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    Should the contractor have submitted for their fee on a cost voucher? Should the 4% withhold apply to the incentive fee?


    Your question has many parts. 
    First, the contract is cost plus incentive fee.  The contract should have submitted their payment request for fee on a cost voucher.  Payment requests for fee on cost plus incentive fee are submitted via voucher unless the contract states otherwise.

    Secondly, Per
    FAR 52.216-10: Incentive Fee, states the ACO shall withhold either no more than 15% of fee or $100,000 (whichever is less).  The withhold is actually performed by a contractor prior to billing. The question mentioned a 4% withhold, the FAR clause requires a withhold on the fee no more that 15% to protect the government’s interest, so if the ACO decided to only withhold only 4% based on a risk assessment that is his/her decision.  This withhold amount would apply to the incentive fee and will be paid to the contractor when they submit their final voucher.

    Lastly, the Contractor Business System Clause
    DFARS 252.232-7005 states withholding will be taken on contracts that contain DFARS 252.242-7005, the applicable business system specific clause, and have a total contract value greater than or equal to $50 million.  The total percentage of payment withheld on amounts due is ten percent for more than one disapproved business systems.  DFARS further states, if the Contractor submits an acceptable corrective action plan and the Contracting Officer determines that the Contractor is effectively implementing such plan, the Contracting Officer will reduce the withholding directly related to the significant deficiencies covered under the corrective action plan, and will direct the Contractor, in writing, to reduce the percentage withheld on interim cost vouchers to two percent.  So if both disapproved business systems have acceptable correction action plans, than the withhold will be 4%.  This withhold is on the total dollar amount of the voucher.  For calculation purposes, if you take the withhold on the allowable costs incurred, then the fee is calculated on the reduced amount. Because the amount payment of fee shall be in the same ratio to the total fixed-fee as the provisional payment of allowable cost is to the total estimated cost of the contract. Once the new fee is calculated based on the withhold of the disapproved business systems, the withhold on the fee per FAR 52.216-10 is taken.

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