Tuesday, July 5, 2011

New Rules Now in Effect for Payment of Fee

A significant change regarding the payment of fees (profit) to contractors became effective last week. The three contract clauses (FAR 52.216-8, -9, and -10) regulating how the Government will pay fees under CPFF and CPIF contracts now requires mandatory rather than discretionary withholds. Under the old rules, contracting officers had the discretion of withholding fee if he/she thought it was necessary to protect the Government's interests. For contractors awarded after June 30th, that contracting officer discretion is taken away in favor of mandatory withholds.

For example, FAR 52.216-8(b) formerly read as follows: 

(b) Payment of the fixed fee shall be made as specified in the Schedule; provided that after payment of 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.

Effective June 30, 2011, FAR 52.216-8(b) now reads:

(b) Payment of the fixed fee shall be made as specified in the Schedule; provided that the Contracting Officer withholds a reserve not to exceed 15 percent of the total fixed fee or $100,000, whichever is less, to protect the Government's interest.

This change will likely have significant cash flow ramifications for many contractors.

The other significant change to this clause affects the timing for releasing a portion of the amount of fee withheld. Under the old clause, the contracting officer shall release 75 percent of the fee withholds after receipt of a certified final indirect cost rate proposal covering the year of physical completion of the contract. Under the new clause, the word "adequate" was added. We will discuss that change tomorrow.


  1. It says not to exceed 15%, doesn't it still have to be specified in the contract what % to withhold? If it doesn't specify % in the contract do you still have to withhold?

  2. Good question. The percentage that will be withheld is still up to the discretion of the contracting officer. Most of the time, contracting officers just use the 15%, although in theory, they could use a lesser amount. However, that would require that they justify their rationale for a lesser amount so they usually just default to the 15%. Under the old clause(s), contracting officers sometimes did not withhold fee because of the word "may". The "may" has been removed so withhold is now mandatory.

  3. According to a recent DCMA audit, we as a contractor have been told we are only allowed to bill for 85% of the profit amount on a current CPFF contract. I interpret the clause to mean that we are to bill for the full amount of profit and it is up to the contracting officer to determine what the withhold amount is. DCMA claims that we have overbilled on the contract and must credit 15% of the fee charged thus far back to the government on our next voucher. We could use some help in deciphering the FAR 52.216-8 clause.

  4. You need to refer to your contract and the billing instructions. The fee is usually expressed as a percentage of costs so that as you bill your costs, you add fee at the specified percentage. Once you reach 85% of the contracted fee amount, you stop billing fee until other events happen. For example, if the contract is complete and you're up to date on submitting your incurred cost submissions, the contracting officer is authorized to release some of the fee withhold. Give us a call if you want to discuss further.