Termination Settlement Audit

Scope

Reviews all cost elements of the termination settlement proposal including direct costs incurred to date of termination, indirect costs allocable to the terminated work, settlement expenses (accounting, legal, clerical costs of preparing the claim), profit on completed work, and claims for finished/unfinished inventory. Also reviews subcontractor termination claims.

Frequency

Triggered by each termination for convenience action. The contractor must submit a settlement proposal within one year of the effective date of termination (or a longer period if approved by the contracting officer). DCAA audits the proposal to support the Termination Contracting Officer's negotiation of the settlement amount.

What to Expect

Auditors perform a detailed review of all costs claimed in the termination proposal, testing for allowability under FAR 31.205-42 (termination costs). They verify that inventory has been properly valued, that settlement expenses are reasonable, and that proposed profit is appropriate. The audit is often complex and may take several months depending on the size of the terminated contract.

Key Documents

• SF 1435 — Settlement Proposal (Inventory Basis)
• SF 1436 — Settlement Proposal (Total Cost Basis)
• FAR 31.205-42 — Termination Costs
• FAR Part 49 — Termination of Contracts
• Subcontractor termination settlement proposals
• Inventory schedules and disposition plans

Other DCAA Audit Types