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    When we issue cancelling fund MOD, should the CLIN amount be reduced along with the ACRN amount and total obligated amount, or is the ACRN amount and the total obligated amount the only things that needs to be reduced?


    There are several issues involved with this question and background.

    The short answer is only the accounting classification reference number (ACRN) amount and total obligated amount need to be reduced when cancelling funds are de-obligated.  The contract price is not required to be reduced to the total obligated amount.  For detailed explanation of the question’s background as well as the different issues and concerns involved in this matter, particularly if the contract price is reduced to the total obligated amount, please read further for consideration.

    The accounting classification reference number (ACRN) (see
    DFARS PGI 204.7107 and 204.7108) is an identifier associated with each funding line of accounting obligated on the contract.

    FAR 16.307(a)(1), “[T]he contracting officer shall insert the clause at 52.216-7, Allowable Cost and Payment, in solicitations and contracts when a cost-reimbursement contract or a time-and-materials contract (other than a contract for a commercial item) is contemplated. If the contract is a time-and-materials contract, the clause at 52.216-7 applies in conjunction with the clause at 52.232-7 , but only to the portion of the contract that provides for reimbursement of materials (as defined in the clause at 52.232-7) at actual cost. Further, the clause at 52.216-7 does not apply to labor-hour contracts.”

    Paragraphs (d) through (h) of FAR clause 52.216-7 address matters related to final indirect cost rates.  Paragraph (d)(2)(i) states “[T]he Contractor shall submit an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.”  Per FAR 42.705, a contracting officer determination procedure or an auditor determination procedure shall be used to establish final indirect cost rates.  The established final indirect cost rates are required to determine the final costs on a cost-reimbursement effort or the reimbursement effort for the materials portion of a non-commercial-item time-and-materials effort.  Once these final costs are determined, then a final invoice can be prepared, submitted, and, to the extent required per the contract, paid.  At this point, the contract can be closed if the remaining applicable elements of FAR 4.804 Closeout of Contract Files are met.  To determine if a quick-closeout may be possible, see FAR clause 52.216-7, paragraph (f) “[Q] quick-closeout procedures. Quick-closeout procedures are applicable when the conditions in FAR 42.708(a) are satisfied.”
    However, until the final indirect cost rates are established, the Contractor uses billing rates per FAR 52.216-7, paragraph (e)
    “[B]illing rates. Until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor),subject to adjustment when the final rates are established.
    These billing rates—
    (1) Shall be the anticipated final rates; and
    (2) May be prospectively or retroactively revised by mutual agreement, at either party’s request, to prevent substantial overpayment or underpayment.”
    Thus, if the established final indirect cost rates exceed the billing rates, then the final costs incurred by the contractor, in relation to costs incurred already through interim payments on the contract, will increase.  If the final rates are lower than the billing rates, the final costs incurred by the contractor will decrease.
    FAR clauses 52.232-18 Limitation of Cost and 52.232-22 Limitation of Funds apply to fully-funded and incrementally funded cost-reimbursement efforts, respectively.  Each of these clauses, as well as FAR clause 52.232-7 Payments under Time-and-Materials and Labor-Hour Contracts, contain language limiting the Government’s liability to the funded (i.e. obligated) amounts on the contract.  If a contractor incurs costs in excess of such funded amounts and the Government does not provide more funding, the Government is not liable to pay such costs to the contractor.  Thus, if the established final indirect cost rates exceed the billing rates and the resulting increase in the contractor’s final incurred costs on the contract exceeds the funding on the contract, the Government is not liable to pay the portion of the amount that exceeds contract funding.  When funds are de-obligated from the contract and the final invoice, and any applicable payment due, has not occurred yet because the final indirect rates have not been established, a contractor may find it to be in its best interest to ensure enough of the undispersed funding remains on contract in the event the established rates result in increased costs so such funding can be used to pay the final voucher.

    When funds on the contract become cancelled, they can no longer be used for payment.  See subparagraph 100303A Closed/Cancelled Accounts of Volume 3, Chapter 10 of Department of Defense (DoD) 7000.14-R Financial Management Regulation (FMR) ( -- “[C]ertain appropriations are available for obligation for a specific period, i.e., annual and multi-year appropriations.  Both the obligated and unobligated balances of such appropriations must be closed/cancelled, and are no longer available for obligation or expenditure for any purpose, on September 30th of the fifth fiscal year after the expiration of an appropriation’s period of availability for incurring new obligations (31 U.S.C. § 1552(a)).”  

    Prior to funds being cancelled, the Government must identify an unliquidated obligations that could be used for future adjustments or payments elsewhere (e.g., to settle a claim on another contract vehicle involving the same year and type of funding).  In addition, if the Government may still be liable for payment against the cancelled or to-be-cancelled (often called “cancelling”) funds but that liability may not be known until the after the funds are cancelled, the Government must ensure adequate funding exists from current year accounts of that type of funding.  See subparagraph 100302B of the DoD FMR -- “[B]efore an account closes/cancels, the affected DoD Component must identify valid unliquidated obligations subject to closure/cancellation to determine whether appropriations are available for future adjustments or payments against such obligations.  Also, the DoD Component must confirm whether adequate resources are available to pay for obligations that will close/cancel with an account.”

    This situation involved with this Ask-A-Professor question is that the funds will be cancelled before the Government establishes the final indirect cost rates for the contractor’s last fiscal year of performance under the contract.  Meanwhile, the Government wants to de-obligate the cancelling funds for potential use elsewhere prior to the funds becoming cancelled.  However, the contractor wants to ensure that the contract (or corresponding contract line item (
    CLIN)) price is not reduced to match the remaining funding on the contract.  If funding equals the CLIN price, then FAR 52.232-18 Limitation of Cost applies, which states the contractor is not entitled to reimbursement for incurred costs in excess of the funding provided by the Government.  The contractor wants to ensure that original funding amount remains on record in the event the established final indirect cost rates exceed the billing rates so the contractor remains entitled to payment of such increased final costs up to the amount of the original funding prior to cancelling funds being removed.  Thus, in this situation, it is not in the contractor’s best interest to agree to reduce the CLIN price to the remaining funding amount on the contract.  It is important to note that if the Government were to unilaterally reduce the price accordingly, that does not absolve the Government of its fiscal obligations to the contractor and may create the conditions for an Anti-Deficiency Act violation.  Meanwhile, the contractor may experience difficulty trying to get reimbursed on it final invoice after the final indirect rates are established because contract data monitoring systems used by the Government will indicate the contract (or CLIN) is already fully funded and thus the Government appears to not be liable for payment when it really is.

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