What a great feeling it is to find a $20 bill in your jacket pocket. It’s a happy surprise many of our clients have come to experience, only the cash they find lingering in the corner of their contracts could be amount to tens of thousands of dollars.
More often than not, FAR clause 52.218-6 is the culprit. Found on most cost plus type contracts, the clause limits billing of fee up to 85% of the negotiated fixed fee (incentive fee contracts are not included), collecting a “withhold reserve” amount up to $100,000.
This is just one of the risk mitigation devices the government employs to insure contract performance and settlement of final costs. Certain conditions must be met in order to collect the balance of the withheld fee amount, many of them surrounding the determination of final contract costs, including indirect rates. Unfortunately, determination of final costs may not occur until many years after the contract is complete. Contractors may forget these amounts can be billed until notified by the government that the funding will expire.
On the positive side, under certain conditions the DCAA presently considers annual incurred contract costs on all cost-type contracts under $1 million (combined) to be low risk. In this case, the DCAA may accept proposed indirect rates (proposed in an incurred cost estimate, or ICE) as final rates, thereby “closing out” the cost determination for a fiscal year.
If the DCAA determines final indirect rates for all years of a particular cost-plus type contract, a contractor then becomes eligible to collect any costs determined to be acceptable above what’s already been billed, along with any fee withheld.
A simple example would be a Phase 2 SBIR contract for $750,000, where $50,000 is a fixed fee and $700,000 is the contract cost ceiling. The contractor would be able to bill up to $42,500 in fee, leaving $7,500 withheld or unbilled. In this hypothetical case, at the end of contract performance the contractor had billed up to the cost limit of $700k, but had to stop billing fee at $42,500.
Only after all years of the cost-type contract has been audited or final indirect rates otherwise determined will the contractor have the opportunity to submit a “final” bill for the $7,500.
In addition, if the contractor had not billed all approved costs up to the cost limit, those costs could also be included in the final bill.
The DCAA practice of approving final indirect rates for low risk contractors also brings into play FAR 42.708 Quick Closeout procedures. Think of this as a streamlined method of contract closeout ahead of a final determination from DCAA.In any case, while progress may be slow, there are measures a contractor can take to maximize cashflow and improve profitability when closing out cost-type contracts.