Reimbursing Underbillings on CPAF Contract in Excess of Ceiling

KB, I am not clear on what your contract calls for.  You use the term "ceiling" several times.  What that means is not clear.  What do you mean by "ceiling"?  Also, what do you mean by "funded value"?  Is the contract incrementally funded?  If so, is FAR 52.232-22 in the contract?

@_KB_ This question comes up occasionally by many agencies.  Often it’s a program office wanting to use excess funding or an accounting office wanting to “clean up” the books.  If I were the contracting officer, I would say no until final audited rates were available.  But if the agency then wanted  to do it anyway, they would be required to cover the difference and add the required funding back to the contract.

formerfed said:

But if the agency then wanted  to do it anyway, they would be required to cover the difference and add the required funding back to the contract.

formerfed, what is the basis for this statement?  What would be your position if the agency included a release in the deob mod?

Retreadfed said:

formerfed, what is the basis for this statement?  What would be your position if the agency included a release in the deob mod?

There shouldn’t be a release at that point until final indirect rates are established and adjustment made from provisional rates, if any.  Also the contractors final voucher is needed as well.

Im not saying it’s a good thing but it’s something that frequently happens when it’s clear that excess funding exist.

formerfed said:

There shouldn’t be a release at that point until final indirect rates are established and adjustment made from provisional rates, if any.

The situation KB describes is very similar to one I had to deal with a few years back.  In that case, the agency deobligated funds from several contracts before final rates were established.  For some of the contracts, the agency did require the contractor to give a release for future claims.  As you can guess, the final rates were higher than anticipated, but total costs were less than the estimated cost of the contracts at the time of the deobligations.  The agency resisted paying the contractor its actual costs on all contracts, those were releases were given and those with no releases.  However, the agency did ultimately relent and agreed to pay the contractor.

On 7/7/2023 at 10:08 AM, _KB_ said:

We are the prime on a CPAF contract and the government is asking to deobligate unused ceiling down to our funded values for previous option years.

Also not clear to me what "unused ceiling" is. Assuming this ceiling is a contract stated amount of dollars, it would require a contract change and consideration. What is the consideration? I would not agree to change contract  amounts unless there was some consideration that made sense to your company.

On 7/7/2023 at 10:08 AM, _KB_ said:

Is the government still required to reimburse us...if in excess of the funded value?

If FAR 52.232-22 is included in your contract, it states in part: "The Contractor agrees to perform, or have performed, work on the contract up to the point at which the total amount paid and payable by the Government under the contract approximates but does not exceed the total amount actually allotted by the Government to the contract." The amount "allotted," is normally the funded amount, and normally the Government would not reimburse a contractor for amounts in excess of the funded amount.

The question _KB_ is asking, I believe, has nothing to do with the last answers.  The question isn’t all that clear but I think it involves the situation where the government sees its contract funding as excess and wants to reduce it.  The contractor is billing using provisional indirect rates and is concerned once DCAA establishes final indirect rates there may not be sufficient funding left on the contract.

formerfed said:

If the contractor ends up under billing, the government must go back and add money to cover the vouchers.

@formerfed, if the contractor agrees to contractually reduce the contract funding, can you point out a normal contract provision or law applicable to the government that mandates the government unilaterally increase the contract funding to the previous higher amount when reimbursable costs exceed the contract funding?

Or, are you saying that the government reduces the funding of the agency internally within the government, and it has nothing to do with the contract funded amount. If that is the case, why does the government ask the contractor if it's "ok" to do so?

formerfed said:

If the contractor ends up under billing, the government must go back and add money to cover the vouchers.

I don't know that this is a correct statement.  If the Limitation of Cost clause is in the contract, the contractor exceeds the estimated cost of the contract at its own risk.  If the government deobligates funds from the contract and changes the estimated cost of the contract, the government could argue that the LOC clause applies to the reduced estimated cost of the contract.  If the contractor's actual costs turn out to be higher than the estimated cost, the contractor would be required to show that it did not know and could not have known of the overrun before it happened.

