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    What is the requirement for Contractor Rate Holdbacks under a CP contract?


    Answer

    The FAR references quoted below in pertinent part are applicable to this response:

    FAR 32.705-2 -- 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.

    FAR 52.232-20 -- Limitation of Cost
    (d) Except as required by other provisions of this contract, specifically citing and stated to be an exception to this clause --
      (1) The Government is not obligated to reimburse the Contractor for costs incurred in excess of (i) the estimated cost specified in the Schedule or, (ii) if this is a cost-sharing contract, the estimated cost to the Government specified in the Schedule; and
      (2) The Contractor is not obligated to continue performance under this contract (including actions under the Termination clause of this contract) or otherwise incur costs in excess of the estimated cost specified in the Schedule, until the Contracting Officer (i) notifies the Contractor in writing that the estimated cost has been increased and (ii) provides a revised estimated total cost of performing this contract.

    FAR 52.232-22 -- Limitation of Funds
    (f) Except as required by other provisions of this contract, specifically citing and stated to be an exception to this clause --
      (1) The Government is not obligated to reimburse the Contractor for costs incurred in excess of the total amount allotted by the Government to this contract; and
      (2) The Contractor is not obligated to continue performance under this contract (including actions under the Termination clause of this contract) or otherwise incur costs in excess of -- (i) The amount then allotted to the contract by the Government or; (ii) If this is a cost-sharing contract, the amount then allotted by the Government to the contract plus the Contractor’s corresponding share, until the Contracting Officer notifies the Contractor in writing that the amount allotted by the Government has been increased and specifies an increased amount, which shall then constitute the total amount allotted by the Government to this contract.

    FAR 52.216-7 -- Allowable Cost and Payment
    (b) Reimbursing costs.
      (3) Notwithstanding the audit and adjustment of invoices or vouchers under paragraph (g) of this clause, allowable indirect costs under this contract shall be obtained by applying indirect cost rates established in accordance with paragraph (d) of this clause.

    (d) Final indirect cost rates.
      (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates.

    (e) Billing 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.

    2. As stated in the contract terms and conditions applicable to either fully funded or incrementally funded cost-reimbursement contracts as specified in FAR 52.232-20 or FAR 52.232-22, respectively, the Government is not obligated to reimburse the contractor for any costs incurred in excess of the funding ceiling specified in the contract, and the contractor is not obligated to incur any costs in excess of the contract funding ceiling.  In a long line of decisions, the Armed Services Board of Contract Appeals (ASBCA) has consistently upheld this principle. Absent any mitigating or other extenuating circumstances associated with a particular case, the ASBCA has denied contractor claims for reimbursement of costs incurred in excess of the funding ceilings specified in cost-reimbursement contracts pursuant to the provisions of these contract clauses. To find a list of relevant ASBCA decisions, click on the link below to access the ASBCA web page and type the following words in the Search box: costs in excess of funding ceiling.

    http://www.asbca.mil/Decisions/decisions2011.html

    3. Based on the above, we believe that it is not unreasonable for a contractor to reserve a portion of the unliquidated contract funding, pending the settlement of final indirect rates, for final billing purposes in accordance FAR 52.216-7(d)(5), so that the contractor does not incur any costs in excess of the contract funding ceiling and thereby risk non-payment of otherwise allowable costs pursuant to the terms and conditions of the contract. However, such a funding reserve should not be excessive relative to this purpose. Therefore, we would recommend that the Contracting Officer obtain information from the contractor to justify the funding reserve being retained, and negotiate a lower funding amount in the event that available information supports a lower value. Such information, for example, could include historical cost data showing the difference between billed costs using “then current” billing rates and the final actual costs using the final negotiated rates applicable to those previous contracts in order to develop a reasonable funding reserve amount for the current contract(s) in question pending contract closeout.


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