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Invoking "not obligated to reimburse" function of 52.232-20 - 'Disallowable cost' or 'Cost that the Government takes exception to'


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Question:

In a situation where the following apply:

1) A CPIF contract contains the clause 52.232-20, Limitation of Cost;

2) The Contractor fails to submit a timely notification in writing when it has reason to believe that the total cost for the performance of the contract, exclusive of any fee, will be greater than had been previously estimated;

3) The Government has elected not to reimburse the Contractor for costs incurred in excess of, under this cost sharing contract, the estimated cost to the Government specified in the Schdule;

4) The Government has elected to reimburse the Contractor for costs up to, but not in excess of, the amount within the Cost Incentive Fee for costs incurred;

Is the Contracting Officer required to issue a written notice of intent to the Contractor to disallow the specified costs incurred in excess of the estimated target cost, which are in excess of those funded by the Cost Incentive Fee. i.e., is the Contracting Officer required to disallow the costs associated with the "estimated cost to the Government specified in the Schedule", which the Government takes exception to? This, vice just simply taking exception to the costs and not funding the overrun on the basis of not receiving a timely written limitation of cost letter?

If that's not clear, the situation is very akin to the situation found within the following court case; within this case the costs appear to have been formally disallowed:

https://bulk.resource.org/courts.gov/c/F3/108/108.F3d.307.96-1028.html

I'm just not certain as to whether the costs need to be formally disallowed or if the Government can just take an indefinite exception to the costs.

Thank you in advance,

- DAMB

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DAMB, just to clarify.

Is this a Cost-Plus-Incentive-Fee (CPIF) contract type, or a Cost-Sharing contract type?

You use both terms in your post, and it confuses me.

Hope this helps.

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The Cost Incentive Fee clause states that there is a 50/50 share line. So overruns are funded up to 8% of the target cost by using the CIF funds which are applied to the contract at 4% of the target cost, and the remainder by the Government. In this case, we read the clause as allowing the CIF funds to be shifted to pay for the overrun, but that the Government will not contribute the balance as the notice was not received timely.

I'm not saying the contract vehicle makes a lot of sense, and is not cost-sharing as it is described in Cibinic and Nash Cost-Reimbursement Contracting, 3rd ed. But that's what the contract states.

Thanks,

- DAMB

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DAMB,

I don't know. It seems confusing to me, and I bet your contractor is going to argue it was confused as well.

To answer your question, I don't think it matters whether the government formally disallows the overrun costs or just chooses not to adjust the incentive fee / cost share as the contractor thinks it ought to be done. In either case, the contractor will have an action that it can appeal, should it choose to do so.

I'm sure others can help you more than I can.....

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Guest Vern Edwards

A notice of intent to disallow costs is not mandatory. See FAR Subpart 42.9 and the clause at FAR 52.242-1. A CO "may" issue such a notice, but is not required to issue one.

Frankly, your moniker, DAMB, is revolting.

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The Cost Incentive Fee clause states that there is a 50/50 share line. So overruns are funded up to 8% of the target cost by using the CIF funds which are applied to the contract at 4% of the target cost, and the remainder by the Government. In this case, we read the clause as allowing the CIF funds to be shifted to pay for the overrun, but that the Government will not contribute the balance as the notice was not received timely.

I'm not saying the contract vehicle makes a lot of sense, and is not cost-sharing as it is described in Cibinic and Nash Cost-Reimbursement Contracting, 3rd ed. But that's what the contract states.

-----------------------------------------

I do not understand your reference to funding overruns up to 8% of the target cost, but will assume it makes sense in the context of the specific arrangements of your contract.

In your case, you have a Target Cost of $XXX. The Limitation of Cost clause says you must give notice when "the costs the contractor expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the estimated cost specified in the Schedule." (I assume "estimate cost" in a CPIF contract means target cost; I am not aware of any other Limitation of Cost clause applicable to CPIF contracts.) The clause also says that unless the Contracting Officer notifies you that the estimated cost has been increased, you are "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 speceified in the Schedule." The clause also says that the "Government is not obligated to reimburse the Contractor for costs incurred in excess of (i) the estimated cost specified in the Schedule."

