In our first post covering the Revolutionary FAR Overhaul (“RFO”) proposed rules, we provided a high-level overview of the first four published by the FAR Council on June 23, 2026. As promised, this post will dig into the details of FAR Case 2026-007, which covers updates to Part 3 (Improper Business Practices and Personal Conflicts of Interest) and Part 49 (Termination of Contracts), along with the associated clauses in Part 52 of the FAR.
One of the most significant updates in FAR Case 2026-007 is found in Part 49, which proposes to compress the deadlines for all termination-related submissions. In particular, the deadline for the submission of a termination settlement proposal has been significantly reduced from one year to just 90 days – we will discuss this further below. But first, an overview of the revised FAR Part 3.
Revisions to FAR Part 3
While the FAR Council retained the statutory requirements governing improper business practices and personal conflicts of interest (see, e.g., 10 U.S.C. 4651 (Expenditure of appropriations: limitation); 10 U.S.C. 208 (Acts affecting a personal financial interest); 41 U.S.C. 3509 (Notifications of violations of Federal criminal law), among others), revisions to FAR Part 3 focused on eliminating provisions that were “obsolete, duplicative, or non-statutory in nature,” such as: references to Executive Order 11222, Prescribing Standards of Ethical Conduct for Government Officers and Employees (from 1965) that has been superseded; FAR 3.301 because it was informational in nature; agency guidance in FAR 3.406; and the now-obsolete Recovery Act whistleblower protections at FAR 3.907 because the underlying appropriations have long since expired.
FAR 3.104-4: New Procedures for Justifying Markings the Agency Believes are Misapplied
One change that deserves attention is FAR 3.104-4 (Disclosure, protection, and marking of contractor bid or proposal information and source selection information), which governs how agencies handle the marking, protection, and disclosure of contractor bid or proposal information and source selection information. The proposed rule clarifies the procedure for challenging markings an agency believes were improperly applied. Rather than allowing a contracting officer to simply cancel or disregard a proprietary or source-selection marking, the rule now requires the Contracting Officer to notify the offeror or contractor in writing and provide a defined period (not to exceed 60 days) for the contractor to submit a written justification substantiating the marking before the agency acts. Additionally, the proposed revisions to this subsection replace outdated cross-references to technical-data procedures and codifies the statutory Freedom of Information Act protection at 41 U.S.C. 4702, confirming that proposals remain exempt from disclosure regardless of a dispute over markings.
These revisions to FAR 3.104-4 provide a welcome process upgrade for protecting contractor proposal information and source selection information. Assuming these proposed revisions remain as part of the final rule, contractors should ensure their proposal and contracts teams: (1) are aware of the new procedures; (2) maintain open communications with the contracting agency; and (3) track any justification windows to provide substantiation letters by the requested date. If a contractor fails to submit its justification by the deadline, the agency may cancel or ignore the marking(s) in question.
Revisions to FAR Part 49
The rewrite of FAR Part 49 preserves the statutory framework that governs Federal contract terminations (e.g., the Government’s right to terminate for convenience, the fair-compensation principles, the excess-cost recovery framework for defaults, and the subcontractor claim settlement requirements) and, like Part 3, removes provisions that are “obsolete, duplicative, or non-statutorily-based,” such as narrative guidance or explanatory text contained in several provisions within Part 49 (See, e.g., FAR 49-108-7 (Government Assistance in Settling Subcontracts); FAR 49.113 (Cost Principles); and FAR 49.405 (Completion by Another Contractor)).
In addition to the aforementioned revisions, FAR Part 49 introduces several key changes to the audits of prime and subcontractor termination settlement proposals and the timeframes associated with the submission of termination settlement proposals and inventory schedules, discussed further below.
FAR 49.107: Settlement-Proposal Audits Now Permissive and Based on Risk
Under the current framework, an audit of a termination settlement proposal is mandatory once the proposal crosses the certified cost-or-pricing-data threshold. The proposed rule rewrites FAR 49.107 to remove the dollar trigger (and reference to the corresponding FAR clause) entirely and replaces it with a risk-based determination made by the Termination Contracting Officer (“TCO”). Under this new framework, the TCO is to assess the need for audits of prime contractor settlement proposals, assess the risk associated with subcontract settlements, and refer to the audit agency for risk review, as needed. Prime contractors and subcontractors remain responsible for performing accounting reviews and any necessary field audits. Under the Proposed FAR 49.107, audit reports remain as advisory and to be used by the TCO to negotiate settlements or make unilateral determinations.
