Late summer is when many agencies add money to existing contracts. For firms holding cost-reimbursement contracts or contracts funded in increments, those funding actions are more than good news. They interact with two clauses that govern how much the contractor may spend and when it must warn the government that money is running short: the Limitation of Cost clause and the Limitation of Funds clause. Both are standard, both carry real consequences and both are easy to overlook in a busy quarter. This is general information; talk to a professional about your contract’s specific terms.
Two clauses, two situations
The Limitation of Cost clause is used in fully funded cost-reimbursement contracts. It ties the government’s obligation to the estimated cost stated in the schedule. The Limitation of Funds clause is used when a cost-reimbursement contract is funded in increments, so the amount the government has actually allotted is less than the full estimated cost. In that case, the government’s obligation is limited to the amount allotted so far.
Fixed-price contracts are generally funded in full at award, though some agencies, notably the Department of Defense, allow incremental funding of fixed-price contracts in limited circumstances under their own clauses. Read your contract to see which rule applies.
The notice requirements
Both clauses use a similar early-warning formula. In general terms, the contractor must notify the contracting officer in writing when it has reason to believe that the costs it expects to incur in the next 60 days, added to the costs already incurred, will exceed 75 percent of the estimated cost or, under the Limitation of Funds clause, of the amount allotted. The Limitation of Cost clause also calls for notice when the total cost is expected to be substantially greater or less than estimated. The Limitation of Funds clause adds a notice, 60 days before the end of the period the allotment covers, estimating any additional funds needed to continue performance and when they will be required.
The point of these notices is to give the government time to add money, adjust the work or plan for an orderly stop.
What happens if costs exceed the money
Under both clauses, the government is generally not obligated to reimburse costs beyond the estimated cost or the allotted amount, and the contractor is generally not obligated to continue performing or incurring costs beyond that amount, unless the contracting officer notifies it in writing that the estimated cost or allotment has been increased. Costs incurred above the limit are incurred at the contractor’s own risk. Program staff may urge a contractor to keep working while funding is processed, but only a written action from the contracting officer changes the limit.
Practical tracking habits
- Track incurred costs, including indirect costs, against each funded amount, not only against the contract ceiling.
- Project spending at least 60 days ahead, with attention to staffing changes and large purchases.
- Send notices in writing when the threshold is approaching, even if funding is expected soon.
- Keep copies of every notice and every funding modification in the contract file.
- Brief project managers on the limits so that no one commits costs above them.
The full clause texts, in FAR Part 52, and the related funding policy in Part 32 are at acquisition.gov.