diff --git a/CHANGELOG.md b/CHANGELOG.md
index b53ae188..8aaebaff 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -6,6 +6,14 @@ Pre-1.0 note: while `pg_durable` is in major version `0`, minor releases may inc
 
 ## [0.2.4] - Unreleased
 
+### Added
+
+- **Skipped node terminal status:** downstream nodes that are not executed after an upstream node failure are now marked `skipped` instead of remaining indefinitely `pending` (#240).
+
+### Changed
+
+- **Failure observability:** on node-level workflow failure, pg_durable now performs a terminal reconciliation pass to mark remaining `pending` nodes as `skipped` when supported by the installed schema.
+
 ## [0.2.3] - 2026-06-17
 
 Provider-line note: v0.2.3 stays in the `duroxide-pg` provider compatibility line started in v0.2.2, so the upgrade source is v0.2.2 (`sql/pg_durable--0.2.2--0.2.3.sql`).
diff --git a/USER_GUIDE.md b/USER_GUIDE.md
index 5a86fade..de6a697c 100644
--- a/USER_GUIDE.md
+++ b/USER_GUIDE.md
@@ -1300,6 +1300,7 @@ SQL |=> 'a': SELECT 1
 | `✗ Failed` | Node encountered an error |
 | `⏳ Running` | Node currently executing |
 | `○ Pending` | Node waiting to execute |
+| `⊘ Skipped` | Node was not executed because an upstream node failed |
 
 ### Visualizing Complex Structures
 
diff --git a/docs/issue-240-skipped-status-plan.md b/docs/issue-240-skipped-status-plan.md
new file mode 100644
index 00000000..e09a5b69
--- /dev/null
+++ b/docs/issue-240-skipped-status-plan.md
@@ -0,0 +1,168 @@
+# Issue 240 Design and Implementation Plan
+
+## Summary
+
+Issue 240 requests a clear way to distinguish nodes that were never executed because the workflow already failed. Today those nodes remain in `pending`, which is ambiguous.
+
+Proposed enhancement:
+- Add a terminal node status: `skipped`.
+- On workflow failure, convert remaining `pending` nodes to `skipped` when the failure came from node execution (that is, at least one node is `failed`).
+
+This keeps the existing instance-level status model unchanged (`df.instances.status` still ends as `failed`) while making node-level outcomes explicit.
+
+## Current Behavior (Observed)
+
+Live repro on local pg instance:
+- Step 1 SQL node: `completed`
+- Step 2 SQL node (intentional error): `failed`
+- Step 3 SQL node (never executed): `pending`
+- Instance: `failed`
+
+This is the ambiguity reported in issue 240.
+
+## Goals
+
+- Make unexecuted downstream nodes observable as `skipped` after terminal workflow failure.
+- Preserve backward compatibility of the new binary against old schemas.
+- Keep implementation minimal and low-risk (no new tables or public function signatures).
+
+## Non-Goals
+
+- No change to `df.instances.status` vocabulary.
+- No new monitoring projection table in this iteration.
+- No attempt to classify every failure mode as producing `skipped` (for example, pre-execution policy rejection may remain as-is).
+
+## Proposed Design
+
+### 1. Schema: add `skipped` to allowed node statuses
+
+Update node status check constraints so `skipped` is valid:
+- Install DDL in `src/lib.rs`:
+  - `nodes_status_chk`: include `skipped`.
+- Upgrade DDL in next upgrade script:
+  - drop and recreate `nodes_status_chk` (or equivalent alteration) to include `skipped`.
+
+`nodes_result_status_chk` can remain unchanged because `skipped` nodes should not carry `result`.
+
+### 2. Runtime: mark pending nodes as skipped at terminal failure
+
+Add an activity that performs one set-based update for a single instance:
+
+- New activity (suggested): `mark_pending_nodes_skipped`.
+- SQL behavior:
+  - `UPDATE df.nodes`
+  - `SET status = 'skipped', updated_at = now()`
+  - `WHERE instance_id = $1 AND status = 'pending'`
+  - guarded by `EXISTS (SELECT 1 FROM df.nodes WHERE instance_id = $1 AND status = 'failed')`
+
+Guard rationale:
+- Avoid changing semantics for failures that occur before any node execution (for example, instance-level rejection paths that currently do not mark node failures).
+- Keep behavior aligned with issue wording: downstream steps skipped due to an earlier step failure.
+
+### 3. Orchestration integration point
+
+In `execute_function_graph` top-level failure path (when instance is being moved to `failed`):
+- After node failure is recorded and before/after instance status update, schedule the new activity once for that instance.
