The cost principles and procedures in the applicable subpart of Part 31 shall, subject to the general principles in FAR 49.201--(a) Be used in asserting, negotiating, or determining costs relevant to termination settlements under contracts with other than educational institutions, and (b) Be a guide for negotiation of settlements under contracts for experimental, developmental, or research work with educational institutions (but see 31.104). (Emphasis added.)Thus, it is mandatory that application of the cost principles is subject to FAR 49.201.
FAR 49.201 is well worth repeating:
(a) A settlement should compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract, including a reasonable allowance for profit. Fair compensation is a matter of judgment and cannot be measured exactly. In a given case, various methods may be equally appropriate for arriving at fair compensation. The use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement.Some contracting officers treat this as an invitation to deny recovery of allowable costs. They have things backwards. FAR 49.201 is a fairness doctrine. The contractor is to be treated fairly. The cost principles are not rigid rules necessarily to be followed if unfairness results. Various methods may be used to arrive at fair compensation. The regulation is designed to provide flexibility from rigid accounting rules.
In the end, FAR 49.201 is designed to promote settlement. A settlement, as we all know, is based on judgment and fair dealing. The government has used a contract clause not found in the commercial world. It has unilaterally decided to walk away from the contract. But not with impunity. It must pay for the privilege. And with that privilege comes the responsibility to act fairly and give the contractor its due. This does not mean a further penalty. It means fair compensation even in the face of cost principles which may, in other circumstances, dictate otherwise.
And that's what FAR 49.201 really means.