Sign In
  • Question

    Is there a single source or set of guidelines to recommend detailed budgeting guidelines to support certain contract types? To date, I have found scattered guidance stating: FFP must budget for entire amount CPIF recommends budgeting for target amount. The main discussion point is the difference between types of cost-plus (CPIF etc) and fixed price type (FPI-FT) that still present a variable total cost to the government. Should a program budget for target plus contingent liability, just target, etc?


    Answer

    Your question revolves around the different types of contract and how to budget for each type of contract.  I am providing the information below:
     
    Contract Type  Budget To:
    FFP  Negotiated price
    FP-EPA  Negotiated price - you cannot budget for the Economic Price Adjustment since it is a contingency
    FPI  Target Cost + Target Profit
    CPFF  Estimated Cost + Fee
    CPAF  Estimated Cost + Base Fee + Max Award Fee
    CPIF  Target Cost + Target Profit
     
    You always want to budget to most likely price. 
     
    There are various places for guidance on how to budget for projects in the Financial Management Regulation (FMR) 7000.14-R Volume 2A and how to obligate funds to specific contract types in FAR Subpart 16.
     
    Some additional guidance from the FAR and the FMR includes: 
     
    FAR 32.700 talks about limitation of cost or limitation of funds both of which apply to cost reimbursement contracts (see FAR 32.706-2 below). 
     
    FAR 32.703-1 talks about obligation (at target price for fixed price category of contracts), but does not address budgeting.
     
    Excerpts from FAR subpart 32.7
    FAR 32.700 -- Scope of Subpart.
    This subpart
    (a) describes basic requirements for contract funding and
    (b) prescribes procedures for using limitation of cost or limitation of funds clauses. Detailed acquisition funding requirements are contained in agency fiscal regulations. 
     
    FAR 32.703 -- Contract Funding Requirements.
    FAR 32.703-1 -- General.
    (a) If the contract is fully funded, funds are obligated to cover the price or target price of a fixed-price contract or the estimated cost and any fee of a cost-reimbursement contract.
    (b) If the contract is incrementally funded, funds are obligated to cover the amount allotted and any corresponding increment of fee.
     
    FAR 32.704 -- Limitation of Cost or Funds.
    (a)
      (1) When a contract contains the clause at 52.232-20, Limitation of Cost; or 52.232-22, Limitation of Funds, the contracting officer, upon learning that the contractor is approaching the estimated cost of the contract or the limit of the funds allotted, shall promptly obtain funding and programming information pertinent to the contract’s continuation and notify the contractor in writing that –
      (i) Additional funds have been allotted, or the estimated cost has been increased, in a specified amount;
      (ii) The contract is not to be further funded and that the contractor should submit a proposal for an adjustment of fee, if any, based on the percentage of work completed in relation to the total work called for under the contract;
      (iii) The contract is to be terminated; or
      (iv)
      (A) The Government is considering whether to allot additional funds or increase the estimated cost,
      (B) The contractor is entitled by the contract terms to stop work when the funding or cost limit is reached; and
      (C) Any work beyond the funding or cost limit will be at the contractor’s risk.
      (2) Upon learning that a partially funded contract containing any of the clauses referenced in subparagraph (a)(1) of this section will receive no further funds, the contracting officer shall promptly give the contractor written notice of the decision not to provide funds.
    (b) Under a cost-reimbursement contract, the contracting officer may issue a change order, a direction to replace or repair defective items or work, or a termination notice without immediately increasing the funds available. Since a contractor is not obligated to incur costs in excess of the estimated cost in the contract, the contracting officer shall ensure availability of funds for directed actions. The contracting officer may direct that any increase in the estimated cost or amount allotted to a contract be used for the sole purpose of funding termination or other specified expenses.
    (c) Government personnel encouraging a contractor to continue work in the absence of funds will incur a violation of Revised Statutes section 3679 (31 U.S.C. 1341) that may subject the violator to civil or criminal penalties.”
     
    FAR 32.706-2 -- Clauses for Limitation of Cost or Funds.
    (a) The contracting officer shall insert the clause at 52.232-20, Limitation of Cost, in solicitations and contracts if a fully funded cost-reimbursement contract is contemplated, whether or not the contract provides for payment of a fee.
    (b) The contracting officer shall insert the clause at 52.232-22, Limitation of Funds, in solicitations and contracts if an incrementally funded cost-reimbursement contract is contemplated.”
     
    Budgeting is the reservation of funds for a particular purpose, but those funds can be used elsewhere (under specific circumstances) if they have not been obligated to the contract.
     
    When the government signs a contract, it obligates funds, those obligated funds are no longer available for any other use unless first deobligated from the contract, generally by mutual consent of the parties.
     
    The FAR states, with regard to obligation:
    "FAR 32.703-1 -- General.
    (a) If the contract is fully funded, funds are obligated to cover the price or target price of a fixed-price contract or the estimated cost and any fee of a cost-reimbursement contract.
    (b) If the contract is incrementally funded, funds are obligated to cover the amount allotted and any corresponding increment of fee."
     
    Incrementally funded contracts are exclusively in the cost reimbursement category (with rare exceptions).
     
     
    “FMR Vol 3 Ch 10
    100304. Contract Change Provisions A. A contract change is defined in 31 U.S.C. § 1553(c)(3) as a change to a contract under which a contractor is required to perform additional work. Paragraphs 100306 and 100307 contain procedures for requesting approval of obligation adjustments for contract changes in excess of $4 million.
    B. Obligation adjustments, such as incentive or award fees and price inflation (escalation or economic price adjustments), are not considered contract changes for purposes of subparagraph 100304.A. To the extent otherwise appropriate, such amounts may be charged to applicable accounts that otherwise have expired for incurring new obligation but have not yet been closed/cancelled. Such charges or adjustments must be supported by comprehensive written documentation containing a statement that the charges do not require, involve, or result in additional work or changes in scope. This statement must explain the circumstances, contingencies, or management practices that necessitated the adjustment. ”
     
    “0806 RECORDING OBLIGATIONS FOR PROCUREMENT CONTRACTS AND ORDERS 080601. Firm Fixed Price Contract When the contract is executed, an obligation must be recorded for the total amount stated in the contract.
    080602. Fixed Price Contract with an Escalation, Price Redetermination, or an Incentive Provision When the contract is awarded, an obligation must be recorded for the amount of the target or billing price stated in the contract, even though the contract may contain a ceiling price in a larger amount. Subsequently, a target or billing price should be adjusted (upward or downward) to a “best cost estimate” whenever it is determined that, and documentary evidence supports, the actual cost of the contract will differ materially from the original target or ceiling price stated in the contract. ”
     
    “Contingent Liability
    As a budgetary term, contingent liability represents variables that cannot be recorded as valid obligations. Such variables include: (1) outstanding fixed price contracts containing escalation, price redetermination, potential liability under incentive clause; or (2) contracts authorizing variations on quantities to be delivered; or (3) contracts where allowable interest may become payable by the U.S. government on contractor claims supported by written appeals pursuant to the DISPUTES clause contained in the contract. ”
     
    “FMR 7000.14-R Vol 2B Ch 5, Exhibit R3 #9 9. Award Fees. Identify amounts budgeted for award fees and indicate contractor performance and percentage of award fees actually awarded in past award fee periods.
     
    The Contracting Officer will be a key player in negotiating the price for each of these types of contracts.  You cannot budget for contingencies such as the Economic Price Adjustment clause.
     
    I strongly suggest you speak with your Contracting Office and/or the Business Financial Manager to ascertain if there is more stringent guidance based on your Agency.

    Open full Question Details