The Government May Be Illegally Withholding Some of Your Contract Fee

Most, but not all, cost-reimbursable contracts contain the FAR Clause 52.216-8, -9, or -10 (depending on whether the contract is fixed fee, construction, or incentive fee). These clauses states that after the Government pays out 85 percent of the fixed fee, the Contracting Officer may withhold further payment of fee until a reserve is set aside in an amount that the Contracting Officer considers necessary to protect the Government’s interest. This reserve shall not exceed 15 percent of the total fixed fee or $100,000, whichever is less. Notice the term "may withhold". The contracting officer may withhold fee, a fee withhold is not automatic.

According to Defense Contract Management Agency (DCMA) Information Memorandum No. 03-121 dated January 14, 2002,

there should normally be no need to exercise the option of withholding fee for a contractor with a record of timely submission of final cost vouchers and certified final indirect cost proposals, and that complies with other contract terms and conditions.

DCMA goes on to state that if the ACO determines that it is necessary to withhold fee to protect the Government's interests, written direction should be issued to the contractor by modification of the contract. The following paragraph provides suggesting wording for the modification:

This modification is issued to incorporate fee withholding in accordance with FAR Clause 52.216-8 (or -9 or -10, as appropriate). In order to protect the Government's interest, (contractor) is hereby directed to begin withholding fee from billings under this contract until a reserve is set aside in the amount of ....etc

DCMA also acknowledged in its Information Notice that some contractors are automatically withholding fee from billings, although not directed by the contracting officer and that DCMA has been advising contractors to stop withholding unless directed by the contracting officer.

Therefore, while the contract clause allows contracting officers to withhold fee when necessary to protect the Government's interest, in order to do so, the contracting officer must amend the contract.

Recently, we encountered a few situations where contractors had their billings rejected because they had billed in excess of 85 percent of fee. These rejections were inappropriate becuase the contracting officer had not amended the contract to require withhold. In one case, the clause was not even part of the contract. These rejections financially harmed the contractors because they disrupted their cash flows.

If you have a similar situation where the Government is withholding fee, you need to read your contract. If the withhold provision is not explicitly spelled out, you are entitled to your full fee. You should meet with DCMA and DCAA and straighten things out.