Contract termination and settlement procedure, reduced to bare essentials, consisted of three steps: (1) the serving of a termination notice by the contracting agency; (2) presentation by the contractor of his settlement proposal (generally referred to as the contractor's "claim"); (3) the negotiation of the settlement agreement. Each of these steps had many possible ramifications, and for large settlements approval by higher authority was required before final agreement could be reached.
The standard settlement procedure was known as the vertical settlement system. It was so described because all termination claims under a given prime contract were passed in successive stages up the contractual chain into the hands of the prime contractor. Each subcontractor's claim would thus be reviewed by his immediate customer who in turn would incorporate all his subcontract termination costs into his own claim. The prime contractor, standing at the top of the contractual chain, would then present to the government the total accumulated termination charges under the entire contract. In this manner the contracting agency negotiating the settlement would deal directly only with the prime contractor instead of with perhaps a thousand or more contracting firms at all stages of production under the contract. This procedure followed the pattern of relationships established in the basic contracting and subcontracting process, under which the government had privity of contract and direct face-to-face relationships only with the prime. But just as the processes of wartime procurement required deviation from the traditional contracting procedures, so did the urgency and complexities of the contract settlement process call for departures from the standard settlement procedure.1
The decision to terminate a contract was made, as already indicated, only after a careful review of various considerations, many of which were unconnected with the circumstances of the individual contractor.2 In anticipation of termination, government representatives held preliminary discussions with the contractor whenever feasible in order to reach tentative agreement on as many issues as possible.3 These included such matters as "stop-work" points, the classification, valuation, and disposition of contractor's inventory, allocation of common inventory and overhead costs, termination and settlement of subcontractors' claims, and so on. In many cases, "pretermination planning" for important prime contracts resulted, as pointed out later, in written pre- termination agreements which bound the____________________