The Federal Acquisition Regulation Council published FAR Case 2026-007 on June 23, 2026, proposing sweeping changes to FAR Parts 3 and 49 that would cut the time contractors have to submit termination settlement proposals from one year to 90 days and convert mandatory threshold-based audit requirements into discretionary risk-based reviews controlled by the Termination Contracting Officer. The proposed rule is one of four packages released the same day under the FAR Revolutionary Overhaul's second phase, with public comments due July 23, 2026 at regulations.gov.
Background
Contract terminations — whether for convenience or default — trigger a cascade of administrative obligations for contractors. Under current FAR Part 49, a contractor receiving a termination notice has one year to compile and submit a settlement proposal accounting for all allowable costs, and 120 days to submit inventory schedules covering government-furnished property and partially completed work. Mandatory threshold-based audit requirements automatically attach to proposals above certain dollar levels, giving government auditors automatic review rights regardless of settlement size or whether an audit would recover more than it costs to conduct.
These timelines date to an era when contract terminations were less frequent and government property accounting relied on manual processes. The FAR Council argues that modern contract management systems, the rising tempo of termination actions in a dynamic acquisition environment, and the overarching goals of the FAR Revolutionary Overhaul — reducing administrative burden and compressing acquisition cycles — justify shorter deadlines and a more flexible, cost-conscious audit framework better suited to current federal contracting.
FAR Case 2026-007 forms part of the Revolutionary Overhaul's second phase. The June 23 release also includes FAR Case 2026-002, covering competition reform across Parts 6, 7, 10, 18, 26, 37, and 41; FAR Case 2026-001, addressing supply chain security consolidation across Parts 1, 2, 4, 33, 39, 40, 52, and 53; and FAR Case 2026-005, covering regulations across Parts 5, 24, and 29. Together the four cases propose amendments to more than 20 FAR parts in a single coordinated rulemaking push.
Key Details
90-day settlement proposal deadline. Under the proposed rule, contractors must submit termination settlement proposals within 90 days of the effective date of the termination notice, down from the current one-year window. A contractor may request an extension of up to 60 additional days under the proposed rule.
60-day inventory schedule deadline. The deadline for submitting inventory schedules — documenting government-furnished property, work in process, and partially completed end items — drops from 120 days to 60 days after the termination notice. This deadline runs concurrently with the settlement proposal clock, requiring contractors to pursue property accounting and cost compilation simultaneously from the moment termination is effective.
Risk-based discretionary audits. The proposed rule eliminates the mandatory threshold-based audit trigger in current FAR Part 49 and replaces it with a permissive framework. The TCO may order an audit at express discretion and is specifically authorized to waive or modify audit requirements when settlement amounts are small or when audit costs would likely exceed amounts recoverable through audit adjustments. The automatic audit right gives way to a cost-benefit judgment made by the responsible contracting official for each individual termination.
Part 3 ethics consolidation. The rule also consolidates contractor code of business ethics and conduct provisions currently spread across multiple FAR clauses, reducing duplicative language without altering underlying ethical obligations.
Comment period. The 30-day public comment window closes July 23, 2026. Submissions go to regulations.gov. The FAR Council has not published a projected final rule date for this case.
What It Means for Contractors
The compression from one year to 90 days for settlement proposal submission is the single most operationally disruptive change in this rulemaking. Under the current framework, a contractor receiving a termination for convenience notice can spend months gathering direct and indirect costs, pursuing subcontractor termination claims, reconciling government-furnished property accounts, and engaging informally with the TCO before the settlement proposal is formally due. The 90-day window collapses that entire process into roughly one fiscal quarter.
Programs involving complex cost structures, multiple subcontract tiers, or large volumes of government-furnished property face the steepest adjustment. A termination on a large systems integration program may involve dozens of subcontractor termination claims, each requiring independent cost analysis and negotiation before the prime can consolidate them into a final settlement proposal. Primes will need to flow the 90-day requirement down to major subcontractors immediately on receipt of a termination notice and cannot afford to first assess their own direct costs before activating the subcontract termination process.
The discretionary audit framework cuts in both directions. Contractors on small-dollar settlements may see faster final resolution if the TCO determines audit costs are disproportionate to recoverable amounts. Higher-value settlements will still attract audits wherever the TCO finds the cost-benefit favorable. Contractors should not assume that eliminating mandatory thresholds reduces audit exposure on large terminations — TCO discretion runs both ways, and nothing in the proposed rule limits the TCO's authority to order a full audit on any settlement.
Analysis published by Schwabe Williamson & Wyatt and Wiley covering the second-phase rulemaking identifies the 90-day settlement proposal window as the most operationally significant change for contractors. The compression leaves no room for the months-long, informal post-termination data gathering that many contractors currently rely on. Contractors managing multi-tier programs should assess whether existing cost accounting systems can produce a complete and defensible settlement proposal within the new window, and should establish subcontractor notification protocols that activate immediately on receipt of a termination notice.
Contractors with concerns about the 90-day deadline's feasibility — particularly those managing multi-tier programs with complex subcontract structures — should submit comments on the record before July 23, 2026. The public comment period is the primary opportunity to shape the final rule's scope and implementation details before the FAR Council proceeds to a final rule.
