More on Fee Withholds

Last week we alerted you to a few cases where DCAA had rejected billings under CPFF contracts because contractors had included amounts for fee that exceeded 85 percent of the negotiated fixed fee. DCAA erroneously cited FAR 52.216-8 that merely allows the Government to withhold fee where it was deemed in the best interests of the Government (the example used to justify fee withhold was a contractor who was consistently late in submitting its annual incurred cost claims). The clause does not require fee withhold. According to the Defense Contract Management Agency, in order to invoke that provision, the contracting officer would need to issue a contract modification to that effect. In the cases we are aware of, there were no contract modifications. We do not know how widespread the DCAA practice but we recommended that if you are having fee withheld on your contract(s), or you are voluntarily withholding fee based on some long established practice, you check your contract to verify that such a withhold is appropriate.

While the fee withhold provision is currently discretionary, there is a proposal on the table to make it mandatory. The FAR Councils proposed a rule last August to do just that. In May, the Director of Defense Procurement and Acquisition Policy (DPAP) completed an assessment of public input on systemic issues related to contract closeout. As a result, certain changes were proposed to the FAR to improve contract closeout. One of those proposed changes was to make fee withholding mandatory to

protect the Government's interest and to encourage the timely submission of an adequate final indirect cost rate proposal

The comment period on this proposed regulation closed last October. Sixteen commentators weighed in but only about half commented on this particular provision. All who did, were opposed to it, believing that it lumped the timely contractors with the recalcitrant ones, that it would have a major impact on contractors' cash flow, and the current regulations already provide for fee withhold when necessary.

This is still an active case. The report by the Implementation Team tasked with reviewing public comments and drafting the final FAR rule was expected in late January. We were unable to determine current status. If implemented as proposed, it will certainly have a significant financial impact on many Government contractors.