The purpose of the notice is to give the Government an opportunity to determine if it wants to provide additional funds to complete the work or terminate the contract. As I read the clause, notice is irrelevant to how much the Government is required to pay (except perhaps if notice is given and there can be an argument that the Government has waived the cost limitation). The Government is required to pay no more than the target cost for the costs you incur. Assuming the contract is terminated (what are we doing here if the contract is not terminated?) the Government will pay allowable costs up to the estimated/target cost. With respect to fee, 52.216-10(e)(3) provides that if the contract is terminated in its entirety, "the portion of the target fee payable shall not be subject to an increase or decrease as provided in this paragraph. The termination shall be accomplished in accordance with other applicable clauses of this contract." The applicable clause is 52.249-6(g) and (h), which say that the Contractor and Contracting Officer may agree on the amount to be paid including an allowance for fee, and if there is no agreement the Contracting Officer shall issue a final decision paying a portion of fee based on "a percentage of completion of work contemplated under the contract."

Under this situation, I do not see how unused CIF funds (the funds obligated to pay the incentive fee) can be shifted to pay overrun costs. Indeed, the whole scheme of how the incentive provisions are used to share overruns is effectively mooted by the termination that will result.

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A notice of intent to disallow costs is not mandatory. See FAR Subpart 42.9 and the clause at FAR 52.242-1. A CO "may" issue such a notice, but is not required to issue one.

Frankly, your moniker, DAMB, is revolting.

Vern,

Thank you for your reply. I noted that the clauses did not use the word "should", although I believe it should. I guess my thought is, in the absence of a specific disallowance of the cost, does it remain allowable until such time that DCAA would conduct an audit of incurred costs? At some point some determination would need to be made, would it not.

- DAMB

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I do not understand your reference to funding overruns up to 8% of the target cost, but will assume it makes sense in the context of the specific arrangements of your contract.

In your case, you have a Target Cost of $XXX. The Limitation of Cost clause says you must give notice when "the costs the contractor expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the estimated cost specified in the Schedule." (I assume "estimate cost" in a CPIF contract means target cost; I am not aware of any other Limitation of Cost clause applicable to CPIF contracts.) The clause also says that unless the Contracting Officer notifies you that the estimated cost has been increased, you are "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 speceified in the Schedule." The clause also says that the "Government is not obligated to reimburse the Contractor for costs incurred in excess of (i) the estimated cost specified in the Schedule."

The purpose of the notice is to give the Government an opportunity to determine if it wants to provide additional funds to complete the work or terminate the contract. As I read the clause, notice is irrelevant to how much the Government is required to pay (except perhaps if notice is given and there can be an argument that the Government has waived the cost limitation). The Government is required to pay no more than the target cost for the costs you incur. Assuming the contract is terminated (what are we doing here if the contract is not terminated?) the Government will pay allowable costs up to the estimated/target cost. With respect to fee, 52.216-10(e)(3) provides that if the contract is terminated in its entirety, "the portion of the target fee payable shall not be subject to an increase or decrease as provided in this paragraph. The termination shall be accomplished in accordance with other applicable clauses of this contract." The applicable clause is 52.249-6(g) and (h), which say that the Contractor and Contracting Officer may agree on the amount to be paid including an allowance for fee, and if there is no agreement the Contracting Officer shall issue a final decision paying a portion of fee based on "a percentage of completion of work contemplated under the contract."

Under this situation, I do not see how unused CIF funds (the funds obligated to pay the incentive fee) can be shifted to pay overrun costs. Indeed, the whole scheme of how the incentive provisions are used to share overruns is effectively mooted by the termination that will result.

wvanpup,

Thank you for the thoughtful discussion.

I can simply say that the cost sharing is defined within the terms and conditions of the contract to allow the crossflow of the funds to pay for overrun. That mechanism is merely administered by following an established process for its use. However, the process is absent an explanation of what to do should the Government crossflow the CIF into the overrun but elect not to fund the balance.

You ask "what are we doing here if the contract is not terminated?" That is a good question and I should have been more clear by stating the fact that the limitation of cost letter was received after the completion of the work. So, like you said, the purpose is to afford the Government a decision point for whether to require the Contractor to continue with work by way of adding funds to the contract.

- DAMB

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Guest Vern Edwards

By the express terms of the contract, the government is not obligated to reimburse the contractor for costs incurred in excess of the estimated cost stated in the Limitation of Cost clause unless and until the CO notifies the contractor that the amount has been increased. There is no need for DCAA to determine anything. If the contractor invoices for an amount that would exceed the estimated cost in whole or in part, the paying office would, presumably, reject the invoice. There is no requirement for a notice of disallowance. But if you want to send one, then send it.

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By the express terms of the contract, the government is not obligated to reimburse the contractor for costs incurred in excess of the estimated cost stated in the Limitation of Cost clause unless and until the CO notifies the contractor that the amount has been increased. There is no need for DCAA to determine anything. If the contractor invoices for an amount that would exceed the estimated cost in whole or in part, the paying office would, presumably, reject the invoice. There is no requirement for a notice of disallowance. But if you want to send one, then send it.

Thank you Vern, that is clear and unambiguous!

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I can simply say that the cost sharing is defined within the terms and conditions of the contract to allow the crossflow of the funds to pay for overrun. That mechanism is merely administered by following an established process for its use. However, the process is absent an explanation of what to do should the Government crossflow the CIF into the overrun but elect not to fund the balance.

You seem to have two quesions. One question seems to concern the mechanics of disallowing the overrun costs, which Vern has addressed. The other seems to be what you describe as "crossflow the CIF into the overrun." If the contract has something other than the standard Limitation of Cost clause (which you seem to indicate by your statement that the "cost sharing is defined within the terms and conditions of the contract to allow the crossflow of the funds to pay for overrun") I cannot help without knowing the exact terms of your contract. If your contract has just the standard CPIF clause and the standard Limitation of Cost clause, I do not understand the conclusion that it allows "the crossflow of the funds to pay for overrun." The standard clauses are pretty clear; if you incur costs in excess of the target cost, and the contracting officer has not provided additional funds, the Government is not obligated to pay you for your overrun whether or not you provided notice (in this case I expect you would receive the target fee rather than a reduced fee based on your actual costs).

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You seem to have two quesions. One question seems to concern the mechanics of disallowing the overrun costs, which Vern has addressed. The other seems to be what you describe as "crossflow the CIF into the overrun." If the contract has something other than the standard Limitation of Cost clause (which you seem to indicate by your statement that the "cost sharing is defined within the terms and conditions of the contract to allow the crossflow of the funds to pay for overrun") I cannot help without knowing the exact terms of your contract. If your contract has just the standard CPIF clause and the standard Limitation of Cost clause, I do not understand the conclusion that it allows "the crossflow of the funds to pay for overrun." The standard clauses are pretty clear; if you incur costs in excess of the target cost, and the contracting officer has not provided additional funds, the Government is not obligated to pay you for your overrun whether or not you provided notice (in this case I expect you would receive the target fee rather than a reduced fee based on your actual costs).

So the terms and conditions that I mention are beyond the standard clauses which are included in the contract, such as 52.232-20. The CIF crossflow is managed by a Determination of Fee clause that states:

Cost Incentive Fee Payable: The Cost Incentive Fee payable under this contract shall be the Target

Fee increased by fifty (50) cents for every dollar that the total allowable cost is less than the Target

Cost or decreased by fifty (50) cents for every dollar that the total allowable cost exceeds the Target

Cost. In no event shall the Cost Incentive Fee be greater than six (6.0%) percent of Target Cost.

Minimum Fee is zero percent (0.0%).

And the Target Fee is defined by a provision of the same clause that states:

Target Fee: As used in this contract, equals four percent (4.000%) and represents the fee

initially negotiated on the assumption that this contract would be performed for a cost equal to the

Target Cost or adjusted in accordance with paragraph ( c ) of this clause.

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