance with the provisions of this Part 1-8 and shall be set forth in settlement agreements.

§1-8.209-3 Government property.

Before any settlement agreement is executed, the contracting officer shall determine the accuracy of the Government property account, if any, for the terminated contract. If the audit discloses property for which the contractor cannot account, the settlement agreement shall reserve the rights of the Government with respect to such property or make an appropriate deduction from the amount otherwise due the contractor.

§ 1-8.209-4 No-cost settlement.

(a) If no costs have been incurred by the contractor with respect to the terminated portion of the contract or if the contractor is willing to waive the costs incurred by him and if no amounts are due to the Government under the contract, a no-cost settlement agreement shall be executed substantially in the format set forth in § 1-8.806-6 or § 1-8.806-7, as applicable. (b) Under a terminated cost-reimbursement type contract, the settlement agreement shall cover only the fee, if any, where the contractor has invoiced or vouchered out all costs within the period during which he may submit invoices or vouchers (see §§ 1-8.402(a) and 1-8.405-1).

§ 1-8.209-5 Partial settlements.

Every effort should be made by the contracting officer to settle in one agreement all rights and liabilities of the parties under the contract except those arising from any continued portion of the contract. Generally, con

(a) With the consent of the contractor, a single settlement agreement may be negotiated to cover the termination claims under two or more contracts, even though the contracts being terminated are with different bureaus or divisions within the contracting agency or with different contracting agencies.

(b) Such joint settlements shall be in accordance with arrangements made between the contracting offices.

(c) Each such joint settlement agreement shall (1) clearly identify the contracts involved; (2) apportion the total amount of the settlement among the several contracts on some reasonable basis; (3) have attached or incorporated therein a schedule showing the apportionment; and (4) be distributed and attached to each contract involved in the same manner as other contract amendments.

§ 1-8.209-7 Settlement by determination.

(a) General. To the extent that the contractor and contracting officer are unable to agree upon the settlement of a terminated contract or if a termination claim is not submitted within the period required by the termination clause in the contract, the contracting officer shall issue a determination of the amount due in accordance with the termination clause in the contract, including any cost principles incorporated therein by reference. The contracting officer shall comply with the applicable provisions of §§ 1-8.209-1 through 1-8.209-6 in making any such determination.

(b) Notice to contractor. Before issuing a determination of the amount due the contractor, the contracting officer shall give the contractor not less than 15 days' notice by certified mail (return receipt requested) to submit on or before a stated date, written evidence substantiating the amount claimed to be due.

(c) Submission of evidence.

(1) The contractor has the burden of establishing, by proof satisfactory to the contracting officer, the amount claimed.

(2) The contractor may submit such vouchers, verified transcripts of books of account, affidavits, audit reports, and other documents, as he wishes. The contracting officer may request the contractor to submit such additional documents and data, and may cause such accounting, investigations, and audits to be made, as he deems appropriate.

(3) The contracting officer may accept photostatic or other copies of documents and records, without requiring original documents unless there is a question of authenticity.

(4) If the contractor wishes to confer with the contracting officer, or if the contracting officer wishes additional information from Government personnel or from independent experts, or wishes to consult persons whose affidavits or reports have been submitted, the contracting officer may, in his discretion, hold such conference as he deems appropriate.

(d) Determinations. After reviewing the information submitted or otherwise available to him, the contracting officer shall determine the amount due and shall transmit a copy of his determination to the contractor by certified mail (return receipt requested). The letter of transmittal shall advise the contractor that the determination is his final decision. In addition, the letter shall state whether or not an appeal may be taken under the Disputes clause (see (f) of this § 18.209-7). The determination shall set forth the amount due the contractor and shall be supported by detailed schedules, additional information, and analyses, as appropriate. An adequate explanation shall be given for each major item of disallowance. The con

tracting officer need not reconsider (1) any settlement with a subcontractor. (2) any disposition of property, or (3) any other action relating to the terminated portion of the contract, where such settlement, disposition, or other action has been previously ratified or approved by him or another duly authorized contracting officer.

(e) Preservation of evidence. The contracting officer shall retain in appropriate files of the contracting agency all written evidence and other data or copies thereof, relied upon by him in making his determination, except that copies of original books of account need not be made. Books of account, together with other original papers and documents, shall be returned to the contractor within a reasonable time.

(f) Appeals. The contractor has a right of appeal, under the Disputes clause of the contract, from any settlement by determination, except that the contractor has no such right of appeal where he has failed to submit his settlement proposal within the time provided in the contract and has failed to request extension of such time. The pendency of an appeal shall not affect the authority of the contracting officer to settle the termination claim or any part thereof by a negotiated agreement with the contractor at any time before the appeal is decided.

The contracting officer shall, at the conclusion of the settlement negotiations, prepare and sign a memorandum setting forth the principal elements of the settlement for inclusion in the contract file and for the use of reviewing authorities, if any. If the settlement was negotiated on the basis of individual items, the contracting officer shall specify the factors considered with respect to each item. If the settlement was negotiated on an overall lump-sum basis, the contracting officer need not evaluate each item or group of items individually, but the total amount of the recommended settlement shall be supported in reasonable detail. The memorandum shall include explanations of matters as to