For T of C settlement proposals over $10,000 the following standard forms are required:

Either SF 1435 "Settlement Proposal (Inventory Basis)" or SF 1436 "Settlement Proposal (Total Cost Basis)".

When applicable, several inventory forms referenced in the SF 1435 and 1436.

SF 1439 "Schedule of Accounting Information".

In addition, SF 1440 "Application for Partial Payment" is usually recommended though not required.

Inventory vs. Total Cost. The choice of forms can be the most significant decision you will make because of the potentially different recovery they indicate you are entitled to. For example, under a one year labor service contract with several option periods it is common practice to keep bid pricing competitive by spreading initial costs over the expected period of performance rather than over one year. When the contract is terminated say half way through the first year, these initial costs are included as "other costs" under the inventory method and we commonly see auditors question most of these costs on the basis they should have been amortized over the "contract period" (e.g. one year). Under the total cost method, these costs would be included as total costs incurred minus amounts paid. In other cases where, for example, a contract is in a loss position you may fare better under the inventory basis because acceptable finished product is subtracted from contractor costs in determining whether a contract is being performed at a loss where this deduction is not made under the total cost method. (See Chapter 12 of the DCAA Contract Audit Manual for illustrations of treating loss adjustments under both methods).

You should become very familiar with these two forms and compute your projected termination proposal using both forms to determine any difference of potential recovery.

The inventory basis (SF 1435) is the preferred method under FAR except where there is a complete termination of a construction contract or a professional services contract based on a lump sum bid. Except for these two types of contracts, where there is little inventory and the total cost basis is preferred, you must obtain advance permission from the CO to use the total cost method. FAR 49.206-2 permits the CO to approve use of the total cost method when the inventory method is "not practicable" or "will unduly delay settlement". It lists nonexclusive examples of situations in which use of the total cost basis is appropriate:

If production has not commenced and the accumulated costs represent planning, preproduction or "get ready" expenses.

Under the contractor’s accounting practices, unit costs or work-in-process and finished products cannot be readily established.

The contract does not specify unit prices

Schedule of Accounting Information. As we shall discuss in the next chapter, termination settlement proposals offer contractors opportunities to deviate from their normal accounting practices. Both normal practices and deviations should be identified in this form. Though prior submittals of disclosure statements can be a legitimate basis not to meet this requirement, it is still a good idea to submit one if your proposal reflects deviations from normal practice. Furnishing this form also will likely expedite partial payment applications.

Partial Payment Applications. Though not mandatory, proper handling of this form can substantially benefit the contractor. Partial payments are available before settlement is made and the government must "promptly" process the partial payment application. It can be quite helpful in expediting cash flow and to avoid being forced to accept an unreasonably low settlement offer because of the need for immediate cash. SF 1440 may be submitted with the proposal or after submission. Contractors are entitled to receive a partial payment that includes, in total:

100% of the contract price adjusted for items completed before the termination date or to be completed after the date with CO approval.

100% of subcontractor settlements the contractor has paid that were approved by the CO.

90% of direct costs of termination inventory including materials, purchased parts, supplies and direct labor.

90% of all other allowable costs not included above that are allocable to the terminated requirements including settlement expenses.

100% of partial payments made to subcontractors.

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