Two FAR Clauses that Are Sometimes Overlooked
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Two FAR Clauses that Are Sometimes Overlooked 
government contractor and technology  audits, reviews and compilations; business advisory 

 

By: Keith Romanowski
Abstract:

Government contracts have a long list of laws and regulations that they must follow in order to successfully do business with the Federal Government. Some are easy to overlook and this can lead to disastrous results.  The Federal Acquisition Regulation (FAR) is the principal set of regulations issued by government agencies that defines the rules contractors and government officials must follow within the acquisition process. Two FAR clauses that can easily go unnoticed are FAR 52.232-20 “Limitation of Costs” and FAR 52.232-21 “Limitation of Funds.”

 

The Limitation of Costs clause applies to cost reimbursement type

contracts and requires that the contractor give written notice to the Contracting Officer (CO) when it has reason to believe that:

 

• Inception to date costs are expected to be greater than a certain threshold (between 75%  and 85%) of estimated costs within the next 30 – 90 days; or
• Total costs at completion will be greater than or substantially less than previously estimated costs.

 

Failure by the contractor to provide written notice along with a revised estimate of costs could prevent the contractor from collecting on any costs incurred in excess of estimated costs.  The contractor is not obligated to perform on contract or incur any costs in excess of estimated costs until the CO notifies the contractor, in writing, that the estimated costs have been increased.


The Limitation of Funds clause is similar to the Limitation of Costs clause; however, written notice to the CO is required when the contractor has reason to believe that inception to date costs are expected to be greater than a certain threshold (between 75%  and 85%) of funds allotted to contract within the next 30 – 90 days. In addition, sixty days prior to the end of the contract schedule, the contractor is required to provide written estimate of any additional funds required and when the funds would be required. If, after written notice, additional funds are not allotted to contract by CO, the contractor is not obligated to perform or incur additional costs and CO will terminate contract.

The Federal Acquisition Regulation (FAR) is the principal set of regulations issued by government agencies that defines the rules contractors and government officials must follow within the acquisition process. Two FAR clauses that can easily go unnoticed are FAR 52.232-20 “Limitation of Costs” and FAR 52.232-21 “Limitation of Funds.”

 

 

Contractors should pay particular attention to the wording of these clauses and the use of “reason to believe.”  A recent case before the ASBCA involved a prime contractor who did not notify the CO of the possibility that costs would exceed estimates. The Prime was made aware that additional costs were possible but, because they were uncertain that the costs were valid, did not notify the CO. The claim filed with the Armed Services Board of Contract Appeals (ASBCA) upheld the CO’s position that the contractor failed to provide notice on the basis that the costs were foreseeable.

 

Contractors should take the following steps to maximize cost recovery on costs type contracts:


• Make sure that the accounting system is capable of capturing and tracking all incurred costs including potential future costs.
• Update contract costs estimates regularly to promptly identify any potential overruns.
• Notify CO in writing of any potential cost increases as soon as they are known, even if validity of costs are still in question.