The same principle would apply if the contract contains the Limitation of Funds clause.  I don't know what the outcome would be in these circumstances, but I think it is risky for contractors to agree to a deobligation of funds unless they know that the funding level remaining on the contract is sufficient to cover the costs they have incurred and expect to incur.

Again I’m not saying this practice is right and I personally I wouldn’t do it.  But many agencies do it as a regular practice.  They don’t want funding to lapse where it could be used for other purposes.

Retreadfed said:

I don't know that this is a correct statement.  If the Limitation of Cost clause is in the contract, the contractor exceeds the estimated cost of the contract at its own risk.  If the government deobligates funds from the contract and changes the estimated cost of the contract, the government could argue that the LOC clause applies to the reduced estimated cost of the contract.  If the contractor's actual costs turn out to be higher than the estimated cost, the contractor would be required to show that it did not know and could not have known of the overrun before it happened.

The same principle would apply if the contract contains the Limitation of Funds clause.  I don't know what the outcome would be in these circumstances, but I think it is risky for contractors to agree to a deobligation of funds unless they know that the funding level remaining on the contract is sufficient to cover the costs they have incurred and expect to incur.

I just edited my prior post where I said that situation applies even when the government does nothing and the contractor burns all money up to the ceiling on their own.  My statement was incorrect and I don’t know what I was thinking at the time.

Hi all,

Thanks for the detailed discussion. Let me clarify a few points from my original question:

• We are incrementally funding, and the contract includes 52.232-22.
• By Ceiling, I was referring to the Total Estimated Cost. 
• By Funded Values, I was referring to the amount of funding obligated to the contract per CLIN that we can burn against.

To be more specific, they are looking to deobligate any excess “Total Value” which they define as the Total Estimated Cost + Total Award Fee for each CLIN. The deobs of any excess award fee pool isn’t concerning to us since we are obviously only are issued funding for the amount of the award fee we earned based on award fee criteria, so that amount will not change depending on finalization of our indirects for each contractor fiscal year. It is the Total Estimated Cost piece we are concerned about. 

We are fearful of a situation where our final rates come back as higher than what we were billing at with our provisionals, and if the Total Estimated Cost has been deobligated down to current funded values, we would not be able to recover the extra actual costs since the Total Estimated Cost had been reduced, leaving no room to recover the costs. 

As @formerfed mentioned in their original comment, that is exactly what our agency is looking to do - they want to clean up their books and deobligate any excess “Value” from our expired CLINs. 

We have asked the COR to hold off on deobligating any unused value until we have the final indirect rates established to avoid this all together, so hopefully they agree.

_KB_ said:

We have asked the COR to hold off on deobligating any unused value until we have the final indirect rates established to avoid this all together, so hopefully they agree.

Yes, that is the proper thing for them to do.  If the insist an alternative you could suggest is leave sufficient funding as a contingency to cover indirect rate adjustment upward.

Thank you!

On 7/13/2023 at 5:29 AM, _KB_ said:

By Ceiling, I was referring to the Total Estimated Cost.

@_KB_ by the way, target cost is not a ceiling. In CPAF contracts for example, you might have an award fee based on how much under the estimated cost you are at any given time. In that case, you would be harming your company by depriving it of more award fee if you lowered it. Estimated cost can not be raised or lowered without consideration, such as the deletion or addition of work.

On 7/15/2023 at 1:00 AM, Neil Roberts said:

Estimated cost can not be raised or lowered without consideration, such as the deletion or addition of work.

Neil, I don't think this is an accurate statement.  Changing the estimated cost of a contract to reflect an overrun does not require additional consideration.  Similarly, reducing the estimated cost of a contract to reflect an underrun does not require additional consideration.

On 7/13/2023 at 5:29 AM, _KB_ said:

We are fearful of a situation where our final rates come back as higher than what we were billing at with our provisionals, and if the Total Estimated Cost has been deobligated down to current funded values, we would not be able to recover the extra actual costs since the Total Estimated Cost had been reduced, leaving no room to recover the costs.

I'm confused.

Have you read the clause at 52.216-7 (Allowable Cost and Payment)?