+- Make the update idempotent and best-effort (safe if retried).
+
+Why this placement:
+- Central place where terminal failure is decided.
+- Avoids needing per-node graph traversal logic.
+- Handles linear and composite graphs (`THEN`, `IF`, `JOIN`, `RACE`, `LOOP`) uniformly.
+
+### 4. Optional hardening in `update_node_status`
+
+No required behavior change, but add a small guard in plan review:
+- Keep allowing transitions to `completed` / `failed` as today.
+- Ensure no code path writes result for `skipped`.
+
+## Backward Compatibility and Upgrade Strategy
+
+### Binary backward compatibility (B1)
+
+New `.so` may run against an older schema where `nodes_status_chk` does not include `skipped`.
+If runtime writes `skipped` in that state, updates would fail.
+
+Plan:
+- Runtime schema detection for `skipped` support before attempting the bulk update.
+- If unsupported, no-op and keep legacy behavior (`pending`).
+
+Implementation options:
+- Option A (preferred): activity checks `pg_constraint` definition for `nodes_status_chk` containing `skipped`.
+- Option B: attempt update inside savepoint-like handling and ignore check-constraint violation.
+
+Option A is clearer and avoids noisy errors.
+
+### Schema upgrade (A/B2)
+
+- Create next upgrade script `sql/pg_durable--0.2.2--0.2.3.sql` (version number illustrative; use actual next version).
+- Add DDL to update `nodes_status_chk` to include `skipped`.
+- Ensure fresh-install schema (from current `src/lib.rs` extension SQL) matches upgraded schema.
+
+## Test Plan
+
+### Unit / Rust-level
+
+- Activity test: when instance has a failed node plus pending nodes, only pending nodes become `skipped`.
+- Activity test: when no failed node exists, no rows are changed.
+- Compatibility test hook: when schema does not support `skipped`, activity no-ops without error.
+
+### E2E SQL
+
+Add a new E2E SQL test (for example `tests/e2e/sql/49_failed_downstream_nodes_skipped.sql`):
+- Build a 3-step sequence where step 2 fails.
+- Wait for terminal instance status `failed`.
+- Assert:
+  - step 1 node is `completed`
+  - step 2 node is `failed`
+  - step 3 node is `skipped` (not `pending`)
+- Include clear failure messages.
+
+Also verify an instance-level failure path with no node failure (if represented in existing tests) does not force all nodes to `skipped`.
+
+### Upgrade tests
+
+Run:
+- `./scripts/test-upgrade.sh`
+
+Focus expectations:
+- Scenario A: fresh install vs upgraded schema parity for `nodes_status_chk`.
+- Scenario B1: new `.so` still works against old schema; `skipped` behavior degrades safely to legacy (`pending`) until upgrade.
+- Scenario B2: data remains accessible post-upgrade.
+
+## Docs Plan
+
+Update user-facing status vocabulary references:
+- `USER_GUIDE.md` (node status semantics)
+- `docs/api-reference.md` if status values are documented there
+- Optional release note entry in `CHANGELOG.md`
+
+## Rollout and Risk
+
+Risks:
+- Writing `skipped` against non-upgraded schema (mitigated by runtime check).
+- Unexpected interactions with in-flight parallel constructs (mitigated by set-based terminal update and idempotence).
+
+Rollout:
+1. Land schema + runtime + tests in one PR.
+2. Validate full local matrix: fmt, clippy, unit, e2e, upgrade.
+3. Document behavior change as node-level observability enhancement.
+
+## Acceptance Criteria
+
+- Failed workflow with downstream unexecuted nodes shows `skipped` for those nodes (post-upgrade schema).
+- No regression to existing instance terminal statuses.
+- New binary remains functional against pre-upgrade schema.
+- E2E and upgrade tests pass.
+
+## Implementation Checklist
+
+- [ ] Add `skipped` to node status check constraint in install DDL (`src/lib.rs`).
+- [ ] Add upgrade script change for `nodes_status_chk`.
+- [ ] Add new activity to mark pending nodes as skipped for failed instances.
+- [ ] Register activity in `src/registry.rs`.
+- [ ] Call activity from orchestration failure path.
+- [ ] Add schema-compatibility guard for pre-upgrade schemas.
+- [ ] Add E2E SQL coverage.
+- [ ] Update docs and changelog notes.
+- [ ] Run fmt, clippy, unit, e2e, upgrade tests.
diff --git a/docs/upgrade-testing.md b/docs/upgrade-testing.md
index 51059edd..825e9134 100644
--- a/docs/upgrade-testing.md
+++ b/docs/upgrade-testing.md
@@ -203,6 +203,14 @@ gate, so they never need to be added to the exclude list.
 Each schema-changing PR should add a section here documenting what changed,
 what the upgrade script handles, and any backward compatibility considerations.
 
+### v0.2.3 → v0.2.4
+
+#### #240 node-level `skipped` status for downstream unexecuted steps
+- **DDL change:** `df.nodes.status` constraint (`nodes_status_chk`) now allows `skipped` in addition to `pending`, `running`, `completed`, and `failed`. Upgrade script: `sql/pg_durable--0.2.3--0.2.4.sql`.
+- **Scenario A considerations:** fresh-install and upgraded schemas must agree on the `nodes_status_chk` status vocabulary including `skipped`.
+- **Scenario B1 considerations:** the new `.so` must still run against pre-0.2.4 schemas where `nodes_status_chk` does not allow `skipped`. Runtime logic therefore detects schema support first and no-ops (retains legacy `pending` behavior) when unsupported.
+- **Scenario B2 considerations:** no data migration required. Existing rows are preserved; only new terminal reconciliation on failed runs can mark unexecuted nodes as `skipped` post-upgrade.
+
 ### v0.2.2 → v0.2.3
 
 #### Rename duroxide provider schema to `_duroxide` for fresh installs
diff --git a/src/activities/mark_pending_nodes_skipped.rs b/src/activities/mark_pending_nodes_skipped.rs
new file mode 100644
index 00000000..7bc10749
--- /dev/null
+++ b/src/activities/mark_pending_nodes_skipped.rs
@@ -0,0 +1,77 @@
+// Copyright (c) Microsoft Corporation.
+// Licensed under the PostgreSQL License.
+
+//! MarkPendingNodesSkipped activity - marks unexecuted nodes as skipped
+//! after a node-level failure.
+
+use duroxide::ActivityContext;
+use sqlx::PgPool;
+use std::sync::Arc;
+
+/// Activity name for registration and scheduling
+pub const NAME: &str = "pg_durable::activity::mark-pending-nodes-skipped";
+
+/// Mark pending nodes as skipped for a failed instance.
+///
+/// Behavior:
+/// - No-op on schemas that do not support 'skipped' in nodes_status_chk.
+/// - No-op unless the instance has at least one failed node.
+/// - Updates only nodes still in 'pending'.
+pub async fn execute(
+    ctx: ActivityContext,
+    pool: Arc<PgPool>,
+    input_json: String,
+) -> Result<String, String> {
+    let input: serde_json::Value = serde_json::from_str(&input_json)
+        .map_err(|e| format!("Failed to parse skipped-status input: {e}"))?;
+
+    let instance_id = input["instance_id"].as_str().ok_or("Missing instance_id")?;
+
+    let skipped_supported: bool = sqlx::query_scalar(
+        "SELECT COALESCE(
+            (
+                SELECT pg_catalog.pg_get_constraintdef(c.oid)
+                FROM pg_catalog.pg_constraint c
+                JOIN pg_catalog.pg_class t ON t.oid = c.conrelid
+                JOIN pg_catalog.pg_namespace n ON n.oid = t.relnamespace
+                WHERE n.nspname = 'df'
+                  AND t.relname = 'nodes'
+                  AND c.conname = 'nodes_status_chk'
+                LIMIT 1
+            ) LIKE '%''skipped''%',
+            false
+        )",
+    )
+    .fetch_one(pool.as_ref())
+    .await
+    .map_err(|e| format!("Failed to detect skipped status support: {e}"))?;
+
+    if !skipped_supported {
+        ctx.trace_info(format!(
+            "Schema does not support node status 'skipped'; leaving pending nodes unchanged for instance {instance_id}"
+        ));
+        return Ok("Skipped status unsupported on schema; no-op".to_string());
+    }
+
+    let rows_affected = sqlx::query(
+        "UPDATE df.nodes n
+         SET status = 'skipped', updated_at = now()
+         WHERE n.instance_id = $1
+           AND n.status = 'pending'
+           AND EXISTS (
+                SELECT 1
+                FROM df.nodes f
+                WHERE f.instance_id = $1
+                  AND f.status = 'failed'
+           )",
+    )
+    .bind(instance_id)
+    .execute(pool.as_ref())
+    .await
+    .map_err(|e| format!("Failed to mark pending nodes as skipped: {e}"))?
