The National Defense Authorization Act of 1991 established a canceled phase for funding. Funds are canceled five years after the date last available for obligation and may no longer be paid out, even if already obligated. Therefore, if all contract obligations using those funds are not paid by that date, the Government must find an alternative source of funds. Usually these alternative sources are from current appropriations.
Obligating funds throughout the life of the contract is a balancing act. Contracting officers do not want to obligate too much funding and potentially lose it. On the other hand, they do not want to obligate too little funding and then later have to find the money from another source.
Contract audits play a big role in cancelling funds. Its very difficult to estimate funding needs when incurred cost audits are backlogged. Will the contractor owe the Government money because final rates were lower than billing rates. If so, those overages could be lost as a source of funding other projects. Will the Government owe the contractor money because the billing rates were lower than the final rates? You would think that from the Government's perspective, underbilling would be a good thing. However, if the obligations for that contract have expired, then the Government has to find the money from other sources.
When the Government has to find money from other sources, payments are often delayed because the Government must figure out from what bucket its going to draw from to pay the extra money. We know of one case right now that is into its fourth month without payment. The contractor's (audited) final rates were significantly higher than its billing rates. The Government acknowledges its liability but has not yet found the funds to pay (by the way, Prompt Payment Interest began accruing after 30 days).
It is to everyone's advantage to resolve final indirect rates quickly and efficiently so that neither party is impacted by cancelling funds.
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