By contract clause, you are supposed to adjust your provisional billing rates so as to match your estimated final billing rates. There is no reason for a large disparity in billing rates to exist. In fact, any such disparity is contrary to the clause's requirements.

Where are these "fears" coming from? Do you know that your final rates will be higher than your provisional billing rates? If you know, then you should do something about it now, IAW 52.216-7. If you don't know -- then why don't you know? Isn't somebody in Finance running variance analyses? If not, why aren't they?

I don't mean to be a jerk but this is all fairly fundamental cost-reimbursable contract stuff. In many contracts, indirect rates make up 50% of total costs billed. It is the responsibility of the contractor--not the government--to manage those rates.

On 7/13/2023 at 8:29 AM, _KB_ said:

We are incrementally funding, and the contract includes 52.232-22.

KB, have you read 52.232-22?  As a refresher, the clause states in part " The Contractor agrees to perform, or have performed, work on the contract up to the point at which the total amount paid and payable by the Government under the contract approximates but does not exceed the total amount actually allotted by the Government to the contract. . . .The Contractor shall notify the Contracting Officer in writing whenever it has reason to believe that the costs it expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of (1) the total amount so far allotted to the contract by the Government . . . 

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."

Reading this, how do you anticipate recovering costs that may exceed the funded amount, even if the government does not change the estimated cost of the contract?

On 7/17/2023 at 10:06 AM, Retreadfed said:

Neil, I don't think this is an accurate statement.  Changing the estimated cost of a contract to reflect an overrun does not require additional consideration.  Similarly, reducing the estimated cost of a contract to reflect an underrun does not require additional consideration.

@Retreadfed, I am not aware of an exception to the concept that a contract change needs consideration to be enforceable...Consideration is the benefit that each party gets or expects to get from the contractual deal. I am not aware of any regulation or statute that Government and Contractor are required to adjust the estimated cost for an overrun or underun condition that may be reported to the Government by a Contractor.

Neil Roberts said:

I am not aware of any regulation or statute that Government and Contractor are required to adjust the estimated cost for an overrun or underun condition that may be reported to the Government by a Contractor.

Whether to fund an overrun is generally a discretionary act on the part of the government.  When you say consideration is necessary for the government to fund an overrun, are you talking about new consideration or are you talking about prior consideration?

Retreadfed said:

Whether to fund an overrun is generally a discretionary act on the part of the government.  When you say consideration is necessary for the government to fund an overrun, are you talking about new consideration or are you talking about prior consideration?

I never said anything about funding and neither did the comment you made to which I responded. Your comment and my response was about changing the estimated cost of the contract.

Neil Roberts said:

Your comment and my response was about changing the estimated cost of the contract.

FAR 52.232-20 states in part "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."  This gives the contracting officer the authority to change the estimated cost of the contract.  Is it your position that the contracting officer cannot change the estimated cost of the contract without receiving some consideration from the contractor?  If so, does the consideration have to be new consideration or can the consideration given by the contractor to form the contract suffice?

@Retreadfed, here is my take about that:

The sentence above in FAR 52.232-20, does not give a contracting officer the unilateral right to change the estimated cost specified in the Schedule of the contract. Instead, when the contracting officer provides the Contractor with a revised estimated cost in accordance with this sentence, the contractor is obligated to continue performance and/or incur costs in excess of the estimated cost in the Schedule.

Neil Roberts said:

The sentence above in FAR 52.232-20, does not give a contracting officer the unilateral right to change the estimated cost specified in the Schedule of the contract

What language in the excerpt quoted above, or any where else in FAR 52.232-20,  indicates that the contracting officer does not have a unilateral right to change the estimated cost of a cost reimbursement contract?  If the contracting officer does not have a unilateral right to change the estimated cost of the contract, what language in the clause indicates that any such change must be a bilateral change?

Neil Roberts said:

when the contracting officer provides the Contractor with a revised estimated cost in accordance with this sentence, the contractor is obligated to continue performance and/or incur costs in excess of the estimated cost in the Schedule.

