52.232-20 Limitation of Cost
Source: FAR 52.232-20 on acquisition.gov
Contractors must closely monitor costs and notify the Contracting Officer before exceeding 75% of the estimated contract cost, as neither party is obligated to continue or pay for work beyond the agreed funding without formal written authorization.
Overview
FAR 52.232-20, Limitation of Cost, is a mandatory clause for cost-reimbursement contracts that establishes strict controls over contract spending. It requires contractors to monitor their incurred costs and notify the Contracting Officer when costs approach a specified percentage (typically 75%) of the contract's estimated cost. The clause also limits the Government's obligation to reimburse costs and the contractor's obligation to continue performance beyond the agreed estimated cost unless the Contracting Officer formally increases the funding. This ensures both parties are aware of and agree to any increases in contract costs, preventing unauthorized expenditures.
Key Rules
- Notification Requirement
- Contractors must notify the Contracting Officer in writing when costs are expected to reach 75% of the estimated contract cost within the next 60 days, or if total costs will be substantially more or less than previously estimated.
- Revised Cost Estimate
- Contractors must provide a revised total cost estimate with their notification.
- Limitation of Government Liability
- The Government is not obligated to reimburse costs exceeding the estimated cost unless the Contracting Officer formally increases the funding.
- Limitation of Contractor Obligation
- Contractors are not required to continue performance or incur costs beyond the estimated cost unless notified in writing of an increase.
- Formal Authorization Required
- Only written notice from the Contracting Officer can increase the estimated cost; informal communications do not authorize additional costs.
- Change Orders
- Change orders do not authorize cost increases unless they explicitly state so.
- Equitable Distribution on Termination
- If the contract is terminated or not increased, property is distributed based on each party's share of incurred costs.
Responsibilities
- Contracting Officers: Must respond to contractor notifications, formally authorize cost increases, and ensure compliance with funding limitations.
- Contractors: Must monitor costs, provide timely written notifications, submit revised cost estimates, and not exceed the estimated cost without written authorization.
- Agencies: Oversee contract funding and ensure proper documentation and approvals for cost increases.
Practical Implications
- This clause prevents cost overruns and unauthorized spending in cost-reimbursement contracts.
- Contractors must have robust cost-tracking and reporting systems to comply.
- Failure to notify or obtain written authorization for cost increases can result in non-reimbursement and contractual disputes.
As prescribed in 32.706-2(a), insert the following clause. The 60-day period may be varied from 30 to 90 days and the 75 percent from 75 to 85 percent. "Task Order" or other appropriate designation may be substituted for "Schedule" wherever that word appears in the clause:
Limitation of Cost (Apr 1984)
(a) The parties estimate that performance of this contract, exclusive of any fee, will not cost the Government more than (1) the estimated cost specified in the Schedule or, (2)if this is a cost-sharing contract, the Government’s share of the estimated cost specified in the Schedule. The Contractor agrees to use its best efforts to perform the work specified in the Schedule and all obligations under this contract within the estimated cost, which, if this is a cost-sharing contract, includes both the Government’s and the Contractor’s share of the cost.
(b) The Contractor shall notify the Contracting Officer in writing whenever it has reason to believe that-
(1) 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; or
(2) The total cost for the performance of this contract, exclusive of any fee, will be either greater or substantially less than had been previously estimated.
(c) As part of the notification, the Contractor shall provide the Contracting Officer a revised estimate of the total cost of performing this contract.
(d) 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 (i) the estimated cost specified in the Schedule or, (ii)if this is a cost-sharing contract, the estimated cost to the Government specified in the Schedule; 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 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. If this is a cost-sharing contract, the increase shall be allocated in accordance with the formula specified in the Schedule.
(e) No notice, communication, or representation in any form other than that specified in paragraph (d)(2) of this clause, or from any person other than the Contracting Officer, shall affect this contract’s estimated cost to the Government. In the absence of the specified notice, the Government is not obligated to reimburse the Contractor for any costs in excess of the estimated cost or, if this is a cost-sharing contract, for any costs in excess of the estimated cost to the Government specified in the Schedule, whether those excess costs were incurred during the course of the contract or as a result of termination.
(f) If the estimated cost specified in the Schedule is increased, any costs the Contractor incurs before the increase that are in excess of the previously estimated cost shall be allowable to the same extent as if incurred afterward, unless the Contracting Officer issues a termination or other notice directing that the increase is solely to cover termination or other specified expenses.
(g) Change orders shall not be considered an authorization to exceed the estimated cost to the Government specified in the Schedule, unless they contain a statement increasing the estimated cost.
(h) If this contract is terminated or the estimated cost is not increased, the Government and the Contractor shall negotiate an equitable distribution of all property produced or purchased under the contract, based upon the share of costs incurred by each.
(End of clause)