Contract Termination and Closeout

This chapter covers the COR's activities at the end of a contract. Most contracts are completed through normal completion and closeout procedures; however, sometimes the government finds it necessary to terminate a contract for various reasons. The two types of termination are termination for convenience and termination for default (or cause).

No matter which type of termination the government employs, the COR's role is essential. The COR, as the primary government monitor of contract performance, is likely to be the first person aware of the need to consider termination of the contract. Because the COR functions as the government team's technical expert, he or she is also the most likely person to advise the CO about termination or alternatives to termination, depending on the circumstances.

This chapter discusses the termination of noncommercial versus commercial item contracts; it also offers guidance regarding cure notices and show cause notices. The second half of the chapter deals with closeout of the contract. The COR plays a vital role in the closeout procedure. Physical completion of the contract must be affirmed by the COR, and the COR must ensure that final payment should be, and has been, made to the contractor. The COR files must be forwarded to the CO for inclusion in the official closeout file for the contract.


Termination of a contract is an extremely serious step. It is serious for the contractor, whose business reputation or profits may be diminished, and for the government, because either the desired project has not proceeded as expected or the timeliness of the project has been, or will be, adversely impacted. For these reasons, termination is not a desirable action to take to resolve a contracting problem.

434. What are the principles of contract termination?

These principles must be followed if the government is considering terminating a contract:

Only the CO has the authority to terminate a contract.

The COR may not terminate a contract or imply that termination action will be taken.

The contractor has the right to appeal termination.

The COR must document all performance monitoring, with particular attention to those activities that support the government's position (i. e., those areas in which performance was weak, thus causing the government to consider termination).

What is the preferred method of contract termination?

The preferred method of contract termination is to effect a no-cost settlement without using formal termination procedures.

A contract can be terminated through a no-cost settlement only if:

The contractor has not incurred costs for the terminated portion of the contract or

The contractor is willing to waive the costs incurred and

No amounts are due the government under the contract.

As with any type of termination, the no-cost settlement may be complete (i.e., the contract is entirely terminated) or partial (i.e., only a portion of the contract is terminated). FAR 49.603-6 prescribes a no-cost settlement agreement to be used for a complete termination:

49.603-6: No-cost settlement agreement, complete termination:

[Insert the following in Block 14 of the SF 30 if a no-cost settlement agreement, under a complete termination, is to be executed.]

(a) This supplemental agreement [insert "modifies the contract to reflect a no-cost settlement agreement with respect to the Notice of Termination dated.........." or, if not previously terminated, "terminates the contract in its entirety"].

(b) The parties agree as follows:

The contractor unconditionally waives any charges against the government because of the termination of the contract and, except as set forth below, releases it from all obligations under the contract or due to its termination. The government agrees that all obligations under the contract are concluded, except as follows:

[List reserved or excepted rights and liabilities. See 49.109-2 and 49.603-1(b)(7).] (End of agreement)

FAR 49.603-7 provides a similar agreement for partial no-cost settlements.

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