When you accept a fully funded cost-reimbursable government contract, it comes along with the FAR contract clause 52.232-20, Limitation of Cost. This clause places a requirement on you to notify the Government when:
(1) The costs you expect to incur under the contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the estimated cost; or
(2) The total cost for the performance of the contract, exclusive of any fee, will be either greater or substantially less than previously estimated.
When you accept an incrementally funded cost-reimbursable contract it also comes along with the FAR contract clause 52.232-22, Limitation of Funds. This clause places a requirement on you to notify the Government when:
(1) You have reason to believe that the costs you expect to incur under the contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of funds allotted to the contract; or
(2) within 60 days of when additional funds are required to continue timely performance.
Don’t Risk Missing Reimbursement!
While you are not obligated to continue performance beyond what the Government has agreed to pay, the Government is not obligated to reimburse you for costs incurred in excess of the estimated cost or funding limitations. Beyond the risk of not being reimbursed, these clauses bring potential complications to your accounting system.
The EAC—Forecasting at its Finest
It is not as simple as comparing your current cumulative billing amount to the limitation; you must maintain a reliable Estimate at Complete (EAC). An EAC is a current forecast of what the total cost are likely to be for the contracted effort. A properly developed EAC is made up of two parts: (1) the costing of your incurred cost to date, and (2) forecast (i.e., pricing) of the work you have remaining to complete the contracted effort.
In considering your incurred cost there are a few key things to remember:
- Monitor Indirect Rates – You cannot simply use your provisional billing rates and assume your indirect costs are on track. You need to monitor your billing rates to your actual-to-date indirect rates plus a projection of the indirect rates at year end. If the rates are not tracking to the current billing rates, you will need to request an adjustment to your billing rates and consider the impact on the costing of your incurred cost to date. Not considering an increase in your indirect rates could result in your failure to meet the limitation reporting requirements.
- Track Scope of Work Completed (Budget vs. Actual) – The fact that you incurred 20% of the hours you forecasted, as part of your original price proposal, does not necessarily mean 20% of the scope of work was completed. For some tasks within the scope of work, less hours may be required and for others more hours will be required. This will be important in forecasting the work you have remaining to complete the contracted effort.
- Remember the Impact of Subcontractors – Your cost reimbursable subcontractors should be doing the same thing you are in terms of tracking and monitoring budget vs. actual. Your subcontract manager should be reviewing subcontract billings and forecasts of future efforts. It is best to come to an agreement with your subcontractors as to what you expect in the way of EAC reporting prior to awarding the subcontract.
The Estimate to Complete Process
Once you have a good understanding of your incurred cost, you must set up a process to develop an Estimate to Complete (ETC). An ETC is a pricing effort of the remaining scope of work to complete the contracted effort. In most cases, it is necessary to develop a detailed pricing of your ETC on a quarterly basis, at a minimum. While the ETC should not require a bottom up proposal effort each quarter, a reliable and consistent process based on an explainable methodology is important. Unlike estimates for progress payments, the Government (e.g., DCAA) is not likely to audit or review your estimate, as the risk of not recovering cost is on you.
Now That You Have All the Pieces
Once your ETC is complete you can add it to your incurred cost to date to arrive at your EAC to compare to the limitations. Both SF 1408 and DFARS 252.242-7006 have a specific requirement that your accounting system to include processes and controls to ensure you comply with these contract clauses, regardless of the level of risk your company may be willing to take. You want to be able to demonstrate your system complies and you are doing your due diligence.
The limitation of funds requirement is even more complex, as you are not dealing with the entire period of performance. You must be able to project likely cost for the next 60 days on a continuing basis as well as at the end of the period of performance.
Final Considerations
A few other things to consider are:
- Change orders do not automatically adjust the limitations;
- Only the contracting officer, by contract modification, can change the limitation amounts, so be careful of relying on statements from Government program office representatives; and
- For limitation of funds; if the Government does not allot all the funds, the fee can be adjusted based on the percentage of work completed.
So, the moral to the story is that even Government cost reimbursable best efforts contracts come with strings attached.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and developing accounting policies and procedures that comply with these limitation requirements.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant