Pricing Change Resulting from a Contract Modification

[VipinOwl]

Good afternoon,

I have a question regarding a seeming FAR discrepancy that I've been unable to resolve.  Under a cost-reimbursement contract which contains a limitation-of-funds clause, can the CO affect a change through a contract modification which he/she knows will result in an increase in funds, without increasing the contract ceiling at the time of the modification? 

The exact scenario is thus:  Cost-reimbursement, completion type, non-severable contract.  The CO will need to make a SOW revision, which the contractor has indicated may result in additional funds.  However, currently the contract has not been billed against and there is in essence 100% of the funds remaining under the contract.  The CO indicates that the issue of increasing the contract ceiling can be addressed when the limitation of cost ceiling is being reached (75%) and additional funds may be added at that time, to allow for any cost savings between now and then.

FAR 43.105 suggests given the inclusion of the limitation of cost clause, a CO may execute a modification that will cause an increase in funds without immediately increasing the ceiling or requiring funds availability certification:

a) The contracting officer shall not execute a contract modification that causes or will cause an increase in funds without having first obtained a certification of fund availability, except for modifications to contracts that --

(1) Are conditioned on availability of funds (see 32.703-2); or

(2) Contain a limitation of cost or funds clause (see 32.704).

Furthermore FAR 32.704(b) states that "Under a cost-reimbursement contract, the contracting officer may issue a change order, a direction to replace or repair defective items or work, or a termination notice without immediately increasing the funds available."  Which again suggests that the presence of the limitation of cost clause gives the government the ability to modify the contract without increasing funds at the time of the modification.  However, the next sentence in that FAR section goes on to state, "Since a contractor is not obligated to incur costs in excess of the estimated cost in the contract, the contracting officer shall ensure availability of funds for directed actions."  

Again, the changes clause 52.243-2, paragraph e., states, "e) Notwithstanding the terms and conditions of paragraphs (a) and (b) above, 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."  This seems to provide support for the ability to not address an increase in funds until a later date.  However, paragraph b., under the same clause states, "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...".  

So does the fact that limitation of cost clause gives the contractor the right to halt work when the limitation of cost limit is reached and the Government the right to not fund the contract above its existing ceiling, allow the CO to increase contract ceilings at a later date than the mod itself?  Can the equitable adjustment be negotiated once the contractor approaches and gives the government notice per the limitation of cost clause?

[ji20874]

1 hour ago, VipinOwl said:

Under a cost-reimbursement contract which contains a limitation-of-funds clause, can the CO affect a change through a contract modification which he/she knows will result in an increase in funds, without increasing the contract ceiling at the time of the modification? 

The contracting officer may issue a unilateral change order under the contract clause at FAR 52.243-2 without allotting any additional funds at that moment.  The contractor starts work on the change order upon its receipt of the change order.

The contractor must assert its right to an equitable adjustment in the estimated cost, amount of fixed fee, and so forth within 30 days from its receipt of the change order.

If the parties agree to an equitable adjustment that increases the estimated cost, amount of fixed fee, and so forth, after a change order concurrence, or if the parties agree to implement the change bilaterally, the parties may memorialize that agreement by bilateral modification without the Government allotting additional funds at that moment.  The Limitation of Funds clause at FAR 52.232-22 still applies.

You must separate the two different matters.  On the one hand, the parties need to negotiate new estimated cost and fixed fee amounts for the new work of the change order.  On the other hand, the Government needs to think about allotting additional funds to the contract.  These two may be done separately.