Today's posting focuses on the meaning of "final payment".
While DCAA and DCMA will usually consider that "final payment: occurs when the contract is closed, contractors often consider that final payment occurs when the Government pays the invoice just after the work is completed. Unfortunately, because DCAA is so far behind in auditing incurred costs, years can elapse between those two dates.
While the guidance is far from clear, we take a conservative position and recommend that contractors maintain their books and records for three years following contract closeout, unless, of course, those books and records fall under one or more of the exemptions found in FAR 4.705.
However, we understand why many contractors believe a shorter retention is appropriate.
Government Contracts at §7.110 (Examination of Books and Records) at  (Statutory Authority) states final payment “means the date when the contract is completed substantially and the agreed payment made with the exception of items usually reserved for future determination and settlement. Unpublished Opinion B-100489, 1962 U.S. Comp Gen. LEXIS 2191 (Oct. 11, 1962).”
The "exception of items usually reserved for future determination and settlement are further defined as insurance, warranties, sales taxes, patent royalties, claims on appeal, and similar items. Records for these items must be maintained until "finally determined".
Well, this listing doesn't specifically include final determination of direct and indirect costs but there is that catch-all phrase; "and similar items". Since costs on a cost-reimbursable contract are not finally determined for (i) indirect costs until the Government (usually DCAA) and the contractor sign a final rate agreement and (ii) directs costs are not finally determined until final acceptance by the Contracting officer, it seems logical to conclude that these "items reserved for future determination and settlement."