52.232-20
Limitation of Cost
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.