Limitation of Costs and Limitation of Funds

All cost-reimbursable contracts contain the Limitation of Costs clause (FAR 52.232-20) or the Limitation of Funds clause (FAR 52.232-22) or usually both clauses. They are similar; the former applies to fully funded contracts and the latter applies to incrementally funded contracts.

Limitation of costs applies to fully funded cost reimbursement contracts. The clause requires a contractor to notify the Government when it expects in the next 60 days to have spent 75 percent of the estimated cost, or expect expenses to be greater or substantially less than previously estimated. The clause allows variations in the number of days, between 30 and 90 days and variations in the percentage between 75 and 85 percent.

Limitation of funds applies to incrementally-funded cost-reimbursement contracts. Contractors must notify the Government that it is coming to the end of obligated funding, and send notification to the contracting officer that obligated funds will be spent within the next 60 days.

In order to comply with these clauses - to know when the specified thresholds have been met - contractors must have an adequate accounting system. An adequate accounting system must meet many criteria but insofar as these clauses are concerned, the accounting data must be current, "booked" indirect expense rates must be reasonably accurate and someone must be monitoring actual costs against estimated costs.

The SF Form 1408, Preaward Survey of Prospective Contractor Accounting System, is used by the Government to assess the adequacy of contractor accounting systems. One of the elements on this form asks whether the accounting system provides the financial information necessary to comply with these clauses. If not,   there is a strong likelihood that the contractor will be disqualified from bidding on contracts.