+    .rows_affected();
+
+    let msg = format!("Marked {rows_affected} pending nodes as skipped for instance {instance_id}");
+    ctx.trace_info(&msg);
+    Ok(msg)
+}
diff --git a/src/activities/mod.rs b/src/activities/mod.rs
index 8d619bad..f9f8a4d6 100644
--- a/src/activities/mod.rs
+++ b/src/activities/mod.rs
@@ -9,5 +9,6 @@
 pub mod execute_http;
 pub mod execute_sql;
 pub mod load_function_graph;
+pub mod mark_pending_nodes_skipped;
 pub mod update_instance_status;
 pub mod update_node_status;
diff --git a/src/lib.rs b/src/lib.rs
index 681b88d4..980c5821 100644
--- a/src/lib.rs
+++ b/src/lib.rs
@@ -248,7 +248,7 @@ ALTER TABLE df.nodes
     ADD CONSTRAINT nodes_result_name_chk
         CHECK (result_name IS NULL OR result_name OPERATOR(pg_catalog.~) '^[A-Za-z_][A-Za-z0-9_]*$') NOT VALID,
     ADD CONSTRAINT nodes_status_chk
-        CHECK (status OPERATOR(pg_catalog.=) ANY (ARRAY['pending', 'running', 'completed', 'failed'])) NOT VALID,
+        CHECK (status OPERATOR(pg_catalog.=) ANY (ARRAY['pending', 'running', 'completed', 'failed', 'skipped'])) NOT VALID,
     ADD CONSTRAINT nodes_result_status_chk
         CHECK (result IS NULL OR status OPERATOR(pg_catalog.=) ANY (ARRAY['completed', 'failed'])) NOT VALID,
     ADD CONSTRAINT nodes_structure_chk
diff --git a/src/orchestrations/execute_function_graph.rs b/src/orchestrations/execute_function_graph.rs
index fd177227..ed637c3f 100644
--- a/src/orchestrations/execute_function_graph.rs
+++ b/src/orchestrations/execute_function_graph.rs
@@ -216,8 +216,28 @@ pub async fn execute(ctx: OrchestrationContext, input_json: String) -> Result<St
         }
         Err(err) => {
             ctx.trace_info(format!("Function failed with error: {err}"));
+            let instance_id = input.instance_id.clone();
+
+            // If this was a node-level failure, mark any remaining pending nodes
+            // as skipped for clearer terminal observability.
+            let skipped_input = serde_json::json!({
+                "instance_id": instance_id,
+            });
+            if let Err(e) = ctx
+                .schedule_activity(
+                    activities::mark_pending_nodes_skipped::NAME,
+                    skipped_input.to_string(),
+                )
+                .await
+            {
+                ctx.trace_info(format!(
+                    "Failed to mark pending nodes as skipped for instance {}: {}",
+                    input.instance_id, e
+                ));
+            }
+
             let status_input = serde_json::json!({
-                "instance_id": input.instance_id,
+                "instance_id": instance_id,
                 "status": "failed"
             });
             let _ = ctx
diff --git a/src/registry.rs b/src/registry.rs
index 03e5c73d..2925b8b5 100644
--- a/src/registry.rs
+++ b/src/registry.rs
@@ -18,6 +18,7 @@ pub fn create_activity_registry(pool: Arc<PgPool>, semaphore: Arc<Semaphore>) ->
     let graph_pool = pool.clone();
     let status_pool = pool.clone();
     let node_status_pool = pool.clone();
+    let skipped_pool = pool.clone();
     let http_pool = pool.clone();
 
     ActivityRegistry::builder()
@@ -37,6 +38,10 @@ pub fn create_activity_registry(pool: Arc<PgPool>, semaphore: Arc<Semaphore>) ->
             let pool = node_status_pool.clone();
             async move { activities::update_node_status::execute(ctx, pool, input_json).await }
         })
+        .register(activities::mark_pending_nodes_skipped::NAME, move |ctx: ActivityContext, input_json: String| {
+            let pool = skipped_pool.clone();
+            async move { activities::mark_pending_nodes_skipped::execute(ctx, pool, input_json).await }
+        })
         .register(activities::execute_http::NAME, move |ctx: ActivityContext, config_json: String| {
             let pool = http_pool.clone();
             async move { activities::execute_http::execute(ctx, pool, config_json).await }
diff --git a/tests/e2e/sql/49_failed_downstream_nodes_skipped.sql b/tests/e2e/sql/49_failed_downstream_nodes_skipped.sql
new file mode 100644
index 00000000..3b0ee899
--- /dev/null
+++ b/tests/e2e/sql/49_failed_downstream_nodes_skipped.sql
@@ -0,0 +1,114 @@
+-- Copyright (c) Microsoft Corporation.