Under the new permissive audit framework, there may be less predictability about when an audit may occur. On the same coin, however, contractors that submit well-documented settlement proposals might benefit from an expedited settlement process absent the automatic audit. Either way, best practice suggests that contractors should maintain well-documented and organized cost records to reduce the likelihood of an audit based on risk.
FAR 49.206-1, 49.206-3, and Related Provisions: Compressed Submission Deadlines for Termination Settlement Proposals and Inventory Disposal Schedules
Current FAR 49.206-1 requires contractors to submit their final termination settlement proposal within one year from the effective date of termination, unless the period is extended by the TCO. Proposed FAR 49.206-1 compresses this deadline to just 90 days from the effective date of termination, while retaining the TCO’s authority to grant extensions upon request. Related FAR provisions, including FAR 49.302, 49.202-1, 49.302(a) and the corresponding termination clauses in Part 52 reflect conforming changes reducing the deadline from one year to 90 days and also reduce the timeline for submission of a contractor’s extension request from one year after termination to just 60 days after termination notice.
Similarly, current FAR 49.206-3 requires contractors to submit inventory disposal schedules within 120 days from the effective date of termination, with extensions available based on written justification from the TCO using Standard Form 1428, Inventory Disposal Schedule. Proposed FAR 49.206-3 compresses this deadline to just 60 days from the effective date of termination, with the same opportunity for extension. FAR 49.303-2, along with the corresponding termination clauses in FAR Part 52 also reflect changes that correspond with this new timeline, including the requirement for a contractor to submit an extension request within 30 days after the effective date of termination (reduced from 120 days in the current FAR Part 52 clauses). See below a quick reference table:
|
Submission |
Current Deadline |
Proposed Deadline |
Percent Reduction |
|
Inventory schedules |
120 days after termination |
60 days after termination |
50% |
|
Extension request for inventory schedules |
120 days after termination |
30 days after termination notice |
75% |
|
Settlement proposals |
1 year after termination |
90 days after termination |
75% |
|
Extension request for settlement proposals |
1 year |
60 days |
84% |
These compressed timeframes apply to both fixed-price and cost-reimbursement terminations, and were not reflected in the FAR model deviations, so they likely will be new to many contractors seeing them for the first time in this proposed rule.
For those contractors that have not had the pleasure of preparing a termination settlement proposal, this process involves reconstructing incurred costs, settling and rolling up subcontractor proposals, disposing of termination inventory, and assembling the correct settlement forms.
Depending on the size and complexity of the procurement, termination settlements can account for some of the most complex cost-accounting practices in federal contracting and, particularly where there are several tiers of subcontractors performing work on a Federal contract, negotiations can typically take many months, with several rounds of discussions needed to reach a settlement. Under the old one-year clock, this process could unfold at a measured pace, but under the proposed rule, contractors will now need to revisit their termination playbooks to front-load much of these steps. We anticipate that extension requests will now become a routine part of the termination settlement process for moderate to complex procurements and/or procurements that involve significant amounts of Government-furnished property.
“You Said, We Did” . . . Except for Parts 3 and 49
The FAR Council’s “You Said, We Did” matrix maps the roughly 1,600 Phase 1 comments to specific revisions the Council made between the model deviations and the proposed rules. For several parts, the matrix shows real, comment-driven change.
However, for Parts 3 and 49, the Council’s matrix reflects that it “considered the public feedback received on RFO parts 3 and 49, but determined that the recommendations . . . had already been addressed in the policy and/or FAR Companion.” Because the Phase 1 comment cycle produced little change to these Parts, it is unclear how much the Phase 2 comment period will influence these provisions either. The FAR Council received just 28 comments on FAR Case 2026-007.
Conclusion
FAR Case 2026-007 reflects a tune-up of Part 3, with some much-needed clarity surrounding the procedures for challenging marked information, and is paired with a Part 49 rewrite that dramatically changes the cadence of contract terminations. We anticipate the compressed settlement timelines will be the most significant pain point for Federal contractors when a termination for convenience arises. We will continue to break down each of the RFO proposed rules as they are published. For the full series and our running analysis, visit our Revolutionary FAR Overhaul Tracker.