What language in 52.232-20 requires a contractor to incur costs in excess of the estimated cost of the contract?

"until"

Neil Roberts said:

until"

Dodgeball

Hmmmmm,

52.243-2 Changes-Cost-Reimbursement (Aug 1987) (Alternate I)

(a) The Contracting Officer may at any time, by written order, and without notice to the sureties, if any, make changes within the general scope of this contract in any one or more of the following:

(1) Description of services to be performed.

(2) Time of performance (i.e., hours of the day, days of the week, etc.).

(3) Place of performance of the services.

(b) If any such change causes an increase or decrease in the estimated cost of, or the time required for, performance of any part of the work under this contract, whether or not changed by the order, or otherwise affects any other terms and conditions of this contract, the Contracting Officer shall make an equitable adjustment in the-

(1) Estimated cost, delivery or completion schedule, or both;

(2) Amount of any fixed fee; and

(3) Other affected terms and shall modify the contract accordingly.

(c) The Contractor must assert its right to an adjustment under this clause within 30 days from the date of receipt of the written order. However, if the Contracting Officer decides that the facts justify it, the Contracting Officer may receive and act upon a proposal submitted before final payment of the contract.

(d) Failure to agree to any adjustment shall be a dispute under the Disputes clause. However, nothing in this clause shall excuse the Contractor from proceeding with the contract as changed.

(e) Notwithstanding the terms and conditions of paragraphs (a) and (b) of this clause, the estimated cost of this contract and, if this contract is incrementally funded, the funds allotted for the performance of this contract, shall not be increased or considered to be increased except by specific written modification of the contract indicating the new contract estimated cost and, if this contract is incrementally funded, the new amount allotted to the contract. Until this modification is made, the Contractor shall not be obligated to continue performance or incur costs beyond the point established in the Limitation of Cost or Limitation of Funds clause of this contract.

Neil Roberts said:

@Retreadfed, here is my take about that:

The sentence above in FAR 52.232-20, does not give a contracting officer the unilateral right to change the estimated cost specified in the Schedule of the contract. Instead, when the contracting officer provides the Contractor with a revised estimated cost in accordance with this sentence, the contractor is obligated to continue performance and/or incur costs in excess of the estimated cost in the Schedule.

Let's think this one through. According to your interpretation, there are two distinct amounts--the "estimated cost in the Schedule" and a "revised estimated cost" that is provided by the contracting officer. The amounts could only be made equal by means of a bilateral modification that revised the "estimated cost in the Schedule." Regardless, the contractor is obligated to continue up to the "revised estimated cost."

Assume the contractor does not agree to a bilateral modification that increases the "estimated cost in the Schedule."

1. Would the contractor be required to provide the notification in paragraph (b) of FAR 52.232-20 if they expected to exceed 75% of the "revised estimated cost"?

2. If the contracting officer issued a change order increasing the cost of performance, would the contractor be required to incur costs in excess of the "estimated cost in the Schedule", but less than the "revised estimated cost"?

3. Regarding paragraph (e) of FAR 52.232-20, would termination costs be limited to the "estimated cost in the Schedule" or the "revised estimated cost"?

Don Mansfield said:

Let's think this one through. According to your interpretation, there are two distinct amounts--the "estimated cost in the Schedule" and a "revised estimated cost" that is provided by the contracting officer.

Lets see how this would work mechanically based on what appears to be Neil's interpretation.  The contracting officer receives notice from the contractor that an overrun will occur.  The contractor tells the contracting officer how much more money will be needed to complete the contract.  The contracting officer agrees and obtains the additional funding required.  Because the contracting officer cannot unilaterally change the estimated cost in the Schedule, the contracting officer sends the contractor an e-mail informing the contractor of the revised estimated cost of the contract.  At the same time, the contracting officer adds additional funding to the contract by an administrative modification.  Thus, the amount obligated on the contract exceeds the estimated cost of the contract specified in the Schedule.  The contractor is then obligated to perform up to the revised estimated cost of the contract specified in the contracting officer's e-mail that is not part of the contract.  Is that correct?

I think that's what he's saying.