+-- Licensed under the PostgreSQL License.
+
+-- E2E Test: downstream nodes are marked 'skipped' after node-level failure.
+
+SET SESSION AUTHORIZATION df_e2e_user;
+
+-- ============================================================================
+-- Test 1: THEN chain failure marks downstream SQL node as skipped
+-- ============================================================================
+
+CREATE TEMP TABLE _test_skip1 (instance_id TEXT);
+
+INSERT INTO _test_skip1
+SELECT df.start(
+    df.sql($$SELECT 'skip-test-step1'::text$$)
+    ~> df.sql($$SELECT 1/0$$)
+    ~> df.sql($$SELECT 'skip-test-step3'::text$$),
+    'test-failed-downstream-skipped-seq'
+);
+
+DO $$
+DECLARE
+    inst_id TEXT;
+    wf_status TEXT;
+    step1_status TEXT;
+    fail_status TEXT;
+    step3_status TEXT;
+BEGIN
+    SELECT instance_id INTO inst_id FROM _test_skip1;
+    SELECT df.wait_for_completion(inst_id) INTO wf_status;
+
+    IF lower(wf_status) != 'failed' THEN
+        RAISE EXCEPTION 'TEST FAILED [skipped-seq]: expected failed, got %', wf_status;
+    END IF;
+
+    SELECT status INTO step1_status
+    FROM df.nodes
+    WHERE instance_id = inst_id AND node_type = 'SQL' AND query = 'SELECT ''skip-test-step1''::text'
+    LIMIT 1;
+
+    IF step1_status != 'completed' THEN
+        RAISE EXCEPTION 'TEST FAILED [skipped-seq]: step1 expected completed, got %', step1_status;
+    END IF;
+
+    SELECT status INTO fail_status
+    FROM df.nodes
+    WHERE instance_id = inst_id AND node_type = 'SQL' AND query = 'SELECT 1/0'
+    LIMIT 1;
+
+    IF fail_status != 'failed' THEN
+        RAISE EXCEPTION 'TEST FAILED [skipped-seq]: failing step expected failed, got %', fail_status;
+    END IF;
+
+    SELECT status INTO step3_status
+    FROM df.nodes
+    WHERE instance_id = inst_id AND node_type = 'SQL' AND query = 'SELECT ''skip-test-step3''::text'
+    LIMIT 1;
+
+    IF step3_status != 'skipped' THEN
+        RAISE EXCEPTION 'TEST FAILED [skipped-seq]: downstream step expected skipped, got %', step3_status;
+    END IF;
+
+    RAISE NOTICE 'TEST PASSED: skipped status on failed sequence';
+END $$;
+
+DROP TABLE _test_skip1;
+
+-- ============================================================================
+-- Test 2: IF condition failure marks both branches as skipped
+-- ============================================================================
+
+CREATE TEMP TABLE _test_skip2 (instance_id TEXT);
+
+INSERT INTO _test_skip2
+SELECT df.start(
+    df.if(
+        $$SELECT 1/0$$,
+        $$SELECT 'skip-then-branch'::text$$,
+        $$SELECT 'skip-else-branch'::text$$
+    ),
+    'test-failed-downstream-skipped-if'
+);
+
+DO $$
+DECLARE
+    inst_id TEXT;
+    wf_status TEXT;
+    skipped_branch_count INT;
+BEGIN
+    SELECT instance_id INTO inst_id FROM _test_skip2;
+    SELECT df.wait_for_completion(inst_id) INTO wf_status;
+
+    IF lower(wf_status) != 'failed' THEN
+        RAISE EXCEPTION 'TEST FAILED [skipped-if]: expected failed, got %', wf_status;
+    END IF;
+
+    SELECT COUNT(*) INTO skipped_branch_count
+    FROM df.nodes
+    WHERE instance_id = inst_id
+      AND node_type = 'SQL'
+            AND query IN ('SELECT ''skip-then-branch''::text', 'SELECT ''skip-else-branch''::text')
+      AND status = 'skipped';
+
+    IF skipped_branch_count != 2 THEN
+        RAISE EXCEPTION 'TEST FAILED [skipped-if]: expected 2 skipped branches, got %', skipped_branch_count;
+    END IF;
+
+    RAISE NOTICE 'TEST PASSED: skipped status on IF branches after condition failure';
+END $$;
+
+DROP TABLE _test_skip2;
+
+SELECT 'TEST PASSED' AS result;
\ No newline at end of file